By: Dr. Mike Campbell
The Bank of Japan has announced that it will cut its interest rate from 0.1% to “near zero” in a move intended to bolster the flagging Japanese economy. The rate had been held at 0.1% since the end of 2008.
This is the second period of zero percent interest policy in Japan’s recent history. Between 2000 and 2006, the rate was set to zero to encourage people to send money rather than save it and to make cheap money available to Japanese business.
The move was regarded as being behind the resurgence that Japan’s economy enjoyed at the time and the ending of the policy (by increasing the rate to 0.25%) in July 2006 marked a period where Japanese employment was strong and the nation had enjoyed five quarters of growth. The global financial crisis, of course, lay just over the horizon.
However, some analysts are questioning how much impact the latest move will have. The initial currency market reaction was to send the Yen lower (by 0.5 Yen) against the Dollar, but this gain is already being eroded. The Bank has indicated that the new policy will remain in force until prices have stabilised;
Japan has been plagued by deflation for a number of years. "Although Japan's economy still shows signs of moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen's appreciation on business sentiment," a spokesman for the Bank of Japan said.
The Japanese government is putting the final touches to another stimulus package worth $55 billion at the moment. The negative impact of the high Yen, particularly against the US Dollar, is beginning to be sharply felt. The US Japan’s biggest trading partner, but has its own problems with slowing growth and high unemployment.