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Bank Of Japan Out Of Options

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The Bank of Japan (BoJ) has completed it’s 2 day monetary policy meeting in Tokyo, the results contained no real surprises. Japanese interest rates are to stay at 0%, a level they have been at since being cut from 0.1% in late 2010.

Examining day-to-day life in the Japanese economy would show everything to be healthy and normal. Prices are stable and the economy is in a full employment situation. But even the enviable 3.7% unemployment rate and steady 1.3% rate of inflation are not enough to instil confidence in an economy with a serious growth problem.

Japan’s GDP currently stands at 0.7% and is once again falling. In fact 9 of the last 24 quarterly growth reports have been negative, some even in double digit negatives.

The Japanese economy is badly in need two elements, stimulus and stability. At 0% interest rates the BoJ has no room for further easing, similar to other global central banks however they have been active with other monetary stimulus methods. This morning’s policy statement did not materially add to the stimulus program, this is in keeping with the BoJ’s recent shying away from non-rates based stimuli. Japanese authorities are concerned that although recent injections have produced growth spurts, these have proven to have limited long term traction and create wide distortions in the country’s economic data.

Japanese debt to GDP is forecast to reach 240% by the end of next year, this has spurned the Government into revenue raising actions. Next month will see sales taxes increased by 60%. This is a gamble. Debt reduction is a prime objective, but then again so is economic growth. The authorities have struggled for years to kick start growth via traditional methods, but to little avail. The Bank of Japan is out of options, so it is over to the Finance Ministry to attempt to tackle this from the fiscal side. This will be a long game, but Japan has been in this situation for over a decade, it looks like there are no short term solutions.

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