Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bank of Japan Goes "All In" To Stem Deflation

Interest-Rates / Japanese Interest Rates Oct 06, 2010 - 04:55 AM GMT

By: James_Pressler


In an attempt to fight off worsening deflation and prevent the economy from falling into another recession, the Bank of Japan (BoJ) announced its largest foray yet into the realm of quantitative easing (QE). It lowered its benchmark interest rate to between zero and 0.1% (effectively 0%), set up a ¥5 trillion ($59.7 billion) fund to purchase government and corporate bonds, and also created a ¥30 trillion lending facility using those assets as collateral. The breadth of such QE measures caught the market off-guard and dispelled most concerns about the BoJ being too timid in the face of another economic downturn. And yet, even though the BoJ seems to be placing its largest wager ever on the table, we cannot help but ask: Is it enough?

By enough, we wonder whether QE alone is the answer. Japan is no stranger to these operations - its last QE program was implemented midway through the 2000-03 recession and lasted for over four years. But its intention - to flood the market with more than ample liquidity - is limited by the amount of demand in the market. Strictly from a financial perspective, lending conditions are ideal. Money is all but free to borrow, banks have plenty of access to funds and the labor market is as loose as it has been in a generation. But weak demand indicators suggest a poor outlook going forward, offering businesses little incentive to do anything more than save those yen for another day. All the QE in the world will not change that situation.

In Tokyo, hints are coming out about a $55 billion (1.1% of GDP) stimulus package being discussed, supposedly to be paid for through unexpected tax revenues accumulated through the first six months of the April-March fiscal year. Depending on how this stimulus is targeted, it could provide enough of a gain to stem off another prolonged recession. Incentives to private consumption - the laggard of the GDP accounts - could provide some benefit and raise confidence, but it would hardly be a fix for flagging demand.

The government and the BoJ have been trying to stimulate exports by intervening to drive down the yen, but like other measures this only provides artificial relief while doing little to get the economy back on a self-sustaining growth track. Even if the Bank wages an extended currency intervention campaign similar to that in 2003-04, it will only offer a brief respite before the country's longstanding imbalances force the yen higher.

The only cure for what is ailing the Japanese economy is a good dose of inflation, which is hard to come by when the globe is concerned about deflation. Even with interest rates as low as possible, real interest rates are at five-year highs, giving strong incentive for foreign investors to flock to the yen and drive its exchange rate ever-higher under the assumption of continued deflation. A burst of higher prices could break that cycle, and the sooner the better as far as the Japanese economy is concerned.

But creating inflation is easier said than done when it comes to Japan. Ultra-loose monetary policy has failed to spur price pressures, and heavy deficit spending has only generated temporary growth and a lasting mountain of debt. The usual vehicles for heating up the economy are no longer adequate, leaving policymakers with the daunting challenge of heating up an economy that refuses to thaw. Creative and possibly counterintuitive policies are required - incentives to encourage spending but not saving, and to rekindle domestic demand in a sustainable manner. Most of the countries throughout the industrialized world are pondering this riddle for their own recoveries, but considering the dire state of the Japanese economy, Tokyo is the one most in need of a solution.

James Pressler — Associate International Economist
James Pressler is an Associate International Economist at The Northern Trust Company, Chicago. He currently monitors emerging markets in sub-Saharan Africa, as well as several European and Asian countries.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in