Former governor of the Bank of Japan: the future demand has exhausted and low interest rate has become eternal

category:Finance
 Former governor of the Bank of Japan: the future demand has exhausted and low interest rate has become eternal


Where will global monetary policy go when two major central banks restart asset purchases? Can Japan, as the initiator of QE, provide experience for reference at this time?

It has been 12 years since the outbreak of the global financial crisis. Japans overall interest rate has remained at 0, specifically 0.5%, since the mid-1990s. Japan officially launched quantitative easing in March 2001, but up to now, most countries are adopting quantitative easing policies, while low interest rates are still continuing. Long term interest rates in the eurozone and Japan are already negative. Nowadays, it is in the environment of low growth and inflation. Low interest rate seems to be eternal. With the prevalence of populism, a large number of negative emotions point to the low interest rate and quantitative easing policy of the central bank.

Baichuan Fangming visual China data map

At this new turning point, the Bank of Japans predecessor, Akira Nagasawa, who was in office from March 2008 to March 2013, shared Japans experience when attending the first Bund financial summit on October 27.

Two effective transmission mechanisms of monetary policy: the main transmission mechanism is to bring future demand to the present and borrow future demand. This is certainly effective. But if the impact on the economy is not temporary, it will not work. Because one day we may borrow the needs of the day after tomorrow, sooner or later the day after tomorrow will become today.

The second mechanism of monetary policy transmission is to bring foreign demand to China, such as exchange rate management. But again, the valid premise is that the impact on the economy is unique and specific to that country, because all countries can lower their exchange rates. For example, when the global financial crisis broke out, Japan maintained a lower exchange rate. It can be said that quantitative easing effectively avoided the collapse of the financial system, so Mr. Shirakawa said he strongly supported the first round of quantitative easing (QE1).

But what is the impact of QE on the macroeconomic side?

Mr Shirakawa is sceptical. He pointed out two facts. First, comparing the GDP after the bubble burst and the bubble peak (Japan 1991 and the US 2007), we can see no specific differences by comparing the United States, Japan, Europe and the United Kingdom. In the case of the United States, the unemployment rate in the United States has declined since 2009, but we cant see the obvious effect after QE2 and qe3.

Mr Shirakawas answer is forever low interest rates. Mr. Shirakawa believes that it can be expected that the world will maintain a very low interest rate range for a long time in the future. Because future demand is exhausted, interest rates will naturally fall. Enter such a low interest rate environment, so that low-efficiency enterprises can continue to survive, then the potential growth rate will also decline, so the central bank can only follow such a low interest rate trend. At present, policy makers and scholars are calling for the implementation of expanding fiscal policy, which is a strategy to promote growth. But Mr. Shirakawa is still skeptical. Can a positive fiscal policy really solve the immediate problem? Because if the future demand is mentioned to the present, the future demand, whether from the private sector or the public sector, is to put the demand first. According to Baichuan Fangming, improving productivity is still the core solution to the fundamental problem. Therefore, the key is to direct investment to projects with high productivity. Source: surging news editor: Wang Xiaowu NF

Mr Shirakawas answer is forever low interest rates. Mr. Shirakawa believes that it can be expected that the world will maintain a very low interest rate range for a long time in the future. Because future demand is exhausted, interest rates will naturally fall. Enter such a low interest rate environment, so that low-efficiency enterprises can continue to survive, then the potential growth rate will also decline, so the central bank can only follow such a low interest rate trend.

At present, policy makers and scholars are calling for the implementation of expanding fiscal policy, which is a strategy to promote growth. But Mr. Shirakawa is still skeptical. Can a positive fiscal policy really solve the immediate problem? Because if the future demand is mentioned to the present, the future demand, whether from the private sector or the public sector, is to put the demand first. According to Baichuan Fangming, improving productivity is still the core solution to the fundamental problem. Therefore, the key is to direct investment to projects with high productivity.