Bank of Japan tries out economic wasabi

Japan's central bank has announced that it will spice up the economy with an enormous expansion of the country's money supply.

by Michael Northcott
Last Updated: 19 Aug 2013

Bosses at The Bank of Japan are aiming to double the country’s money supply in the space of two years in an extremely aggressive long-term bonds purchase programme. The plan is to spend 50 trillion yen on the things to get the money supply moving again. On the face of it, it looks like the most radical strategy so far to combat the Japan’s infamous two-decade abyss of deflation. 

It’s also the first big move in new PM Shinzo Abe's 'Abenomics' agenda. As the new central bank governor Haruhiko Kuroda said on Thursday: ‘We can’t escape deflation with the incremental approach that’s been taken until now,’ adding: ‘We need to use every means available.’

What’s notable about Kuroda is that he did not rule out accelerating the bond-buying programme yet further if prices do not start rising with the initial burst. But he seems sure that the first round will have the desired effect. He said: ‘I am confident that all the policies we need to achieve 2% inflation in around two years are now in place.’

So what is the issue Kuroda is trying to tackle? Well, most economists agree that continually falling prices in Japan have discouraged people from spending their money and put firms off making any significant investment. Both of those things have created a permanent downward spiral and a ‘stagnant’ economy that bumbles around on the zero-growth line, often dipping into recession. Sound familiar? It is a miracle, given that this has been going on in Japan for 20 years, that the country is still the world’s third-largest economy.

Markets reacted quickly to the decision, which effectively inflates the currency. The yen fell against the US dollar as currency traders ditched it, but Tokyo’s Nikkei 225 index jumped 2.2%, so the government is getting exactly what it wants even before the buy-up programme has begun.

So all is hunky-dory, right? Well, not exactly. Japan is extremely indebted, just like most other developed nations. Enormous bond-buying programmes like this will only add to the country’s debt pile, and as we are seeing with some of the PIIGS countries, lenders’ patience is not unlimited. 

Nonetheless, many in Japan will feel that it is definitely worth a shot. Flatling for 20 years is enough to make anyone say ‘for goodness saké’.

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