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The Bank of Japan on Tuesday announced a new measure of quantitative monetary easing “in a broad sense” as the Japanese economy faces deflation and the yen rises against the U.S. dollar. It decided to inject about ¥10 trillion into the financial market by lending funds to financial institutions for three months at a fixed interest rate of 0.1 percent against collateral such as government bonds and corporate debentures. It will also keep the bank’s short-term interest rate unchanged at 0.1 percent. The decision, the BOJ’s response to a government call for further monetary easing, represents a turnabout of the central bank’s policy stance.

In making public its monthly economic report for November, the government had announced that the economy was in a state of mild deflation. But, at the time, BOJ Gov. Masaaki Shirakawa appeared reluctant to take another monetary-easing step. He said that merely increasing liquidity would not lead to price rises, hinting disagreement with the view that the economy risked falling into a deflationary spiral. Thus the government’s and BOJ’s perceptions of Japan’s economic conditions differed.

Then, on Nov. 27, the yen rose to a level of ¥84.82 against the U.S. dollar. It is clear that the Japanese economy faces the dual threat of deflation and a high yen, which would send Japan into another downturn. With its decision this week, the BOJ’s view has converged with the government’s. On Monday, Gov. Shirakawa said the central bank will “do its utmost” to overcome deflation. The government and the BOJ should take harmonious measures to prevent a second dip in the economy.

The government should consider the possibility that the BOJ’s new measure may not necessarily contribute to pushing up prices, and that the root cause of the current deflation is sluggish demand falling short of supply. It will be important for the government to pursue both a short-term policy of stimulating the economy and spurring employment, and a long-term policy geared toward economic growth.

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