Japan’s Central Bank Tries More Quantitative Easing

Cheap lending is a temporary fix. The government needs to tackle long-term impediments to growth.

Tokyo, Japan at night, December 4, 2008
Tokyo, Japan at night, December 4, 2008 (Flickr/Cocoip)

In a move widely expected, but one which ultimately left markets disappointed, the Bank of Japan announced more measures that it hopes will fight off deflationary pressures and spur economic growth as well as weaken the yen versus the dollar to boost exports.

Japan’s central bank is expanding its government bond buying program by ¥10 trillion ($124 billion) to ¥40 trillion, extending the duration of corporate bonds it buys from two up to three years maturity and increasing the size of its total asset buying program by ¥5 trillion ($61 billion) to ¥70 trillion.

In addition, the central bank’s policy board voted unanimously to keep interest rates at virtually zero or .1 percent.

Market reaction was initially positive but when investors digested the news in its totality, sentiment soured. Given the size of Japan’s economy, the amount of easing was seen as fairly tepid.

In addition, the Bank of Japan said it was decreasing the amount of funds it lends at a fixed rate of .1 percent to institutions by ¥5 trillion. So, traders saw this as the central bank on the one hand injecting liquidity into the economy while removing it on the other.

Lawmakers have been pushing for the central bank to begin another round of quantitative easing as Japan continues to battle deflation amid anemic growth with the yen strengthening as a result of fears about the global recovery. Coupled with an announcement by the Japanese flagship company, Sony, of massive layoffs, concerns that Japan’s recovery has begun to slow are mounting.

Industrial production for March rose 1 percent from February, versus expectations of it rising 2.6 percent. Japanese manufacturing, while still in expansion mode, slowed in April.

However, the moves by the Bank of Japan belie the fact that the Japanese government has still not faced up to the endemic structural problems in the economy which continue to prevent strong growth from taking hold. Specifically, Japan’s policymakers have avoided taking the tough but necessary measures to reverse thirty years of stagnation.

Japan’s aging society demands that the government do something that increases the country’s declining birthrates, as it has some of the lowest in the world. Liberalization of the nation’s immigration laws, for instance, would enable an infusion of workers.

Japan has long resisted opening large segments of its economy to foreign competition, as its politicians cling to the protection of their power bases. The government needs to bite the bullet and encourage more trade.

Instead of instituting reforms, the government avoids confronting its vested interests and lays the responsibility of stimulating growth on the central bank. Such policy avoidance by the legislature has not worked over the last three decades and will unlikely be the answer going forward.

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