May 20, 2005


Ultraloose monetary policy intact, for now (HIROKO NAKATA, 5/21/05, Japan Times)

The Bank of Japan will keep its ultraloose monetary policy intact -- but may be inching toward tightening as concerns over the once-shaky financial system recede.

After its two-day meeting ended Friday, the BOJ Policy Board left its policy untouched, but stated that it would tolerate a reduction in financial market liquidity below its target range.

The BOJ said it aims to keep the outstanding balance of banks' deposits at the central bank within a range of 30 trillion yen to 35 trillion yen.

Since March 2001, the BOJ has maintained this so-called quantitative easing monetary policy, in which the bank injects excess funds into the financial market in pursuit of an economic recovery. Interest rates have been glued near zero for four years.

Even with ultraloose money and rates that have actually been negative at times they haven't managed to reflate--though they face phenomena we don't, like declining population, Chairman Greenspan might want to take note.

Posted by Orrin Judd at May 20, 2005 9:45 PM

I was chatting with a Japanese economist a few years ago and they're all as baffled by this as we are. The strange thing, regarding monetary policy, is that the Bank of Japan has been expanding the money supply for years, but the normal stimulative effect of this is being counteracted by perverse private sector behavior.

The ultra-mega-simplified cartoon version seems to be this: BOJ expands the money supply, but instead of spending it, people just hoard it, so there's no stimulus to output. When bank reserves are expanded, banks seem to be using them to shore up weak balance sheet positions instead of making new loans.

Posted by: Tom at May 21, 2005 7:27 AM