Will Japan abandon its ultra-loose monetary policies now that Kazuo Ueda has replaced Haruhiko Kuroda as governor of the Bank of Japan? The answer, it seems, is “no”. The new governor, a well-known and respected academic economist, stressed that the two pillars of Japan’s current monetary policy — negative interest rates and yield curve control — remained appropriate. Was he also right to stick to these policies? On balance, my answer is “yes”. This is not because this is without risk, as Robin Harding argued last week. But because the alternatives are risky, too.
Even if one ignores the BoJ’s asset purchases (or “quantitative easing”) and more recent policy of yield-curve control, the striking fact remains that its short-term intervention rate has been 0.5 per cent, or lower, since 1995. How many economists would have guessed that a country could run such an accommodative monetary policy for almost three decades and yet remain worried about weak demand and low inflation?
This is clearly a deep-seated structural phenomenon. So what has caused it? The answer is chronic excess savings. Japan is not the only large market economy with a strong manufacturing sector and structural excess savings. The other is Germany. But Germany has had an answer Japan does not have: the euro.