The U.S. appears to be leading other parts of the globe out of an extended era where central banks relied heavily on low and negative interest rates and stimulus to jump-start growth and keep prices from falling. The Federal Reserve has raised U.S. interest rates, and the European Central Bank is considering easing its stimulus.
Japan remains definitively stuck, despite a long and aggressive experiment with ultralow rates. A quarter-century after its property bubble burst, a penny-pinching generation has come of age knowing only economic malaise, stagnant wages and deflation—a condition where prices fall instead of rise.
The belief that deflation will continue has become so ingrained it has presented seemingly insurmountable challenges to monetary policy, a lesson for other countries that are traveling a similar path.
“It is hard to change the deflationary mind-set even with radical policies,” says Frederic Neumann, co-head of Asia economics for HSBC. “I would argue Japan will remain in its funk and will remain there for many years.”
Japan is nearly four years into a Central Bank stimulus effort involving printing trillions of yen and guiding interest rates into negative territory, perhaps the globe’s most aggressive such efforts under way. Bank of Japan governor Haruhiko Kuroda’s shock-and-awe stimulus, launched in April 2013, fizzled after a short-lived spurt of growth and rising prices. Japan fell back into deflation last year. More recently, the inflation rate has been bouncing around near zero.
In November, Mr. Kuroda postponed his goal of reaching 2% inflation, all but admitting he is out of ideas. He said in a series of speeches last year that an entrenched “deflationary mind-set” stifled hope that wages or prices will rise, limiting the impact of monetary policies such as negative rates.
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Jeremy Jones, CFA
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