Japan: The Bank of Japan is getting the message. The US Federal Reserve and the Bank of England have engaged heavily in quantitative easing to avert deflation. Now the BoJ, kicked by Japan's politicians, is talking about QE and achieving "price stability". Japan is trying harder to end its long stagnation, by copying its western counterparts.
Although the new monetary activism surprised markets, it can be traced to the political ructions of a few weeks ago, when Naoto Kan, the prime minister, survived a leadership challenge from Ichiro Ozawa. Ozawa and his supporters had shouted loudly that Kan and the BoJ ought to be doing more to weaken the yen, counter deflation and invigorate the economy. The day after Kan's victory, the finance ministry intervened in the currency markets for the first time in six years. The BoJ played ball. It did not "sterilise" the finance ministry's yen sales by issuing bills. The question was what it would do in October. Now we have the answer.
The BoJ adopted a “virtually zero” interest rate policy, cutting its overnight interest rate to almost zero from the 0.1 per cent rate that had prevailed since 2008. It also committed itself to keeping its interest rate at this minimal level until “price stability is in sight”. The bank therefore gave itself an imprecise but nonetheless significant inflation target: price stability, not the deflation Japan is suffering now.
The bank also took a step towards quantitative easing, promising to “examine establishing” a fund to buy longer-term financial assets, such as government and corporate bonds. The bank said that fund might be of ¥5 trillion, about $60 billion. That is still small beer. The Bank of England has so far spent £200 billion ($320 billion) in a UK economy less than half Japan’s size.
What’s more, the US Fed may engage soon in another big bout of QE. That is undermining the dollar and means the BoJ’s moves won’t do much to weaken the too strong yen. But small, almost symbolic steps are better than none. Japan is trying harder to break the grip of deflation on its economy - and doing it with monetary policy, not still more fiscal spending. The world should welcome that.
