Chart of the Day: Japan Under Quantitative Easing

Owen F. Humpage and Michael Shenk of the Cleveland Fed have a nice summary of what happened to Japan's economy under quantitative easing between 2001-06.

Overall, they offer what I interpret as a mixed outlook for the prospects of quantitative easing (by itself) working to bring back growth, particularly during a global downturn:

The connection between the quantitative easing policy and the macroeconomic recovery remains somewhat more flimsy. Most observers believe that because the quantitative easing policy aided the banking sector, economic activity at least did not deteriorate further. The pace of economic activity did pick up, with contributions from consumer spending and investment, but exports, which benefited from growth among Japan's trading partners, spurred much of the improvement. Although deflation ended in 2006, along with the quantitative easing policy, it returned after a very short hiatus in 2007, and continued until the recent commodity price boom.

The Japanese experience suggests that when inflation and short-term interest rates approach zero, central banks should act aggressively, giving greater than normal weight to downside risks. Moreover, they should commit to an inflation target and clearly explain their actions in terms of that target.

Go Krugman?