How Japanese policymakers fell into a very deep hole


Iinvestor betting on tighter monetary policy from the Bank of Japan (burden) have experienced little winning over extremely low interest rates over the last three or so decades. first decision by burdenThe new governor of Ueda Kazuo was no exception. The central bank’s key policy of yield-curve control, which caps ten-year government-bond yields at 0.5% with aggressive bond-buying, was left unchanged on 28 April. instead of this, burdenPolicymakers announced a review of their monetary policy. The exercise is expected to last possibly for a year.

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It’s a bleak comedy to see bookies once again nursing burning fingers. But the policy review may be more meaningful than it appears at first glance to be a bureaucratic exercise. assess the decisions made by the report burden Since the 1990s, the Japanese economy entered a period of deflation.

The starting point should be the grim reality in which central banks find themselves. The yield-curve controls, which began in 2016, were a concession to the fact that burdenHeavy asset-buying was causing problems in the functioning of the country’s bond market, and little additional stimulus was possible. burdenThe problem is quite different now: Japanese inflation is at its highest level since the early 1980s, but even a modest increase in rates could be devastating to the economy. After decades of efforts to stimulate a stable economy, the country’s central bank is in dire straits, unable to move much in either direction.

To understand why, it helps to return to the source of the problem. Japan had a huge asset bubble in the late 1980s, mainly in stock and property prices. Six of the ten most valuable companies in the world call the country home. The bubble was intentionally popped with a rise in interest rates in 1989, which caused stock prices to immediately fall, and land prices continued to decline in the 1990s. Since then, Japan has been mired in what Richard Ku of the Nomura Research Institute, associated with the bank of the same name, called a “balance-sheet slump.” Firms and households focus on repaying debt rather than investing and consuming, which slows economic growth.

As a result of decades of austerity, Japanese residents have far more financial assets than debt, and do not appear to be very vulnerable to rate hikes. Instead of depositing savings in stocks, families prefer to deposit them in the bank, which now holds an impressive ¥1.1 quadrillion ($8trn), equivalent to nearly 200% of Japan’s. Gross Domestic Product, Non-financial companies hold another ¥561trn.

Around the world, homes are generally squeezed by higher rates. Japan may prove to be a beneficiary, at least in the short term. Marcel Thielient of Capital Economics, a research firm, notes that with each percentage-point increase in Japanese interest rates, households’ net interest income would increase by ¥4.7trn, or 1.5% of their annual disposable income. Coupled with a stronger currency, which will make imports cheaper into the country, it seems likely that households will enjoy the rate hike.

However, the pain will be felt elsewhere. The first victim will be an institution that has become far more indebted because the private sector has bailed out: the central government. In last year’s budget, about 8% of spending was allocated to interest payments, even at the average interest rate on government bonds of 0.8%. A one-percentage-point rate hike across the board would mean more than doubling the portion of spending since bonds rolled out.

The effect would subside over the years, though not as slowly as it once would have happened. The truth is that burden It now owns more than half of the Japanese bond market, and even more of the long-maturity bond market, which has accelerated the pace at which higher rates will hit fiscal arithmetic. When burden When a bond buys, it creates a reserve asset that pays its benchmark rate. If rates go up, then burden There is more immediately outstanding on these reserves. It will bear the losses for which the government will have to pay.

The other part of the economy that will immediately feel the pain of a rate hike is the banking system. Higher rates would result in larger unrealized losses on the assets of smaller financial institutions. The Japan Center for Economic Research, a consultancy, suggests that, if long-term interest rates increase by one percentage point, regional banks’ economic value (their value in terms of expected cash flows from assets and liabilities) will decline. equal to 60% of their capital.

i won’t start here

Reducing demand by dramatically weakening some of Japan’s weakest lenders will, over time, serve as a method of limiting the recent surge in inflation, even if it is not the ideal way to achieve such a goal. Do not be Yet solving the long-term problem of deficient demand is now even more difficult. Despite the huge increase in government debt over the past three decades, the fiscal stimulus has begun right up and down; Enough to prevent total economic collapse, but not enough to ignite strong growth. For years, a concerted effort to raise consumer spending through more aggressive government spending was the obvious Keynesian prescription for Japan. The rise in government-bond yields complicates the picture.

It sounds a bit strange to say that Japan is still recovering from a crisis that began around the same time the Berlin Wall was coming down, but the country’s economy has never experienced a solid recovery from the asset-bubble burst . Japan in the 1990s Gross Domestic Product per capita was about 18% below the US level. In 2021, by the same measure, Japan’s per capita economic output was 39% less than that of the US.

Thus the world’s third largest economy remains in a bad shape, which its policymakers have played a role in maintaining. Mr. Ueda, an outsider burden Academically, there is a chance to express yourself clearly. Reviews must be a cry for help. Acknowledging a problem is the first step toward finding a solution, especially when the solution is unpleasant.

Read more on free exchange, our column on economics:
Economists and investors should pay less attention to consumers (27 April)
Is China better at monetary policy than the US? (20 April)
How can the state control the banking system (April 12)

Also: Free Exchange Column How got its name

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