BoJ says decade of deflation is over
Japan’s decade of deflation was officially declared over on Thursday when its central bank ended five years of ultra-loose monetary policy and moved to a regime of managing interest rates.
ADVERTISEMENT
The Bank of Japan decision, which came a month earlier than many had expected, marks a decisive statement by the bank that the world’s second-biggest economy has returned to normality after 15 years in post-bubble doldrums. The move was also an assertion of the central bank’s independence following intense pressure from politicians not to tighten prematurely and risk choking off Japan’s most promising recovery in years.
But the bank sought to avoid unsettling Japanese and global financial markets. It said the new target, the uncollateralised overnight call rate, would be kept at “effectively zero per cent” for several months.
The Bank of Japan’s ultra-loose policy was brought in five years ago to avoid the risk of financial meltdown. Banks were suffocating under a mountain of non-performing loans, which Glenn Hubbard, former White House economist, estimated in 2002 at 20 times the relative size of the US savings and loan crisis.
More on this story:
Lex: Japanese interest rates
Click here
The Short View: Be first to cut your positions, not last
Click here
Analysis: Japan looks forward as monetary calm returns
Click here
Martin Wolf: Unreformed, but Japan is back
Click here
Full text of BoJ statement
Click here
The financial crisis left conventional monetary policy impotent and obliged the government to issue huge amounts of debt, much of it bought by the BoJ, to ensure the economy did not sink into depression.
Deflation made the debt problem worse by increasing the size of past loans in comparison with falling earnings and a gross domestic product that has fallen, in nominal terms, for most of the past decade.
Japan’s economic revival was finally sparked by demand from China and the US. Unlike in the 1990s, a decade dominated by anaemic growth, this revival has not been snuffed out by policy errors or external shocks.
The BoJ shift means the big three central banks are now tightening in unison, although Goldman Sachs said keeping Japanese rates at zero while inflation gathered momentum actually constituted a loosening.
On Thursday, the bank said it would take its time mopping up the excess liquidity with which it has been flooding the system.
It pledged to continue buying Y1,200bn ($10bn) of Japan government bonds a month
