In a dramatic policy reversal, the Bank of Japan has shifted its priority from cutting interest rates to expanding the money supply. The shift involves changing the key target for monetary adjustment from uncollateralized call-money rates to private banks' demand-deposit balances in the central bank.
Under the new formula, the outstanding amount of these interest-free deposits will be increased by 1 trillion yen to 5 trillion yen. The increase effectively brings the call-money rate to zero. The BOJ says it will continue this quantitative easing until year-on-year changes in consumer prices reach zero or higher. The BOJ will also increase, if necessary, purchases of long-term government bonds, now totaling 400 billion yen a month.
BOJ Gov. Masaru Hayami described the shift as a "drastic measure that is not normally taken." Finance Minister Kiichi Miyazawa welcomed the move, saying the Bank of Japan "has done everything it can." With an easy-credit policy now in full force, he added, "deflationary psychology" -- expectations of continuing price declines -- will go away. The market has reacted positively.