2024-03-22 08:54:00
The Bank of Japan (BoJ) announced on March 19 that it would stop its “ultra-loose” monetary policy, but still maintained its “loose” monetary policy.
Important changes include: raising short-term interest rates from the original negative 0.1% to 0 to 0.1%, which is not only the first interest rate increase in 17 years, but also ends eight years of negative interest rates. Secondly, controls on long-term interest rates are removed, and the “yield curve control” (YCC) policy is no longer used to limit the upper limit of Japan’s 10-year government bond yield. In addition, the quantitative easing (QE) policy will be significantly reduced. Although the Bank of Japan will continue to purchase Japanese government bonds, the monthly bond purchase amount will be reduced, and it will stop purchasing “Japan Stock Index Fund ETF” and “Real Estate Investment Trust Fund” ( REIT), Japan’s securities and real estate markets will therefore no longer receive funding from the central bank.
All of the above policy changes point to the same policy goal, which is to enable Japan to escape from the economic downturn of more than 30 years. The downturn is not only reflected in economic growth that is lower than that of other countries, but also in the deflationary state of continued falling prices.
The fall in prices is like a thermometer, an indicator that indicates the lack of purchasing power and the sluggish economy. Getting rid of deflation is therefore the medium-term goal for economic development to return to normal.
The cycle of prosperity is actually like the four seasons of spring, summer, autumn and winter, with its own regularity. When the economy is overheating, we see inflation, and when the economy is in recession, we see deflation.
Generally speaking, the classical school of economics focuses on the long term and believes that cycles have their own laws. If the “invisible hand” is allowed to operate, the problem will naturally be solved. If government policies intervene, it will not only be ineffective but often leave sequelae. However, the Keynesian school believes that the short term cannot be ignored, that is, Keynes’s famous saying “In the long run, we are all dead” (in the long run, we are all dead), under this thinking, inflation and deflation, The government should not sit idly by; the most direct way is to adopt tightening or loose monetary policies, including raising or lowering interest rates.
But in some cases, these countermeasures have limited effectiveness and often come at a huge cost. For example, both inflation and deflation have the characteristic of “psychological self-fulfillment of expectations.” In other words, once expectations arise, inflation or deflation will really happen. When inflation is expected, goods will be purchased in advance, causing prices to rise. If everyone’s expectations are fulfilled, purchasing power will be increased, causing prices to rise even more. When deflation is expected, except for immediate necessities, people shrink their purchasing power and wait for prices to fall, which also fulfills expectations and falls into a self-fulfilling vicious cycle of deflation.
In this case, it is not easy to raise or lower interest rates. The global inflation 40 years ago is an example, and the Japanese deflation in the past 30 years is also an example. Avoiding or eliminating the psychology of expectations therefore becomes the first priority in fighting inflation or deflation.
40 years ago, because inflation expectations could not be eliminated, repeated increases in interest rates were unable to reduce double-digit inflation. The problem was not solved until the interest rates were finally raised to over 20% and the whole world paid the price of economic recession. .
In the past 30 years, Japan has formed expectations of deflation. Therefore, in addition to weak purchasing power and low willingness to invest, wages have also stagnated, which has also led to sluggish private consumption. In terms of policy, Japan has had low or zero interest rates for the past 30 years. In the past eight years, it has even implemented negative interest rates, but it has been unable to fight deflation.
This time, under various favorable conditions of time, place, and people, Japan has actually seen prices not fall for 23 consecutive months, but has even reached or exceeded the 2% inflation target set by the Bank of Japan. There are still many variables as to whether Japan has really got rid of deflation; however, this year’s “Spring Fight” labor negotiations in Japan reached an agreement to increase wages by 5.28%. Compared with the previous wage increase, which was only about 2%, the Bank of Japan therefore judged that both labor and management have reached an agreement. Get rid of the deflationary mentality of “prices will not rise.” At this time, we announced an interest rate increase, ended negative interest rates, and expected that the normalization of monetary policy would bring about a “virtuous cycle of wages and prices” and the beginning of a new era in Japan.
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