Japan rescinds war on deflation
This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.
At least that is the way I read today’s monetary policy release. According to the statement released today: “The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.” However, the statement curiously omits the following from item 6. of the previous release:
I don’t know why the Bank of Japan would rescind their commitment to 0 percent, when the median inflation projection is negative through 2011, although improved from its latest forecast in June 2009 (at the end of the January 2010 policy statement). That’s bad – rising real debt, further hits to consumer spending, the works. Admittedly, there’s debate over the actual benefit of quantitative easing and zero-interest rate policy (see this paper at the FRSB).
But another policy-relevant bit of news hit the wire today: S&P put Japan’s credit rating on negative watch. From the NY Times:
Diminishing policy flexibility? Given the central bank’s propensity to move away from the ZIRP, and the government debt running stock at 183% of GDP (and rising), I’d say that diminishing policy flexibility is a euphemism.
Notice how Japan’s government debt rose while the nonfinancial sector’s obligations fell – that’s the deleveraging story.
Japan is not “insolvent”, at least that is what the external debt metrics say. But the only real policy flexibility is held by the central bank. And the Bank of Japan, ostensibly at least, doesn’t seem to be providing adequate liquidity.
If left unchecked, this could happen to the U.S.: policy mistakes. Raising taxes and hiking rates too early can turn into persistent economic problems.
Source: Rebecca Wilder, News N Economics, January 27, 2009.
* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.
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