Tuesday, December 1, 2009

Japan: Quantitative Easing Part Deux

through and through Keynesian

(and the very definition of a fool as someone who keeps repeating the same thing over and over even if it doesn't produce the result he wants).

Bank of Japan held an emergency meeting on December 1 afternoon (their time) and decided to embark on the second round of quantitative easing. The first one was from 2001 to 2006, with dubious results (more later in the post). Just like the first one, BOJ wants to induce further decline of longer-term interest rates to stimulate borrowing and spending. This time, there is an added purpose of stabilizing Japanese yen (i.e. reversing the recent rapid rise of yen). Here's the BOJ statement in English.

BOJ intends to roughly double the size of "current deposits" at BOJ (Japanese equivalent of "excess reserve") by introducing a new 10 trillion yen (US$115 billion) lending program in which financial institutions can get a 3-month loan at 0.1% fixed rate (overnight call rate). Eligible collateral includes Japanese government bonds, corporate bonds, commercial papers, and loans on deeds.

Looking at BOJ's latest balance sheet, they have about 40 trillion yen (US$460 billion) of various lending programs. Unlike the U.S. Federal Reserve, its balance sheet size has remained steady at about 110-115 trillion yen (US$1.26 - 1.32 trillion) since 2007.

Federal Reserve Bank of San Francisco has a paper on the last quantitative easing by Bank of Japan. Their conclusion was that it did lower the longer rate somewhat, but it was hard to tell whether it was the direct result of quantitative easing or the future expectation. They also said that Japan's quantitative easing probably had an unintended consequence of helping weaker banks stay afloat and encouraging further risk-taking, thus delaying the real structural reform.

From the Japanese consumers' perspective, price deflation has been the only good thing that has happened since their real estate bubble burst in 1989-90. But Keynesians in the government and at Bank of Japan would have none of that. Price must increase.

(John Maynard Keynes, who didn't even have a degree in economics...)

It's safe to assume they know nothing about Austrian economics.


Musa Kocaman said...

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