For years, Japan has flooded its moribund economy with money: interest rates near zero, asset purchases by the central bank and public works projects that have dammed the nation’s rivers and paved remote mountain roads.
Japan’s central bank redoubled that effort Tuesday, lowering its benchmark interest rate to a range of zero percent to 0.1 percent — a symbolic, if slight, edging down from the previous 0.1 percent. The Bank of Japan also said it would set up a fund of 5 trillion yen, or $60 billion, to buy government bonds, commercial paper and other assets in a bid to shore up a faltering economic recovery.
Stock markets around the world reacted favorably, as investors apparently saw it as a sign that central bankers in leading markets will continue trying to stoke their economies.
And yet, there seems to be a widespread sentiment in Japan that the announcement on Tuesday may do little to reverse the strong yen and persistent deflation that threaten the economic recovery.
Some economists say the Bank of Japan is still not doing enough to get funds flowing again into the economy, and that its soft-spoken governor, Masaaki Shirakawa, must open up the money hose even further. Others say that easy money has been available in Japan for so long that more funds in the economy will do little to get the country out of its slump.
Still others say the problem is not the amount of money in the economy. Japan’s woes, they insist, stem from how that money is allocated — to “zombie” companies propped up by easy money, or immense income transfers to the country’s burgeoning elderly — things the central bank has little power to change.
The money that the central bank had already been pumping into the economy, they say, has either sat in bank coffers — bank lending has been sluggish, despite loose monetary policy — or lent out to the same venerable but obsolete companies by loan officers untrained and ill-equipped to identify new promising entrepreneurs and other more dynamic, creative borrowers.
The easy credit, in fact, has “further impaired the efficient allocation of resources,” Ryutaro Kono, chief economist for Japan at BNP Paribas, said in a note to clients Tuesday. “The proper policy response,” he said, “should be to facilitate structural reform.”
Masamichi Adachi, an economist at JPMorgan in Tokyo, said that established companies “lacked imagination” to take advantage of the easy money by proactively expanding overseas, for example, or taking other risks to bolster their businesses.
“Japan’s low growth and deflation may be partly caused by the corporate segment remaining somewhat profitable and competitive, thus unwilling to take on risks,” Mr. Adachi said in a note earlier this year.
Households have also been reluctant to spend, because of a combination of factors, including pessimism over future income after two decades of sluggish economic growth and the rising value of cash in a deflationary economy. (When prices are falling, cash in hand is worth more every day.)
With the interest rate cut, the central bank effectively reintroduces a policy of a zero interest rate for the first time since July 2006. But given the already low rate that was in place, the effect may be largely symbolic. “Though there will be debate over the effects of the monetary loosening, I believe the Bank of Japan has done all it can at this time,” Hirokata Kusaba, an economist at the Mizuho Research Institute in Tokyo, said in a note. But that also meant that the bank “had now depleted most of its policy options.”
The other way that the central bank had hoped to bolster the economy was to weaken the yen, which has battered the nation’s export industry.
A strong yen hurts Japanese exporters by making their goods more expensive overseas and eroding the value of their overseas revenue. Despite the weaknesses in the Japanese economy, the yen tends to strengthen against other currencies in times of global financial uncertainty, partly because the country still runs a current-account surplus.
The yen’s value is also related to the difference between Japanese interest rates and those elsewhere. Low rates in Japan could give investors more incentive to sell the yen to invest in higher-yielding currencies, which would weaken the yen. More purchases by the central bank of government bonds and other assets could have a similar effect.
But Naomi Fink, a strategist at the Bank of Tokyo Mitsubishi-UFJ, said the measures announced Tuesday would offer only “a temporary boost” to the dollar-yen exchange rate. Intervention by the Japanese government in currency markets has also failed to reverse the upward trend in the yen.
Indeed, the yen initially fell against the dollar after the announcement, but it later rebounded to 83.40 to the dollar, stronger than before the rate change.
“From market reactions, we can see that Japan ultimately cannot look to monetary policy alone to solve problems like deflation and the strong yen,” said Mr. Kusaba at Mizuho Research Institute. “From now on, the market will be watching what actions Japan takes on the fiscal and policy front.”
But there are only so many rivers to dam and mountain roads to pave.
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