Despite a return to deflation for the first time since 2013, the Bank of Japan wrong-footed markets last week by holding fast on its interest rate policy, rather than implementing the stimulus many had expected.
The news reminded me of a Project Syndicate article from a few months ago by Lord (Adair) Turner, former Chairman of the FSA and now Senior Fellow at the Institute for New Economic Thinking, in which he correctly predicted that the BOJ’s turn to negative rates wouldn’t combat deflationary pressures:
“… it is increasingly clear that ultra-low short and long-term interest rates are not boosting nominal demand. Nor should that surprise us. Japan’s experience since 1990 teaches us that once companies feel overleveraged, pushing low interest rates still lower has little impact on their investment decisions. Cutting Japan’s ten-year yield from 0.2% to 0.1%, and Germany’s from 0.5% to 0.35% – the movements over the last week – just doesn’t make a significant difference to consumption and investment decisions in the real economy.
The BOJ’s announcement of a negative interest rate certainly did produce a currency depreciation. But a lower yen would help Japanese exporters only if China, the eurozone, and South Korea – all themselves struggling with deflationary pressures – do not match Japan’s rate cuts…”
(Project Syndicate, February 5th 2016)
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