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April 21, 2005
More Deflation For Japan?
The Bank of Japan is poised to abandon its forecast of a return to inflation this fiscal year, delaying an exit from zero interest rates until the year to March 2007 at the earliest, according to Yutaka Yamaguchi, former deputy governor.
Mr Yamaguchi said the BoJ’s much-watched half yearly forecast, due out next week, would reverse its October prediction that the economy would finally climb out of deflation this year by registering a rise of 0.1 per cent in consumer prices. Instead it would predict yet more deflation, he said.
You might guess that this means that news of the quantitative easing program's impending death was definitely premature. Maybe not.
Mr Yamaguchi, who oversaw the introduction of the current ultra-loose monetary policy from March 2001, said the so-called quantitative easing framework had failed in its principal aim of stimulating economic and price activity. Under quantitative easing the bank floods the market with excess liquidity...
Mr Yamaguchi’s assessment of the purpose of quantitative easing contradicts the present board's official interpretation. The current board says quantitative easing was introduced to stabilise the financial system, which it achieved. Mr Yamaguchi said, by contrast, that the real purpose was to fight deflation.
Mr Yamaguchi said it was indeed time to start normalising monetary policy because the economy had proved itself capable of growing even with mild deflation. Zero interest rates punished savers and rewarded borrowers, he said, a distortion that should be ended as soon as possible.
Hmmm. I guess Mr. Yamaguchi isn't buying the conventional wisdom on Japanese economic performance.
UPDATE: In other news from Japan, Mark Thoma links to a Bloomberg report, indicating that Japan is not ready to bail on the dollar just yet.
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