Bank of Japan fights deflation battle with novel easing policy

Ben Southwood
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THE BANK of Japan yesterday hit markets with another bout of quantitative easing (QE), easing policy for two consecutive months for the first time in eight years.

The Bank added 11 trillion yen (£86bn) to its main asset purchase programme, which also includes lending provisions, but they did not stop at traditional QE, and also announced new and unprecedented deflation-busting schemes.

Bank bosses, including governor Masaaki Shirakawa, released a joint statement with the government, promising to reverse price declines and bring inflation up to the one per cent target, potentially firming up markets’ confidence that policymakers will to do what is necessary.

And the Bank, following similar plans worldwide, launched a scheme offering banks 15 trillion yen of cheap, long-term credit, as it tries to fend off world economic pressures and put the Japanese economy back on the path to growth.

But analysts said that lending demand would be constricted by deflation – growing purchasing power – regardless of funds made available to the banking sector.

“The problem is not banks ability to lend,” said Masayuki Kichikawa, top economist at Bank of America Merrill Lynch in Tokyo. “The problem is lack of demand for loans due to deflation and a high exchange rate.”