Comments on Kazumasa Iwata and Shinji Takenaka's paper "Central bank balance sheets expansion: Japan's experience"

The paper considers the impact of aggressive monetary easing by one country upon the welfare (as opposed to production or employment) of its trading partners. Its central message is that in order to assess the international transmission of monetary policy one must consider the impact on terms of trade, which together with the impact on production and employment determines the overall impact on welfare. The working assumption, based on casual empiricism, is that monetary easing causes the exchange rate to depreciate (no distinction needs to be made between nominal and real rates in the short run, when prices are not fully flexible). But how currency depreciation alters the terms of trade depends on the price setting behavior of exporting firms, which in turn is related to the choice of invoice currency. The paper notes that the predominant use of local currency pricing by Japanese exporters has led to a negative relationship between exchange rate and terms of trade (eg depreciation accompanied by worsening) and concludes by implying that, in view of the worsening of the country’s terms of trade (and given the favorable impact on the level of global interest rates), recent aggressive monetary easing by the Bank of Japan did not have a beggar-thy-neighbor effect on the welfare of foreign countries.

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