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Central bank rebuffs calls for QE program in Taiwan

TAIPEI, Taiwan -- The central bank said that Taiwan does not have a deflation problem and, with a relatively higher nominal interest rate, there is no need to launch quantitative easing (QE), according to a press release published by the central bank yesterday.

It was suggested recently by some commentators that the central bank might consider following the fiscal policy adopted by Japanese central bank and implement a QE. The central bank said in response that circumstances in Taiwan and Japan vary widely, and that such a policy would not work in Taiwan's favor.

The central bank launched “Taiwan's version of QE” during the financial crisis, according to the press release. As economic recovery gained pace, the central bank made adjustments to its fiscal policy accordingly, and currently adopts a modestly lax monetary policy which works in tandem with overall economic development, the central bank said.

Reasons Not to Launch QE

The central bank provided five reasons for not following Japan in launching QE in its press release:

First, Taiwan does not have a deflation problem like Japan. There is abundant capital in the market and the credit crunch problem does not exist in Taiwan. Businesses have no problem raising funds.

Second, Taiwan's nominal interest rate is high compared with the near zero rate in Japan. In regard to the real interest rate, Taiwan shares a similar rate with Japan.

Third, Taiwan's M2 money supply is growing steadily, the amount of which is sufficient to sustain domestic economic activities. In addition, a relatively lax policy is applied in relation to banks' reserves.

Fourth, QE is beneficial to major economies as it contributes to depreciation of currencies and helps exports. Taiwan will never realize this advantage, as Taiwan is not a major economy. Since the New Taiwan Dollar is not a currency commonly adopted in the global economy, a QE launch will not significantly affect the New Taiwan Dollar's exchange rate.

Fifth, the central bank pointed out that the depreciation of the yen reflects the fact that the yen, used for hedging purpose, was overvalued. It is also a reflection of Japan's widened trade deficit. The yen's real effective exchange rate (REER) is still higher than the lowest point pegged before the financial crisis. The New Taiwan Dollar's REER, on the other hand, is still lower than those of South Korea's won and China's renminbi. As such, it still gives Taiwan an edge on exports.

QE Regarded as a Successful Measure

The central bank said that interest rates of major economies have dropped to a near-zero level. Not only the U.S. Federal Reserve, but also the central banks of Japan and Britain have launched large asset buying programs, which are essentially QE programs, to stimulate the economy.

While different parties held different opinions regarding the soundness of the QE measure, most people believe that QE successfully prevent the global economy from plunging into another Great Depression which occurred in the 1930's.

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