Reply #20: Bank of Japan set to predict yet more deflation [View All]

[54anickel]

http://news.ft.com/cms/s/c32ce34c-b23e-11d9-bcc6-00000e2511c8.html

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.

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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.

The aim had been specifically to promote an expansion of banks’ balance sheets, he said, but in fact these had contracted ever since the policy was introduced. “It is evident that the core transmission mechanism of this policy did not function,” he said.

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.

The distinction is important because the BoJ has been talking openly about the possibility of reducing liquidity targets on the grounds that the banking system has stabilised. Some economists have criticised such a move arguing that it would be seen by markets as a tightening, since it was described as a loosening when it was being phased in.

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.


:wow: Abandoning Greenspinism? "Chopper" Ben might have been wrong in his strategy to fight delation? Does this mean it's time to stop cranking out Yen to buy US$? So many questions!!!