Moody's casts doubt on radical Japanese plans

As asset purchases began in Japan today, ratings agency Moody's has voiced concerns about new Bank of Japan (BoJ) governor Haruhiko Kuroda's radical plans:

Monetary easing on this scale is untested, and both the efficacy and the timeline for the BOJ's policies to produce the intended positive macroeconomic effect are uncertain.

Our economics reporter Ben Southwood on Kuroda's plans for the central bank:

  • In order to bring inflation up to the Bank of Japan’s (BoJ) two per cent target as soon as possible, new governor Haruhiko Kuroda promised to keep injecting new money into the Japanese economy until the monetary base reaches ¥ 270 trillion (£1.87 trillion), almost double where it is now.
  • Other things being equal, this will require the world’s biggest ever monetary stimulus, worth about ¥ 130 trillion – or £900bn – more than double all the quantitative easing (QE) the Bank of England has done so far.
  • Kuroda managed to secure a unanimous vote on the measures at the BoJ’s rate-setting committee, and moreover switched the Bank’s focus from interest rates to the monetary base.
  • This marks a drastic break with the previous governor, Masaaki Shirakawa, who allowed mild deflation during most of his time in the job.
  • This came after the so-called lost decade of the 1990s, when Japan first slipped into deflation, and found itself unable – despite massive public spending programmes and quantitative easing – to fight its way out.
  • Whereas in the UK prices were – according to the consumer prices index (CPI) – 37.1 per cent higher in 2012 than in 1997, in Japan, last year’s average prices were about 3.3 per cent lower than 1997’s.
  • In the same period the Japanese economy grew a total of only 9.4 per cent, while the UK economy, even counting the slump, grew 34.3 per cent.
  • Economists believe deflation holds back economies partly by increasing the real value of debt. Deflation also means people hold back from investment and consumption they would otherwise have undertaken, reducing output.

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