Japanese official rates havent been over 1% since 1995 after trying to stem the deflationary spiral after the bubble economy burst in the early 1990's:
As you can see, with Japanese rates so close to zero, is a drop in the official rate from 0.5% to 0.3% really make going to make that much difference?
I dont think we'll see Japanese rates rise significantly anytime soon. But really this cut was a gesture to show that Japan is taking part in the global co-ordinated action against the credit crisis. Unfortunately this monetary policy action wont spare them from the deflationary effects of the Commodity price crash which should begin to feed into their inflation numbers over the coming months.
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2 comments:
0.5% to 0.3% - how low can you go? The Japanese have been basically giving away free money for about a decade. It makes one wonder about the effectiveness of monetary policy when you can give away money for a whole decade without stimulating a massive surge in growth.
Well, monetary policy in its current form involves targetting a headline interest rate (or price of money). This should then in turn direct the supply of money which is the cornerstone of the monetary system. Since the supply of money is difficult to measure, it is easier and more transparent to target a rate. However when the target price of money moves from 0.5% to 0.3% will it cause an increase in money supply? It really depends on the transmission mechanisms working properly and we have seen recently a major breakdown in this area.
For example the Fed has bombarded the market with liquidity but the banks are not lending it on due to counterparty risk concerns. This has been exacerbated by the systemic shock of Lehman defaulting and recovering only 8c in the dollar... A massive systemic shock.
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