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May 31st 2005

Japan’s Central Bank in Difficult Position

In the early 1990’s, Japan’s economy plunged into recession. Japanese Central Bankers were dumbfounded, and uncertain as to how they could induce a recovery.  10 years later, it seems they have finally figured out the formula: a loose monetary policy- and then some. First, the central bank lowered real interest rates, until they were effectively negative. This resulted in a multiplication of the money supply.  Next, the bank injected fresh cash reserves into insolvent banks, which had suffered as a result of massive unpaid loans brought on by recession. These banks, in turn, used the cash reserves to lend money to struggling businesses in an effort to revive the economy. It seems to have worked.  Now, as the economy is growing at a healthy rate, the Central Bank must slowly unwind this policy, by raising interest rates. This, however, is easier said than done. The Wall Street Journal reports:

If it [Central Bank] ends the easy-money policy too soon, it could snuff out economic growth. But maintaining super-loose credit too long during an economic recovery could be like spraying gasoline onto a fire, causing a flare-up of inflation.

Read More: The Real Trick to Japan’s Easy-Money Policy is How to End It

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Posted by Adam Kritzer | in Central Banks, Japanese Yen | No Comments »

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