To end or not to end. That is the question. The Bank of Japan says yes. The government says no. The BOJ feels the time is ripe to do away with the policy of "quantitative easing." The govern- ment feels it is premature to do so. Dueling time is here again over the conduct of monetary policy.
The quantitative easing policy has been in operation since March 2001. This is a long time for such an extraordinary policy measure to have been in place. It is extraordinary because it has rendered interest rates dysfunctional.
By flooding the private-sector banks' reserve accounts with surplus cash, the BOJ effectively drove them away from the money markets. With cash being generously provided by the central bank, what need was there for banks to tap the money markets for still more extra cash? Money markets are the place where short-term interest rates are supposed to be determined. But if there are no participants in those markets, by definition there is nothing there to determine.