MONETARY POLICY
FX
Japan, much earlier than that). So I think it is worth listening also to his subsequent comments to Draghi ‘we beg to differ’ explanations.
Draghi: “Te first (reason)… we
have taken decisive monetary policy measures of great significance at a very early stage, even when, as a matter of fact, inflation was not at the levels at which it is today. It was way higher and way closer to 2% and this did not happen in Japan.”
Koo:”…the US and Europe were facing massive bank crises fom the start, while Japan in the early 1990s had only a loan scandal at two small credit unions and the failures of ‘jusen’ housing loan companies to deal with. Hence there was no need to drop interest rates and supply liquidity to save the banking system. It was only in the autumn of 1997, fully six years aſter the bubble collapsed, that Japan experienced a systemic banking crisis. And long before that the BOJ had slashed short term rates fom 8% during the bubble era to nearly zero.”
Draghi: “Te second reason why – by the way, this is an interesting
little bit late. Tey didn’t really tell us anything until it was too late for the central bank to do anything. Given that, how appropriate is it that you are placing so much faith in these inflation expectations in warranting not doing more now?”
Draghi’s answer has been quite elaborate, stating 5 reasons why situation in Europe is different from
Japan two decades ago. In the last few years I have been a constant reader of Richard Koo, Chief Economist of the Nomura Research Institute. He has been, in my opinion, the best in explaining a lot of mechanisms behind the ‘balance sheet recession’, the special beast of recession we have been suffering aſter the 2008-2009 crisis in most of the western world (and some countries, like obviously
comparison which you can imagine we look at with great attention – but there is a second reason why this comparison is not actually there. We are in the process of doing the asset quality review. You are aware that the situation in Japan lasted much longer than it should have because the balance sheets of the banking system and the private sector were burdened, and had to be deleveraged and the action to induce this deleveraging lacked
FX TRADER MAGAZINE January - March 2014 49
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