Introduction

The major earthquake that hit eastern Japan in 2011, the greatest disaster the country has experienced since the end of World War II, has about 20 000 people and caused huge damage. After the earthquake and tsunami, recovery, initially strong, marked time in mid- 2012 , scoring production at a lower level of 2½ percent level in record 2008 , before the economic and financial crisis World (Chart 1) . Japan experienced three recessions in five years. The main challenge will be for him to sit sustainable growth and fiscal sustainability after these two shocks.

More than two decades after the bursting of the bubble in asset prices 80s, Japan remains a prisoner of deflation in asset prices and consumer prices continue to fall despite a near zero interest rate and of quantitative easing measures taken by the central bank. Sluggish growth in production and rising public spending, due in part to the aging of the population, have passed the gross public debt to over 200% of GDP, raising serious concerns in terms of fiscal sustainability . Overcoming the primary budget deficit, estimated at 9% of GDP in 2012 (on the basis of government), would involve a large-scale fiscal consolidation will weigh on growth in nominal GDP, making the stabilization of the ratio of the difficult public debt. At the same time, structural problems, including the rapidly aging population and low integration into the world economy, limited growth potential. The political instability of the country, which has seen a succession of six prime ministers since 2008, has made the definition of economic policy difficult.

The new government is committed to implement a three-pronged approach built around a bold monetary policy, fiscal policy and a flexible growth strategy encouraging private sector investment to put an end to deflation and revitalize the economy. The Government is committed to present a new growth strategy by mid-2013, to be followed by a new medium-term fiscal strategy. This growth strategy should include bold reforms to boost potential growth of the country, which is now about ¾ percent per year, according to OECD estimates.

A range of other structural policies, in particular to increase participation in the labor market and to improve education, is also a priority to promote growth and tackle fiscal imbalances. At the same time, the authorities should take into account the effects of fiscal consolidation on social cohesion in the context of increasing inequality of income and the worsening of relative poverty. The reforms, particularly those intended to end the dual labor market (see the chapter on the reform of the labor market in Japan's Economic Survey published in 2011 by the OECD) and attempt to resolve the problems plaguing the education system (see the chapter on education in the 2011 Economic Survey) is a priority to promote inclusive growth and should be accompanied by measures to improve the outcomes for all a series of well-being indicators.

An expansion driven by government action

The decline in production in the second and third quarters of 2012 (Chart 2) was mainly due to poor environmental conditions. Exports fell sharply (Chart B), reflecting the concentration of Japanese foreign trade in capital goods and intermediate goods, and the consumer discretionary (Thorbecke, 2012). In addition, exports suffered from the appreciation of the yen in mid-2012 was 45% higher than its 2007 level in nominal effective terms and 24% in real terms (Chart 3), reflecting the influx capital sought refuge in Japan, considered a "safe haven" during the global financial turmoil. According to the IMF (IMF, 2012b), the yen was "moderately overvalued" of up to 10% in mid-2012. Furthermore, over the same period, the yen has appreciated 82% against the Korean won, which is very important given the competition between the Japanese and Korean products on world markets. Japanese exports to China (which account for a quarter of total exports of the Archipelago) and other Asian countries have declined, reflecting the slowdown in growth and political tensions with China (Chart C). Finally, the intensification of the crisis in the euro area last year contributed to a double-digit decline in Japanese exports to the European Union.

The deterioration of the global environment has weighed on domestic demand, which was driven by reconstruction spending after the disaster of 2011. In 2012, an estimated amounts for reconstruction represented 1½ percent of GDP. However, the fall in exports led to a reduction in industrial production, which is less than a day poses to the stability of Japan as well as in the global economy, it is time to reassess the approaches taken by the authorities. Fiscal consolidation remains a priority, especially after the stimulus initiated in early 2013. It is up to monetary and structural policies to support growth. Should implement the policy of "quantitative and qualitative easing" to achieve the new objective of price stability set at 2%, but this may not be enough. To achieve sustainable growth, it is equally imperative to advance structural reforms across a broad front. fifth to its 2008 peak (Chart B), which weighed on business investment. The decline in confidence, especially in small businesses, also had a negative influence on investment (Chart D). Despite the sluggish business sector, employment increased in the second half of 2012 (Chart E), supporting private consumption has also benefited from public subsidies for the purchase of environmentally friendly vehicles. In fact, sales of cars made in the first half of 2012, an increase of 59%, representing about half of the increase in private consumption, before slowing in the second half (figure F). In this context, the unemployment rate stood at around 4¼ per cent in early 2013, when he had a low of 3.7% in 2007, while deflation persists (Chart 4). The recovery impulses observed after the two already mentioned shocks were transitory and Japan is now facing an estimated output gap of 1% of GDP at the end of 2012. Growth is expected to increase again in 2013-2014, although there is a high risk of deterioration than forecast

