The Bank of Japan plans to pump around ¥10 trillion into the banking system to rein in deflation and the surging yen. Here are some questions and answers about the ramifications:
Why has the BOJ introduced the measure?
The central bank expects the measure to help the economy overcome deflation, in which price drops lead to deterioration of corporate earnings, job cuts and household income declines. The measure is timed to back up an economic stimulus package now being hammered out by the government.
In a past bout of deflation, the BOJ in 2001 introduced the so-called quantitative easing policy that set a target quantity of liquidity instead of an interest rate target adopted for conventional monetary policy.
What are the details?
Through open market operations, the BOJ is providing banks with three-month loans that carry an annual interest rate fixed at the same rate as the BOJ’s policy interest rate of 0.1 percent on overnight interbank loans.
Banks offer such assets as government bonds as collateral on these three-month loans.
Before the introduction of the new measure, interest rates on such loans had been fixed through competitive bidding, tending to be higher.
What will be the effect of the new measure?
Deflation represents a general price decline where money remains static as people delay spending in anticipation of lower prices. The BOJ measure is designed to provide banks with abundant low-cost funds and encourage them to lend to businesses and consumers to expand spending.
Will it accelerate the end of deflation?
Deflation causes demand shortages in the economy as businesses and consumers lack confidence in future prosperity. Few experts expect the BOJ’s ample liquidity provision alone to resolve deflation. The government may have to develop and implement a long-term growth strategy to gradually increase the economy’s strength.
What effects will the measure have on the yen’s value against other major currencies?
It can be expected to help correct the yen’s excessive appreciation against other major currencies, including the dollar. Institutional investors have bought yen for dollars to cause the yen’s rise as interest rates on three-month yen loans have topped those on dollar loans. The BOJ measure will work to lower interest rates on such loans, contributing to reducing the attractiveness of the yen for institutional investors.