That “portfolio rebalancing” channel is thought to have been largely absent in Japan, where most of the Japanese government bonds purchased were held by the banks, which in turn used the proceeds to directly de-leverage without obviously increasing the demand for other assets (although the purchases may have had an impact through other channels). Buying assets held by non-banks was relatively straightforward in the UK. At the time, insurance companies and pension funds were the largest category of holders of gilts in issue. Although commercial banks act as market-makers for gilts, and were thus the immediate conduit for the gilt purchases, they typically held only a very small amount on their own balance sheets as part of their liquidity portfolios. Market-makers had to source gilts in the market before selling on to the Bank. Moreover, because the banks’ own liquidity holdings were generally very short-dated, we were able to target our purchases by restricting them to be longer-dated: initially we only bought gilts over 5 years maturity. 9 We were also conscious of the pressures on pension funds and their need to match longdated liabilities by buying index-linked and longer-dated nominal gilts. Real yields and ultra-long nominal yields were already being driven to low levels by that demand. Hence, we restricted the Bank’s purchases to nominal gilts only and initially capped the maturity at 25 years. The latter restriction was later relaxed as the purchase programme expanded.
In order to deliver the high-level policy objective of the MPC to inject extra money into the economy, there were a number of operational objectives for Bank staff. First we wanted to make sure that we were actually able to buy the targeted quantity. There were market participants who told us that this would not be possible as the asset managers would not be able to move away from their benchmark holdings (the initial target being £ Once the programme was announced, the Bank took steps to proactively discuss our operations with market participants, to allay that initial scepticism. In the weeks that followed the announcement in March 2009, we called in our contacts at the Gilt-edged Market Makers and many of the larger asset managers, to explain the operations and to encourage them to participate. The market collectively responded very positively, and the total value of offers exceeded the targeted purchases in every auction undertaken. A second operational objective was to ensure that purchases were at a fair market price. We had to consider this against the backdrop of a heavy UK Government issuance programme: we were alert to the risk that market participants might buy direct from the Government’s  8  For example, on timing see Shirakawa (2010) Uniqueness or Similarity? Japan’s Post-Bubble Experience in Monetary Policy Studies. Available at http://www.boj.or.jp/en/type/press/koen07/ko1009c.htm. 9  Subsequently relaxed to 3 years, once the Bank started to hold more than 70% of some of the gilts in issue.