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Quantitative Easing Case Study

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The bond that the Japanese government issued calls with Japanese Government Bond (JGB). JGB plays an important role in the financial instrument securities market in Japan. Like many other countries in Asia, the financial system in Japan is dominated by large bank. As there is a huge shortage in the country, MOF assigned to the big banks to buy Japanese government bank continually in order to push the interest down. As the interest rate fall to the zero level, it reduces deposit rates on Japanese Company’s savings account to zero because the big banks need to maintain the money supply. With the low interest rates, the Japanese companies who bought the bonds would face a low risk with a low return. This made the bond less attractive to the Japanese …show more content…

The purpose of quantitative easing is to push up the economic growth by lowering the interest rate. The central banks has its unique function to create the money. (eco.com). By increasing the money supply, it will keep the value of dollar low. With a low interest rate, it permits banks to make more loans. Bank loans stimulates demand by giving firms more money to expand. (eco.com). However, if money supply increases too quickly, quantitative easing can lead to a high inflation. This is due to the fact that there is still fixed amount of goods for sale when more money is now available in the economy. The banks may decide to keep its funds in reserve account rather than lending those money for businesses or individuals. Nevertheless, this strategy loses its effectiveness when the interest rates approach to zero percent and it will force banks to try using other strategy to stimulate the …show more content…

Credit risk is the chance the issuer will default. An investor who owns bonds issued in and secured by assets of an issue within the borders of his or her home country has specific legal resource in the event of default. If the bonds go on defaults, one can drag the issuer to the court and demand the collateral that secures the bonds. Sometimes the protection on paper for foreign bonds seems illusionary. The higher they perceived credit risk, the higher the rate of interest that investors will demand for lending their

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