Japan Slashes Interest Rate to Near Zero

Japan Slashes Interest Rate to Near Zero

Japan's central bank cut its interest rate to near zero (AP) and announced a $418 billion monetary stimulus program to spur economic growth, amid growing worries about a strong yen and persistent deflation. The asset-buying stimulus program would be similar to "quantitative easing" policies (FT) adopted by central banks in the United States and Europe). The central bank attributed the surprise move to the "slowdown in overseas economies and the effects of the yen's appreciation on business sentiment." The government already undertook market intervention when the yen hit fifteen-year highs (WSJ) in early September. The intervention initially succeeded, but the U.S. dollar has since lost most of that gain, largely because of the weakening economy and expectations that the U.S. Federal Reserve will take drastic measures to pump money into the economy in a so-called "monetary easing war." Global leaders have expressed growing concern that moves by other countries--including Japan, China, South Korea, and Brazil--to restrain their currencies to boost exports could jeopardize the global economic recovery (FT). The Institute of International Finance announced Monday that net private flows to emerging-market economies will surge to $825 billion this year (GlobeandMail), a 42 percent increase from last year, in part due to low interest rates in the United States, Europe, and Japan.

Analysis:

In the Japan Times, Hasahiko Okazaki says the ruling Democratic Party of Japan has wasted time since it came to power last year, and its "wishy-washy handling of affairs" has compromised Japan's international standing.

In the Globe and Mail, Carl Mortished says Japan's yen-selling strategy "creates dangerous asset bubbles in high-yielding or emerging markets as investors borrow yen to buy Brazilian or Australian assets. . . . In a world of weak or falling consumption, it is a futile game."

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