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Discussion Paper Discussion Paper 134 (2012.1)

[No.134] Central Bank Balance Sheets Expansion: Japan’s Experience

Kazumasa IWATA
  Senior Economist



Facing the global financial crises, the central banks of developed countries have continued their monetary expansion and unconventional policy measures. Japan and Switzerland, for instance, have witnessed the appreciation of their home currency while the US dollar has kept its depreciation. The comparative values of currencies lead to different effects, depending on the exchange rate policies, export firms’ choice of invoice currency and the price setting behavior of those firms, which all affect the terms of trade among the countries and the nations’ welfare. Contrary to their initial impression of the public, a monetary expansion is not necessarily beneficial for the domestic welfare; the theories of new open-economy macroeconomics show their effectiveness for analyzing the ramification of monetary expansions in the contemporary globalized economy amid the financial distress, accompanied by fiscal expansions in many cases. Employing such theoretical development in macroeconomics, this paper attempts to clarify the recent behavior of central banks, the changes in the exchange rates and the effects on the welfare of those nations.