Tuesday, October 05, 2010

BOJ Follows Roger Farmer?

NY times(05/10/2010);TOKYO — In a surprise move Tuesday, the Japanese central bank lowered its benchmark interest rate to a range of 0 percent to 0.1 percent, a tiny change from its previous target of 0.1 percent but a symbolic shift back into an age of zero interest rates.

The Bank of Japan (BOJ) also said it would set up a fund of ¥5 trillion, or $60 billion, to buy Japanese government bonds, commercial paper and other asset-backed securities amid concerns about weakening growth in the economy, the world’s third largest, after those of the United States and China. The bank also kept its credit facility for banks at ¥30 trillion.

According to the one book written by Roger E. A. Farmer of UCLA, How the economy works,Oxford University Press, Roger says in this book,

"Control of an index fund(=mutual fund*) is the ideal way to implement this idea(=stabilizing stock market movements and preventing them from devastating the real economy),..."pp.159
*mutual fund : a basket with some stocks, bonds and other assets

"To maintain the interest rate, Fed(=US central bank) intervenes in the market by buying and selling Treasury bills(liabilities issued by government) in exchange for money,... (and at the same time) announces a price path for index funds and stands ready to buy and sell these funds each day at the announced price." pp.160

However, BOJ didn't announce the purchase of index funds/mutual funds and didn't say it follows Prof Farmer, but when I heard this news tonight I recalled Farmer; it seems to me that
BOJ's announcement of purchase of Japanese government bonds, commercial paper and other asset-backed securities will have similar effects on the economy to what Prof Farmer's suggested.

I am not sure what Farmer says is going to happen in the Japanese economy when BOJ seeks the above new policy measures, but I would like to watch what's going on.

By the way, the press seemed surprised at the BOJ announcement, as Hirokata Kusaba of Mizuho Research Institute says, “The latest move gives off a much more powerful impression than past, incremental measures, which had sparked market disillusionment

Though there will be debate over the effects of the monetary loosening, I believe the Bank of Japan has done all it can at this time

At the same time we can say that BOJ has no more policy tool to shore up the economy, as Richard Jerram of Macquarie Securities says,

despite the (BOJ's) exaggerated language claiming that this is radical,...BOJ is apparently acting reluctantly and de-emphasizing the temporary nature of the measures, which is likely to limit the impact" and “There is a stark contrast with the Fed’s ‘whatever is necessary’ approach.” **The parentheses are added by Taro.

At any rate I am sure that this BOJ's action will soon lead to a widespread debate among economists and policymakers all over the world.

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