Author: James Smalhout Those tough guys on the Bank of Japan’s policy board did the right thing in spite of themselves when they met on July 17. The group had been flirting since April with the idea of ending its policy of zero overnight interest rates. The rate first hit zero in February 1999. In the end, they voted not to hike it, but threatened to do exactly that if Japan’s recovery continues much longer. Only the bankruptcy of the Sogo department store a few days earlier made the policy board flinch.
The decision to leave overnight rates unchanged should have been a no-brainer. The rationale for a tighter stance escapes just about every reputable analyst from Tokyo to Timbuktu. The smart move for the world’s second largest economy would be to ease quite a bit more and soon. So argued professor Ben S Bernanke, chairman of Princeton University’s economics department, during a recent seminar at the Federal Reserve Board in Washington.
The markets seem to agree. Forward rates six months out on the yield curve actually have fallen since early Spring, predicting more easing – not a tightening – to come.