The Japanese economy

Economics

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The Japanese economy

Easy does it

by K.C. | TOKYO

JAPAN'S economy has long been ailing. But it now also has to contend with a strong yen, thanks in part to loose monetary policy in the rich world. That alone gave the Bank of Japan (BoJ) reason to act on October 5. So too did criticism that it has not done enough to spur the economy, which has inspired Japanese politicians to suggest legislation to weaken the central bank's independence.

Whatever its primary motivation, the BoJ took three modest but symbolic steps today. First, it lowered the policy rate from 0.1% to a range between 0% and 0.1%. That signals to the market, and to angry politicians, that the BoJ cares. Second, the BoJ stated that it would maintain the virtual zero-rate policy until there was "medium- to long-term price stability". Until deflationary Japan sees consumer prices rise between 0% and 2% (with an unofficial aim of 1%), the near-zero policy rate will remain (as it has done for ages).

Third, the central bank said that it will consider establishing a programme to buy public- and private-sector assets from banks—including commercial paper, corporate bonds and even exchange-traded funds (ETFs) and Japan real-estate investment trusts (J-REITs). Since the recent financial crisis, Japan has continued to accept financial instruments as collateral in order to pump money into the system, but hasn't bought the assets. The effect would be to restart the policy of quantitative easing that Japan used to claw out of its banking crisis between 2002 and 2006. The initial amount under consideration is about ¥5 trillion (¥3.5 trillion of which is for public-sector debt), which adds to a sum of ¥30 trillion already budgeted for BoJ loans to banks.

The market had expected some form of monetary easing but hadn't imagined a whittling of interest rates, even if merely symbolic. The Nikkei Stock Average closed 1.5% higher. The yen, which has been strengthening in recent days and months, fell initially against the dollar and euro.

From a political standpoint, too, the moves were a success. The finance minister, Yoshihiko Noda, said he expects the actions to weaken the yen and improve the economy. "Very timely", gushed the economics minister, Banri Kaieda. "I think it met Prime Minister Naoto Kan's expectations", he added.

Will the BoJ's actions have any impact on the economy? The policy-rate change doesn't change much in practice—it merely reinforces the message that low rates are here to stay for a while. The asset-purchase programme is as yet too small to matter. A new round of quantitative easing by America's Federal Reserve this autumn will not help the yen, which rebounded against the dollar later in the day. But the moves do suggest the BoJ is willing to respond to a worsening economic climate and to be sensitive to political pressure. The psychological boost that represents should not be discounted.