Exports have stabilized at the end of 2012, which resulted in faster growth of production in the first quarter of 2013, driven by a rebound in industrial production. Exports will regain momentum, fueled by the planned restart of the increase in global trade and investment by Japanese companies, which have a lot of cash, will evolve in parallel. Due to recent developments, the outlook for Japan has been revised upwards. First, the new government announced in January 2013 a package of measures representing 10 JPY 300 billion (or 2.2% of GDP) (see below). Second, the yen depreciated by 15% against the dollar since mid-November, when national elections were announced. Thirdly, stock prices have increased by almost 30% during the same period.

Monetary policy to support growth and end deflation

Deflation leads to lower nominal GDP, which has the effect of inflating the debt ratio and threatens the sustainability of public finances. The GDP deflator fell by about 13% since 2001 and over the same period, the monthly price index to the underlying consumption only rose year on year for 12 months. If inflation had reached if only 1% since 2001, the average annual growth rate of nominal GDP would be stood at 1¾ per cent over the decade and mechanically, the ratio of public debt would have amounted to 160% of GDP instead of exceeding 200%. Obviously, the actual numbers would depend on a number of factors.

Background information

Unconventional quantitative easing measures implemented since 2001 have contributed to the decline in long-term bank lending rates (Chart 5), which fell even during the longest period of expansion has known the Japan since the end of the war (2002-2008). A recent study showed that the strategy of the Bank of Japan had a positive effect on economic activity (Berkmen, 2012) in a context it is true holder, marked by the recovery of the banking sector and household deleveraging. However, in the future, it will be very difficult to quantify the exact impact of new unconventional measures.

Modest growth remaining credit, the Bank of Japan adopted in June 2010 an "in support of growth financing mechanism" to make available long-term financing banks at low cost to encourage them directly to extend credit to businesses. Targeted companies were those in growth sectors such as health or the environment. The established mechanism lends to financial institutions one year loans that can be renewed up to three times. The total amount of funds thus made available was increased from 3 000 billion JPY (ie 1.2% of the outstanding loans granted by private banks to non-financial private sector companies) to 5 500 billion JPY. Nearly 3 500 billion JPY has been disbursed to date. The loans of the major banks have recently started to rise year on year, although this translates mainly an increase in loans to foreign borrowers. As is the case for other unconventional measures, this mechanism may risk delaying necessary restructuring of the banking sector and the business sector by providing support to non-viable enterprises. In addition, the decision to target specific sectors gives this mechanism industrial

policy orientation that could lead to misguided allocation of resources, and raises concerns about the equity.

Objectives of the study

QE was as a matter of fact born in Japan at a time when it was plagued by deflation as well as rolling recession. The term “quantitative easing” was coined in order to describe efforts by Japan to kick-start growth and get prices up again, beginning in 2001. That program has however been touted as having failed to rid the Japan its persistent deflation. The study intends to evaluate how quantitative easing has affected Japan’s economy over the last three decades. In this respect, the study will evaluate if Japan’s economy has been stagnated over the last three decades and if introduction of quantitative easing has had any positive on Japan’s economy since its introduction.

Research question

In order to successfully accomplish the objective stated above, the paper will seek to answer the following research question,

Has introduction of quantitative easing had any impact on Japan’s economy?

Sources of data

Measures previously taken by the Bank of Japan

In addition to gradually lower the rate to "virtually zero" (0 to 0.1%) in October 2010 (Table 2), the Bank of Japan has taken a number of measures to stabilize prices. In2009, it launched a "liquidity-providing operation" to lend (against collateral) money to banks for three-month interest rate. In October 2010, the Bank of Japan has also set up an "asset purchase program" focuses primarily on government securities, but also on private assets such as bonds issued by companies. The scope of this program has continued to be heavily adjusted upwards. In December 2012, the objective of the acquisitions to be made by the end of 2013 was thus increased to 101 JPY 000 billion (21% of GDP), the transfer of cash included operation.