Different monetary policy directions

As expected, the Federal Reserve (the US central bank) raised interest rates last week—a tightening of monetary policy. A couple of days later, and rather unexpectedly, the Bank of Japan announced steps to bolster its quantitative easing program. You don’t need to know the details, but you should know that it implies further monetary expansion. It seems that Japan is concerned that growth is still rather weak and needs boosting. It is still nowhere near its 2% inflation target.

Consider the implications–not only for real investment by firms but also for financial flows (portfolio “investment”) between the USA and Japan (in the Balance of Payments). It does seem nowadays that the effect on financial flows is much stronger than the effect on real investment. Japanese firms are still too reluctant to invest despite the “easy” money. On the other hand, the rise in US interest rates could dampen investment and growth in the US. Contraction through monetary policy seems easier to achieve than expansion. Perhaps the latter is like “pushing on a string”.

In other news…the holiday has started. Have a good rest, so that you are really ready for the next semester.



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