Question

Read the following article, relating to monetary policy and inflation in Japan, and answer the following questions.

TOKYO (Kyodo) -- The Bank of Japan on Wednesday cut its inflation forecasts for the three years through March 2021, putting its elusive target of 2 percent price gains farther from reach.

As widely expected, the central bank's Policy Board also decided after a two-day meeting to keep interest rates at their current ultralow levels as risks including trade friction between the United States and China cast a pall over growth in the global economy.

Inflation during fiscal 2018 ending March is expected to be 0.8 percent, down from 0.9 percent predicted in October amid a decline in global oil prices, the board said in its quarterly economic outlook report.

Prices are expected to rise 0.9 percent in fiscal 2019, a significant downgrade from the earlier forecast of 1.4 percent. In fiscal 2020, prices will rise 1.4 percent, down from 1.5 percent, it said.

Governor Haruhiko Kuroda told a post-meeting press conference that despite the dip in inflation, momentum toward the 2 percent target remains intact.

"It's true that we believe it will take some time to achieve 2 percent. The BOJ will persistently continue its current accommodative policy," he said.

The delay in reaching the target, which the central bank has been pursuing since 2013, puts the BOJ in an exceedingly difficult position.

It could put pressure on its policymakers to roll out additional easing measures, even as the protraction of current stimulus draws criticism for side effects such as hurting the profits of commercial banks.

Kuroda said he is closely watching this year's labor negotiations expected to start next month for signs that wages will begin rising in line with a tightening job market, an outcome that would give businesses the confidence to hike product prices.

"Wage gains are still somewhat tepid compared to the improvement in the real economy, corporate profits and the labor market. We'll see how that changes."

The central bank also lowered its forecast for Japan's economic growth in fiscal 2018 to 0.9 percent from 1.4 percent. For the following two years, it slightly lifted its forecasts to 0.9 percent and 1.0 percent growth, respectively.

The board's first meeting of the year came days after the International Monetary Fund downgraded its forecast for global economic growth this year.

Kuroda acknowledged that the world economy is facing increased downside risks including the U.S.-China tariff war and Britain's troubled attempt to exit from the European Union.

"If the trade tensions continue, there will be severe consequences," he said.

The board voted 7-2 to continue applying a short-term policy rate of minus 0.1 percent and to keep long-term yields near zero percent, with board members Goshi Kataoka and Yutaka Harada dissenting.

It also retained a pledge to keep rates low "for an extended period of time" ahead of a hike in the consumption tax in October, which it is feared will trigger a fall in domestic demand, and made no changes to its purchases of risky assets such as exchange-traded funds.

Source: Mainichi.jp

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1. Australia’s short-term policy rate is called the cash rate. The cash rate has been held at 1.5% since 2016. Explain briefly the main mechanism used by the Reserve Bank of Australia to stabilise the cash rate. (2 marks).
2. The Bank of Japan has used large scale quantitative easing in recent years. What does quantitative easing involve? How does the use of quantitative easing change the way a central bank controls its short-term policy rate? (2 marks).
3. The article tells us that the Bank of Japan is continuing to apply a short term policy rate of minus 0.1%. How has it been possible for the Bank of Japan to reduce its policy interest rate below zero? What does a negative policy rate imply for private banks with reserve balances held at the Bank of Japan. (2 marks).
4. What does the Japanese experience demonstrate about the impact on the rate of inflation of large scale quantitative easing? Identify two factors, mentioned in the article, which suggest inflation will remain below target during 2019. (2 marks).
5. The Bank of Japan has chosen to hold the rate of interest (or yield) on long term (10-year) Japanese Government bonds close to 0%. How has the Bank of Japan been able to control the rate of interest on these bonds? What has the Bank done to hold the rate of interest on these bonds at zero? (2 marks).

Answer 1

Answer:

Given

some information of TOKYO.

based on the given information the conclusions are:

Australia Cash Rate Policy :

explanation:

Monetary policy decisions are expressed in terms of target cash rate which is the overnight money market interest rate .

It is a rate of interest which the central bank charges on overnight loans to commercial bank .

Thus central bank uses it as a monetary measure through domestic market operations.

Bank of Japan Quantitative easing policy :

explanation:

​​​​​​​​It is also known as large scale asset purchases .

It is a monetary policy whereby a central bank buys predetermined amount of government bonds and other financial assets to inject money into economy when inflation is very low or negative.

Negative policy Rates in Bank of Japan

explanation:

The main reason for keeping negative policy rates in Japan :-

1) To encourage borrowing , spending and investment.

2) Low interest rates makes it easier for the government to afford interest payments.

Factors that will keep inflation below the target rates :

explanation:

1) Decrease in crude oil prices globally.

2) Depressed wages driven by inflexible Labour market .

Bank of Japan rate of interest on bonds :

explanation:

When Japan was going through deflation it curbed it's interest rate to negative .

They lend the money out for business investment and domestic expenditure to increase the demand in economy .

Another major reason for decreasing interest rates were repayment of debt by the government.