Finance, Forex and Investments

How does a Central Bank , "stimulate the economy by injecting cash into system"...?

What does it mean when the news says the Japanese Central Bank has put $ billions into the economy...? They can drop interest rates I know but what else do they do ..?

Public Comments

1. Well putting money into the economy gives "the economy" more spending power and therefor more ability for work to get done, services to be done, goods to be sold, and stuff like that. It may rise inflation however as well because more paper money does not equal more physical value and backing to that paper. It's the same actual amount of real money but divided among more paper basically. But it is possible I guess that because price levels would not change fast enough buying power could be increased because there is more "money" out there. But these "cheap dollars" really hold less value than before. The whole idea is really to get the economy flowing.
2. Central Bank's injections are called Quantitative Easing (QE). Or Credit Easing (CE) as in the U.S. Japan used QE, which involves the central bank buying up lots of government securities from businesses (mainly banks I think). In a stagnant economy this can raise liquidity and boost firms spending, borrowing and lending etc. The idea is that, as well as the increase in the money supply by the central bank injecting money, the buying up of these government securities raises their price, thus lowers their yield, thus firms will choose to move out of government debt and move into other assets, further boosting economic activity. In practice it has been seen to work yet has many drawbacks. Unlike the U.S, Japan didn't buy up enough government securities and so their system went on for over 5 years. For further information look up quantitative easing or unconventional monetary policy.