Macroscope | Why Japan’s long fight against deflation looks doomed to fail
- Unlike its peers, Japan’s central bank has stuck to aggressive government debt purchases, rock-bottom interest rates and near-zero long-term bond yields
- The costs of this approach keep rising, though, as a weak yen is at odds with the need for more consumer spending and ending the deflationary mindset
Divergences in monetary policy have been a major theme in financial markets since the recovery from the Covid-19 pandemic took hold, causing inflation to surge to multi-decade highs in advanced economies.
Differences in policy between the United States and Europe are more stark. While the Fed is confident that the US economy is strong enough to cope with higher borrowing costs, the European Central Bank is much more cautious and has yet to raise interest rates.
Yet, among the world’s leading developed economies, one country has moved in a radically different direction to its peers. Japan is the odd one out in global monetary policy.
Alone among the big central banks, the Bank of Japan (BOJ) has maintained its uber-dovish stance. It has persisted with its aggressive purchases of government debt, kept rates at rock-bottom levels and stuck to its policy of keeping yields on long-term bonds near zero.