IMF questions effect of quantitative easing

There is increasing skepticism about advanced economies’ recession-busting policy of quantitative easing amid a warning by the International Monetary Fund (IMF).

In a study of the impact of “unconventional” monetary policies, the IMF said that a series of quantitative easing by major economies has stalled economic recovery, fueling the question if such policies are as cost-effective as expected.

IMF Managing Director Christine Lagarde has acquiesced in unlimited monetary easing by the central banks of major economies including Japan. The latest IMF report goes against such a tendancy.

The report warned that although advanced economies’ quantitative easing has revived the global economy, the policy could cause huge side effects, noting that if their central banks initiate their exit strategy, they could sustain unexpected losses.

According to the report, if the central banks, which have bought large amounts of bonds, face a situation in which they have to sell their bonds suddenly, Japan could suffer a loss equivalent to 7 percent of gross domestic product (GDP) in a worst-case scenario. The United Kingdom and the United States could also see losses of up to 6 percent and 4 percent, respectively, the report warned.

Saying the biggest concern is that there expectations on monetary policy has become too high, the report said that while quantitative easing has given the major economies a breather, their governments have failed to reform the fiscal and financial sectors.

The Korea Institute of Finance also said in a report released Friday that Japan’s unlimited quantitative easing and inflation aimed at inducing the yen’s weakness could become a “shortcut” to pushing the Japanese economy to danger, rather than rescuing it. The report indicated that if Japan achieves an inflation rate of 2 percent as a result of quantitative easing, nominal interest rates will also likely rise, increasing interest on treasury bonds issued by the Japanese government.