The media were asking this question before the central bank in the US, the Federal Reserve, left interest rates unchanged.
The Bank of Japan was waiting for that news before deciding what it should do. It is also waiting to see how economic events unfold in China. Japan has benefitted greatly from the rapid rise of China, its largest trading partner, but the rate of growth there is slowing.
The Bank of Japan’s governor Haruhiko Kuroda said that if China’s economy maintains stable growth, Japan’s exports should too. He is probably also expecting some investors to move their money from China to Japan, just as they did in August when a Chinese stock market crash boosted the yen.
The decision by the Fed to leave rates unchanged makes it unlikely that the Bank of Japan will raise its rates, which remain close to zero. The other tool which central banks use to try to stimulate economies is expensive and difficult to grasp. Since the global financial crisis, they have been buying government bonds and other assets in what the economist David Stockman calls money printing madness. The more polite definition is a “stimulus programme”.
For Japan the annual cost is almost incomprehensibly large: 80 trillion yen, $663 billion. In overall terms that is not quite as much in dollar terms as the European Central Bank spends buying assets each year; 1.1 trillion Euros, or $1.3 trillion.
Challenged on this, the Vice President of the ECB Vitor Constancio suggested the European figure was prudent compared with Japan because the Eurozone’s economy is larger than that of Japan’s.
“The total amount that we (the ECB) have purchased represents 5.3% of the GDP of the Euro area,” said Mr Constancio. “Whereas what the [US] Fed has done represents almost 25% of the US GDP, what the Bank of Japan has done represents 64% of Japanese GDP.”
Hearing this strange defence, economists concluded that the ECB has the scope to spend more if needed and “potentially much more“.
The message from the Bank of Japan seems similar to that of the ECB. Although it has decided not to increase speeding on its stimulus programme yet, it may well do so soon. Its mood is described as bullish by the Financial Times.
As well as the Fed’s decision, the Bank of Japan will be influenced by government spending decisions. As the FT pointed out recently, there will probably be a supplementary budget based on more public works spending, perhaps in November.
The Bank of Japan and the Japanese government share the same goals: a revival of economic growth and modest inflation. Their credibility rests on achieving them and their hope is that once that happens the money printing can stop and monetary policy can get back to normal.