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I believe we are firmly on the path toward bold monetary easing
By NELSON D. SCHWARTZ and HIROKO TABUCHI
Another central bank, another round of unconventional monetary policy.
Following the lead of their counterparts in the United States, Japan’s central bankers announced Tuesday what they called a groundbreaking effort to reinvigorate the country’s long-moribund economy and defeat deflation.
With no more room left to cut interest rates and previous steps unsuccessful, the Bank of Japan is taking a page from the Federal Reserve’s playbook and will pump trillions more yen into the economy by directly buying government bonds and other assets. It also doubled the country’s official inflation target to 2 percent. The action came after months of intense pressure on the Bank of Japan from the country’s audacious new prime minister, Shinzo Abe, to take more aggressive action to bolster the economy.
But as in the United States, there are doubts about just how much of an effect the move will have in Japan. Three rounds of asset purchases since the onset of the financial crisis have successfully headed off deflation in the American economy but failed to generate the kind of growth necessary to return employment to prerecession levels.
Japan’s move is also likely to further devalue the yen in the long term — causing some to worry about a possible round of competitive devaluations as countries weaken their currencies to bolster growth in exports. On Tuesday, however, the yen actually rose against the dollar and the euro amid disappointment that the Bank of Japan’s efforts had not gone far enough.
Traditionally, curbing inflation, not worrying about deflation, has been the principal task of central bankers. But when economies enter prolonged periods of slow growth, or even contraction, other concerns come to the fore. Ben S. Bernanke, the Federal Reserve chairman, was keenly aware of Japan’s long-running struggle with deflation as well as the American experience in the Great Depression when he began the first round of United States asset purchases, or quantitative easing, in November 2008.
After a second round of quantitative easing beginning in November 2010, the Fed started a third round in September. It said in December that it would continue to purchase $85 billion in Treasury securities and mortgage-backed securities each month until the job market improved. After considerable pressure, European central bankers also began moving more aggressively last year, vowing to do “whatever it takes” to keep the euro zone from fracturing.
Given the scale of the efforts in the United States and Europe, many experts were disappointed by the Bank of Japan’s action because the expanded asset purchases will not begin until 2014. They complained that was a waste of valuable time in turning around an economy whose descent into deflation has become a test case of the effects of doing too little in the face of an economic slowdown.
To make matters worse, the Bank of Japan’s new plan to purchase 10 trillion yen, or $112 billion, in assets each month sounds more aggressive than it actually will be, said Gustavo Reis, senior international economist at Bank of America Merrill Lynch. That is because many of the securities the Bank of Japan will be purchasing are in the form of short-term debt that will quickly mature, so the additional purchases will equal about $112 billion a year — not a month — beginning in 2014.
By contrast, he said, the Fed’s balance sheet is expected to expand by a trillion dollars in 2013.
“The Bank of Japan should be more aggressive,” Mr. Reis said. “It’s a step forward, but given where their economy is, they need to do more.”
In fact, with such a small annual increase in asset purchases, it is unlikely Japan will achieve 2 percent inflation, analysts said. The Consumer Price Index for 2012 fell 0.5 percent, according to government statistics. The Bank of Japan’s announcement “will likely disappoint those who expected the policy board to answer Abe’s call for a ‘different kind of B.O.J. policy,’ or significantly ramp up its pace of easing,” Izumi Devalier, an economist with HSBC, said in a note to clients.
While certainly better than inaction, there is evidence that unconventional monetary policy can only do so much to lift overall economic growth.
The Fed’s monetary policy seems to be having a much more significant effect on asset prices than it has on the underlying economy, said Larry Kantor, head of research at Barclays. He noted that nearly four years after markets hit bottom in March 2009, stocks in the United States had more than doubled in value. By contrast, “most people would characterize the economic recovery as weak.”
For all the challenges in the United States and Europe, Japan’s economy, the world’s third largest, has been depressed for much longer; the 1990s are regarded as a “lost decade,” and the last 10 years are proving to be not much better. Deflation, an all-around fall in prices, profit and incomes, has plagued the country since the late 1990s.
Since last year, when Mr. Abe was still opposition leader, he has urged the central bank to do more after previous rounds of asset purchases failed to reverse deflation. He stepped up the pressure on the bank after a landslide victory by his Liberal Democratic Party in parliamentary elections in December, which catapulted him to office for the second time since a short-lived stint in 2006-7.
Mr. Abe’s call for the Bank of Japan to increase the monetary supply has weakened the yen, a boon for exporters, which are responsible for much of Japan’s growth. Earlier this month, Mr. Abe also announced an emergency stimulus of 12 trillion yen, providing even more tail wind for the Japanese economy. Those steps have pushed the Nikkei stock index 20 percent higher since mid-November, when Mr. Abe first campaigned on his expansionary platform.
In a joint statement with the government, the Bank of Japan said it was doubling its inflation target to 2 percent and said it would “pursue monetary easing and aim to achieve this target at the earliest possible time.” The bank’s board voted to keep its benchmark interest rate at a range of zero to 0.1 percent. The bank also updated its estimates for economic growth in fiscal 2012 and 2013. The bank now forecasts growth of 1 percent for 2012 and 2.3 percent for 2013, with the increase taking into account the new measures.
Mr. Abe immediately hailed the bank’s moves, telling the Bank of Japan governor, Masaaki Shirakawa, that the measures were “groundbreaking,” according to Kyodo News.
Mr. Abe’s critics, however, warn that the central bank will become a printing press for profligate government spending — expenditures that carry great risks for a country whose public debt is already twice the size of its economy. Critics also say that before flooding a broken system with money, Japan must first tackle structural problems that hurt economic efficiency.
Mr. Abe maintains that deflation will undermine any efforts to grow, and that the government and central bank must act together to get prices rising again. But in a nod to critics, the joint statement said the government would also promote “all possible decisive policy actions for reforming the economic structure” and establish “a sustainable fiscal structure.”
“I believe we are firmly on the path toward bold monetary easing,” Mr. Abe told reporters.
http://www.nytimes.com/2013/01/23/bu...l?ref=business
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