The monetary policy of Japan ECO215 Alma Zhantleuova
JAPAN STOCK MARKET (NIKKEI 225) Source: Trading Economics web-site, database 2014-04-01 http://www.tradingeconomics.com/japan/stock-market
The bubble period (1985-1990) This period is considered as the reason of the Japanese stagnation The result changes of the bubble burst are: • The stock price index and the land price index increased 4 times. F.ex, Stock price index (Nikkey 225) from 10000 yen to near 40000 yen (1983-1989) • The inflation rate had gradually come down from 12 percent in 1974 to below 4 percent in 1978. • The CPI inflation rate was quickly brought down to below 3 percent in 1982 • The inflation rate fluctuated at the low range of 0-3% during all 80s. • The yen appreciated from 260 yen/dollar in February 1985 to 150 yen/dollar in the summer of 1986, which cause recession and disinflation. Result: a difficult position of having nonperforming loans that led to the banking crisis.
The inflation rate had gradually come down from 12 percent in 1974 to below 4 percent in 1978. The inflation rate suddenly went up to about 8 percent in 1979 due to the second oil crisis. However, the CPI inflation rate was quickly brought down to below 3 percent in 1982. The inflation rate fluctuated at the low range of 0-3% for the rest of the 80s. After Decreasing the Monetary base the CPI inflation rate rose from 1% at the beginning of 1989 to 3% toward the end of the same year. The CPI inflation rate declined from just above 2 percent in the beginning of 1992 to 0 percent by mid-1995. It’s clear from the graph that the deflation remains one of the most serious issue of Japan. Source of graph : Trading Economics web-site, database 2014-03-28 http://www.tradingeconomics.com/japan/inflation-cpi
The yen appreciated from 260 dollar/yen in February 1985 to 150 dollar/yen in the summer of 1986, of which some part was a movement toward an equilibrium and some part was overshooting. The sharp yen appreciation caused a recession (due to a slump of exports) and imported disinflation In spite of a weak economy, the exchange rate was appreciating from 1993 to 1995. The exchange rate appreciated from 100 yen/dollar to 80 yen/dollar in the spring of 1995, with no apparent macro-fundamental reasons for such a sudden move. Since 199 the exchange rate of US. Dollar/yen is not as volatile as before because of the decreasing the interest rate. Source: Bank of Japan: US.Dollar/Yen Spot Rate at 17:00 in JST, Average in the Month, Tokyo Market for duration January 1980 ~ September 2010. Retrieved February 24, 2013 http://www.stat-search.boj.or.jp/ssi/mtshtml/m_en.html
Interest rates were lowered from 1996 to 1997 in part to help stimulate the economy that was depressed by sharp yen appreciation. Low interest rates were necessary to prevent the yen from appreciating too much. After tightening Monetary Policy in 1989, The official discount rate (ODR) rose from 2.5%, where it had been since 1987, to 3.25% in May 1989. The ODR rose to 3.75% in October and 4.25% in December. The official discount rate was raised to 6.00% in August 1990. Yet the discount rate was lowered to 5.5% in July 1991, to 5% in November 1991, to 4.5% in December 1991. The decline of the official discount rate continued in 1992 and 1993. Sharp decrease of the discount rate was supposed to decrease the inflation rate. Source: BOJ's Main Time-series Statistics (Monthly) http://www.stat-search.boj.or.jp/ssi/mtshtml/m_en.html
Monetary Base/Average Amounts Outstanding Source: BoJ: Long-term time-series Data of Monetary Base http://www.boj.or.jp/en/statistics/boj/other/mb/index.htm/#p03
The dilemma of the monetary policy Increase of the stock and land prices (at 30% annually) • Reason: Bubble period • Solution: monetary tightening Low CPI inflation (lower than 2% target, about 0.5%) • Reason: a sharp yen appreciation, from 260 yen/dollar in February 1985 to 150 dollar/yen in the summer of 1986, and to 120 dollar/yen in December 1987. • Solution: monetary easing
Actions of BoJ: • Monetary policy was finally tightened in 1989. • Stock prices finally turned down from the first trading day of 1990, which was a result of monetary policy and bubble burst. • Sharp decrease of the discount rate in 1992-1993 was supposed to decrease the inflation rate. • Interest rates were lowered from 1996 to 1997 in part to help stimulate the economy that was depressed by sharp yen appreciation. • The government made a decision to expand the monetary base from 2000.
Recovery of the economy • The economy started to grow in the second half of 1995, and the year 1996 turned out to be a good one, with the growth rate exceeding 3 %. • The yen depreciated to a level above 110 dollar/yen providing additional support for a recovery. • A fragile economic recovery of 1996 accelerated in the first quarter of 1997, as the pre-announced consumption tax rate increase of April 1997 induced consumers to accelerate big-ticket consumption. • In April 1997, the consumption tax rate was raised from 3% to 5%, and the temporary special income tax cut was allowed to expire, both as planned. • The growth rate significantly slowed down in the second half of 1997. This was the result of the Asian currency crisis, and the banking crisis of the Japanese economy in November. • The economy continued to deteriorate in 1998: the year 1998 recorded negative growth for the first time since 1976. • The government made a decision to expand the monetary base from 2000. In 2014 The BOJ injects from 60 trillion to 70 trillion yen ($671 billion) annually. • Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008 and approaching the 2 percent target set a year ago. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year. • The BOJ expect that the monetary easing will cause the core consumer prices will rise 1.9 percent in the year starting April 2015. • The Japanese currency was at 104.32 per dollarin Jan 2014.
References: • “Two Decades of Japanese Monetary Policy and the Deflation Problem” TakatoshiIto and Frederic S. Mishkin. NBER Working Paper No. 10878 October 2004 • “Bank of Japan Sticks to Record Easing as Inflation Picks Up” By Toru Fujioka and Andy Sharp, web, Jan 22, 2014 • BoJ: Long-term time-series Data of Monetary Base http://www.boj.or.jp/en/statistics/boj/other/mb/index.htm/#p03 • Bank of Japan: US.Dollar/Yen Spot Rate at 17:00 in JST, Average in the Month, Tokyo Market for duration January 1980 ~ September 2010. Retrieved February 24, 2013 http://www.stat-search.boj.or.jp/ssi/mtshtml/m_en.html • Trading Economics web-site, database 2014-03-28 http://www.tradingeconomics.com/japan/central-bank-balance-sheet