The monetary policy that dare not speak its name is returning to Japan. The central bank, as expected, cut interest rates on Friday to 0.1 per cent. Yet it was cagier on whether it had re-engaged quantitative easing, the liquidity-boosting policy pioneered in Tokyo and now being embraced round the globe.
The reluctance to say “QE” may be partly because it didn’t work that well the last time Japan used it in 2006. It may also be because to say QE smacks of policy desperation. There is no suggestion, as last time round, the Bank of Japan is targeting the quantity of reserves held by its banks instead of interest rates. Quite the reverse; the BoJ said the overnight call rate would be “encouraged to remain at about 0.1 per cent”.
Semantics aside, the BoJ will increase its outright purchases of government bonds. That is a felicitous coincidence, given that bond issuance is increasing to pay for pump-priming. The BoJ will also, on a temporary basis, buy commercial paper. That looks like QE, at least in the books of the US Federal Reserve, although the amounts involved appear far smaller. The increase in bond purchases will be less than $30bn a year. Nor was there any hint of the scale of planned commercial paper purchases. They would need to be massive to bring the BoJ’s balance sheet up to the $1,700bn it last reached under QE, 1½ times its current size.
In any event, regardless of whether Friday’s moves constitute QE, they fall short of what is required. The yen actually strengthened further, highlighting the belief that Japan is streets behind the Fed. That means – BoJ governor Masaaki Shirakawa’s apparent reluctance notwithstanding – a more recognisable form of QE is on the cards. Delaying the inevitable does not look especially clever, especially when – by the BoJ’s own admission – economic and financial conditions are deteriorating so fast.