What is Quantitative Easing ?

Quantitative Easing, also known as QE is the recent buzz word used in the financial market. It is significant to become used to these types of words as they might be a catchy phrase in the year 2009. We should be thankful to the recent cuts on interest rate by Federal Reserve and Bank of Japan.
Explain Quantitative Easing
It is the monetary policy device that the central banks utilize when they lack room for cutting the interest rate. The term “Quantitative” defines the supply of money and easing the money supply signifies to raise it. For large number of people, the term is totally new and comes with a proper reason as this was discovered by Bank of Japan during the year 2001 after it took the rate of interest to zero. When this happened, they did not have enough space to reduce the rates, making the Quantitative Easing their B plan.
Basically, quantitative easing involves printing of money to purchase varieties of securities with an aim of flooding in the financial market with liquidity or cash. By doing this, it raises the whole currency amount in a circulation which lessens the currency value and at the same time boosts inflation. A proper way to note this is if it was about hundred baseball cards worth one thousand dollar in the whole world and suddenly another thousand baseball cards were invented, then one would now expect every baseball card to be worth. Having large number of baseball card in whole market at low costs spurs various activities in the market of baseball card.
In various ways, Quantitative easing focuses on similar things. By flooding the whole market with the liquidity, the main aim of Central Bank is to promote the lending and also avoiding a shortage in future days. Definitely, Quantitative easing is more involved than the trading of baseball card.
Result from the Quantitative Easing
Approved that the quantitative easing has been implemented only a single time in Japan, you will not find much precedent. HY keeping this thing mind, we can be sure that Fed analyzed outcome of the zero rate of interest of Japan before bringing the interest rates of US within the whisker of 2000 levels of Japan.
Bank of Japan boarded upon the new idea in the monetary economies in the effort for fighting the period of frustration of economic inactivity and fall in the year 2001 which lasted till the year 2006. With the charges at 0%, most of the central banks were enforced to implement certain new policy level for fighting the deflation wave which plagued the nation. Deflation, another transformed catching word in the economic climate is a complete fall in costs over a long time period.
All of us are familiar with how catastrophic a state of inflationary can be on the economy; inappropriately deflation is not different from that. The reason behind a phenomenon is when the customers become resistant to spend that most of the sellers are enforced to cut the costs. In Japan, BOJ accomplished the simple targets by increasing the limits to kinds of several securities that they are planning to buy, for example, purchasing permanent treasuries, equities and several commercial paper levels. These are all efforts to engulf financial system with large number of reserves and a liquidity that would be forced for resuming a normal situation of lending.
During the initial year of the quantitative easing, the USD/JPY increased to nearly 18.5 percent. It signifies that Japanese Yen deteriorated against US dollar; it is a normal reaction to the quantitative facilitation. Nikkei also decreased to nearly 28%. Between 2002 and 2004, the USD/JPY decreased to twenty two percent as Japanese economy started stabilizing. During this time, Nikkei recovered nearly twenty percent, but not prior to the time when this fell next twenty percent. Though it has been debated heavily that whether quantitative easing resulted in a turnaround in an economy most of the individuals agree that it has put a stop in deflation.
Quantitative Easing according to the Version of Fed
With the interest rate of US at zero, Federal Reserve has adopted a version of the Quantitative Easing. Some individuals might argue that Fed had been pursuing the strategy for several months. In association with Treasury Department, Fed had doubled the balance sheet during the past three months to over two trillion dollars. This is done by buying direct equity investment in the banks, simplifying the standards on the purchase of commercial paper, made several efforts for relieving the institutions of the securities backed by asset and is nowadays regarding purchasing the Treasury bonds and several agency debts. By purchasing these assets, they add large amount of money to a financial system. Like Japanese Yen, Quantitative Easing reveals US dollar to important downside dangers, but is also an important step that Central Banks need to follow in order to stabilize US economy and also for avoiding the deflationary spiral.