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Why is Monetary Policy Underrated?

TOKYO – Last month – just a few days before the European Central Bank announced its intention to initiate quantitative easing (QE) – I attended a seminar in Geneva with international journalists, policymakers, and investors. The discussions there, much like those in Japan before Prime Minister Shinzo Abe launched his groundbreaking economic-reform strategy in 2012, reflected an inadequate understanding of unconventional monetary policy's transformative potential.

Indeed, at the seminar, European economists and journalists – especially the Germans, and even some of the Britons in the room – adopted a dismissive tone. “Monetary policy's power is limited, particularly when the interest rate is so low," some said. “We cannot count on accommodative monetary policy to spur a portfolio reshuffling," others added.

These statements were all too familiar – and somewhat surprising, given the progress that Japan's ongoing QE-based strategy has enabled the country to make. Clearly, many in Europe lack an understanding of the history and significance of so-called “Abenomics"; but such an understanding should inform their monetary-policy debates.

In 2001, the Bank of Japan (BOJ) was struggling to find ways to help the economy escape recession. Having already reduced the target short-term interest rate to very close to zero, it turned to open market operations – specifically, purchasing long-term government bonds and increasing bank reserves held at the BOJ – in order to increase the money supply and reduce long-term interest rates.