Bank of Japan Does No More Than Expected

February 19, 2009

By a significant margin, Japan’s economy is contracting more rapidly than other advanced economies, and it is the one in greatest danger of deflation, having been there for much of this decade and the late 1990’s and now showing on-year declines in some key price indices.  The Japanese output gap, which measures how far below fully-employed potential GDP was actual GDP — leaped to 4.3% last quarter from 0.7% in 3Q08 despite assumed trend growth of only 1.0%.

If any central bank could justify quantitative easing, it would be the Bank of Japan.  However, officials there believe that their experiment with quantitative easing, something the Fed and Bank of England have now endorsed, did more damage than good.  So Japanese officials continue to take selective half-measures to alleviate corporate funding strains. Admittedly, the Policy Board agonized, meeting for seven hours and 41 minutes over two days, which is longer than the typical policy meeting.  The vote was unanimous, 9-0, to adopt several steps outlined in their released statement.  These include further details on a program to buy one trillion yen of corporate bonds and extending the outright purchase of commercial paper for the first half of the next fiscal year, that is until September 30, 2009.

But the overnight money target will remain at 0.1%, which is only 40 basis points less than such was at peak.  Policy stimulus is a function both of the level of rates and their rate of change, and on the second of these the Bank of Japan has done woefully less to stimulate growth than other central banks like the Fed, Bank of England, Bank of Korea, and even ECB.  Three-month rates remain more than a half-percentage point above the BOJ target.  Also contributing to Japan’s image of policy foot-dragging is the partisan politics in parliament, where LDP opponents control the Upper Chamber and are preventing passage of a fiscal support package of more than 2% of GDP.

Copyright 2009 Larry Greenberg.  All rights reserved. No secondary distribution without express permission.

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