Japan's secular stagnation and monetary policy

PLEASE NOTE: THE VENUE FOR THIS EVENT HAS CHANGED.
Crawford School of Public Policy | Australia-Japan Research Centre

Event details

Seminar

Date & time

Monday 29 May 2017
12.00pm–1.00pm

Venue

Griffin Room, Level 1, JG Crawford Building 132, Lennox Crossing, ANU

Speaker

Ikuko Fueda-Samikawa, Japan Center for Economic Research.

Contacts

Nicholas Horton

Since the end of the 1990s, Japan has been in a period of secular stagnation with a decline in the natural rate of interest. The natural rate of interest, first advocated by Swedish scholar Knut Wicksell in the 19th century, means the interest rate consistent with stable inflation without any shocks to demand and supply. When the natural rate turns negative it becomes highly difficult for monetary policy alone to guide the real interest rate below the negative natural rate.

The Bank of Japan (BOJ), to tackle the long persisting deflation, has been purchasing unprecedentedly massive amounts of Japanese government bonds. The BOJ now holds 40 per cent of the total Japanese Government Bonds (JGBs) issued and there is increasing concern that the Bank may eventually run out of willing JGB sellers.

In September 2016, the Bank announced a new framework for strengthening monetary easing: ‘Quantitative and Qualitative Monetary Easing with Yield Curve Control’, replacing the previously introduced policy, ‘QQE with a Negative Interest Rate’. It is the sixth unconventional monetary policy the BOJ introduced after Japan’s nominal interest rate reached its zero lower bound. Nevertheless, the Bank has not yet succeeded in attaining its inflation target of 2 per cent and Japan is still under the imperative risk of slipping back into deflation.

In recent months, the Fiscal Theory of the Price Level known as the Fiscal Theory of the Price Level (FTPL) has attracted public attention in Japan as an alternative measure to the BOJ’s bold monetary policy. The idea is that it is not the monetary policy but the fiscal policy that determines the price level.

Japan might have moved to the phase of FTPL in which there is a combination of fiscal policy which does not try to observe fiscal discipline, and of monetary policy that does not change the policy rate that is needed to reach the inflation target. Although the government has announced its aim to achieve a primary surplus by FY2020, the Cabinet office’s January 2017 ‘medium-to-long term economic and fiscal outlook and revitalization’ shows that this goal is probably unattainable.

If we consider the BOJ’s monetary policy stance within the framework of the FTPL, a transition from ‘monetary dominance’ to ‘fiscal dominance’ might have taken place with the adoption of the Yield Curve Control aiming to influence the long end as well as the short end of the yield curve.

The most important issue is to change the expectations of the private sector. Consumers are expected to respond to falling prices by spending more, which in turn boosts the economy and raises employment and wealth. But this has not been the case in Japan. If people do not believe in the government or central bank, consumption will remain weak, and prices will not rise.

Ikuko Fueda-Samikawa obtained LLB from SOAS, the University of London. She joined Nikkei Inc. in 1990 as a staff writer. Having worked in the Financial News Department and Economic News Department, she was seconded to Japan Center for Economic Research (JCER) as an economist in 1997. She specialises in monetary policy and banking. Her research project now explores the impact of BOJ’s current monetary policy on Japan’s economy as well as the financial market. She was Senior Economic Advisor at the Embassy of Japan in London (2007-2008). She has recently published a book in Japanese Minus Kinri Seisaku (Negative Interest Rate Policy) with Kazumasa Iwata, former Deputy Governor of Bank of Japan, now the President of JCER.

A light lunch will be provided. Please contact Nicholas Horton nicholas.horton@anu.edu.au if you would like to attend this seminar.

This event is co-hosted by the Embassy of Japan in Australia and the Australia-Japan Research Centre.

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