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Japan: Economic policy under negative interest rates – Nomura

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    Research Team at Nomura, suggests that the limits of monetary policy have become increasingly clear since the 2008–09 global financial crisis.

    Key Quotes

    “In the communique issued after their meeting in Shanghai on 27 February, the G20 finance ministers and central bank governors said that they would "use all policy tools." This hints at the possibility of a change to the economic policies pursued up to now, which have been skewed toward monetary policy.

    What monetary policy can achieve

    The monetary policy options available are purchases of overseas bonds, wage targets, and stamped money. These policies may increase demand and provide a boost toward the achievement of the inflation target. However, there would be disadvantages if these measures were in fact implemented and implementing them would in itself not be easy. At the moment, we think it unlikely that central banks will actively promote such measures.

    Rehabilitation of fiscal policy?

    Former US treasury secretary Lawrence Summers, a key member of the fiscal policy camp, has argued that the world's advanced economies have embarked on "secular stagnation" and has called for an increase in fiscal spending in order to create demand as a way of countering this.

    Of course, an increase in fiscal spending could also have a negative impact on countries' fiscal positions. However, the debate about fiscal deficits appears to have shifted slightly. We focus on the following two points. The first is the view that, paradoxically, an increase in fiscal spending would in fact improve the fiscal situation. The second is the view that there is nothing wrong with increasing government bond issuance in order to fund a fiscal deficit because these bonds will be bought. The latter incorporates the view that debt monetization by the central bank would be justified and that a government can force its own nationals to buy government debt.

    Policies that aim to stimulate demand via fiscal means also serve to redistribute income. A redistribution of resources from high-income to low-income households acts as a reinforcement of progressive taxation. The Japanese government has already unveiled a policy of raising the minimum wage and has asked companies to increase wages in order to encourage a redistribution of resources from companies to households.”
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