The Bank of Japan’s Policy May No Longer be Effective

In the last quarter of 2008, Japanese growth plunged to a 35-year low, contracting 12.7% annualized. Has the Bank of Japan used all available measures? What else can be done to stop the downturn spiral?

Recently, the Bank of Japan announced more measures aimed to provide liquidity and boost credit growth. Along with an interest rate already close to zero, the central bank plans to buy up to 1 trillion yen (or $10.6bn) in high rated corporate bonds and extend its emergency purchases of other assets from financial institutions. Moreover, it will extend its programs to acquire commercial paper and provide unlimited collateral-backed loans to financial institutions.

However, at Trading Economics we think these measures may not bring the expected relief to a deteriorating economy as the real problem is not the availability of credit but a deficient demand for Japanese products from overseas. Indeed, a sudden plunge in exports is depressing business investment as profits are fading. In addition, less income from overseas is hurting consumer spending through deteriorating employment and falling asset prices. In our opinion, what the Japanese economy needs, is to boos its domestic demand which can be achieved in the form of a large fiscal stimulus package.

Anna Fedec,
2/24/2009 8:22:25 AM