Friday, June 11, 2010

Update on Japan

The Bank of Japan is set to detail a plan to stimulate credit for private companies that may prove insufficient to spur economic growth and defeat deflation.

The program is unlikely to exceed a few trillion yen (tens of billions of U.S. dollars) two people familiar with the matter said. The facility would do little to stoke domestic demand, said former BOJ board member Teizo Taya, adding that the effort is mainly aimed at fending off calls for broader monetary easing.

Pressure may rise in coming months as newly appointed Prime Minister Naoto Kan, who as deputy repeatedly called on the central bank to step up its efforts, lays out his government’s priorities.

Bank lending declined for a sixth month in May, the central bank said this week. However, other data indicate Japan’s export-led recovery remains intact. GDP rose at an annualized 5 percent rate last quarter, the most since the second quarter of 2009, the government said yesterday. Machinery orders climbed for a second month in April.

It appears that Japan's central bank needs to do more in order to spur economic growth and prevent deflation. However, with Naoto Kan as the newly appointed prime minister and with new leaders in the finance ministry, there may soon be greater pressure on the BOJ to purchase government bonds and set specific inflation targets.

Daniel A.
Summer Analyst
Analyze Capital LLC

1 comment:

  1. Are you suggesting Bernanke style Quantitative Easing? Nice post Sir.

    Japan, has a potential deflationary problem. In the past there have been theories on how to fix this but none have been as succinct or experimented with as inflation policy. Japan is expected to see deflation of -1.0% for 2010 according to the latest edition of the economist.

    Deflation is dangerous because it allows consumers to hoard cash in expectations of declining prices.


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