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Home > Blogs > Anthony Harrington > Bank of Japan explores the difference between nought and nought

Bank of Japan explores the difference between nought and nought

Japanese banks | Bank of Japan explores the difference between nought and nought Anthony Harrington

Until its high profile decision on October 5 to cut its overnight call rate from 0.1% to 0.0% plus some fraction less than 0.1%, the Bank of Japan had not altered its rate since December 2008. This was when it reduced the rate to the now superceded 0.1% level, a decision that flipped savings in Japan from massive to under 3%. Why save when you are getting nowt for your money? The current rate cut will look to savers like some kind of gesture from the Theatre of the Absurd. “We’re not giving you anything for your savings, now we’re going to give you even less…” What’s next? Criminalising saving?

However, when you are in a seriously deflationary world, central bankers have to scratch around for something to hammer the public psychology with. According to CCN Money the Bank of Japan (BoJ) has described its move as necessary in order to launch a “comprehensive monetary easing policy” in an attempt to ginger up Japan’s sluggish economy.  

After an improved 2009, where exports put in a good year on year showing, the increasing strength of the Yen has stamped all over Japan’s export sales. Last week the BoJ took steps to weaken the Yen, and achieved only a temporary success. Now it has announced that it plans to purchase five trillion yen ($60 billion) worth of government bonds as the first step into another QE foray. The news went down well in Japan, with the Nikkei index gaining 1.5% on the assumption that printing money in large tranches would eventually do something to halt the rise and rise of the Yen. Anything that weakens the Yen helps Japanese exporters and that would be good news for business.

The Japanese government has also decided to risk the wrath of the US, which gets very annoyed when its major export partners give their export chances against US companies a boost by competitively devaluing their currencies. It has announced that it intends to be active in the coming weeks in the currency market buying dollars to weaken the yen. Yet the U can hardly in good faith blame the Japanese for emulating the Chairman of the Federal Reserve. As the New York Times pointed out on October 5:

“… Japan is taking a page from US Federal Reserve Chairman Ben Bernanke’s playbook. The move closely resembles a move by the Fed to cut its key interest rate to near zero and then turn to other unconventional methods, such as buying securities, to juice up economic growth.”

Bloomberg quoted Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, who welcomed the move. “It’s positive for equity markets and a step in the right direction,” he said. Asian stock markets certainly agreed, heading back into positive territory after digesting news of the BoJ rate cut. The MSCI Asia Pacific Index rose 0.2% to 127.48 on the evening of October 5, reversing a previous fall of 0.9% before the BoJ decision, according to Bloomberg.

Bloomberg cites Kenichi Hirano, General Manager and Strategist at Tachibana Securities Co, who called the BoJ rate cut and decision to buy more assets “a big surprise”. “That weakened the yen and people started buying shares at once,” he said.

Further reading on global inflation and export risk:

Tags: Bank of Japan , Ben Bernanke , Federal Reserve , Japan , yen
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