MONETARY POLICY
FX Chart 2
for many years. Te review is expected to, produce this action. And as a matter of fact, this action has already started, and is actually underway right now. Much of it, well, some of it, is actually taking place even before the review is being implemented.“
Koo: “In fact, however, it was because Japan’s private sector was already deleveraging at a very rapid pace on its own initiative that the economy weakened so quickly.
I suspect the
ECB president was also implying that Japanese banks were slow to write off their bad loans. But it only appeared that way fom the outside because the Japanese tax code made it difficult for banks to remove bad loans from their balance sheets. In fact, a look at trends in loan-loss provisions over time makes it clear that Japanese banks were rapidly writing off their bad
Source: Wall Street Journal assets from the very beginning.”
Draghi: “The third reason is that the situation of the private sector balance sheets is not at all comparable in the euro area. It is not at all comparable with what it was in Japan at that time.”
Koo: “However, it is difficult to tell what he meant to say as he did not explain which of the two he thought was in better shape.”
Draghi: “The fourth reason is that the countries in the euro area have made significant progress in addressing their structural weaknesses. Now, in some countries the progress toward structural reforms has been slower, in other countries faster, but you see that the situation today is completely different fom what it was two years ago.”
Koo: “But when an economy is in a recession triggered by balance sheet problems, no amount of structural reform will improve the situation— and it may actually make things worse. Tis should be clear fom the Koizumi and Hashimoto reforms in Japan and Germany’s experience fom 1999 to 2005. Te average unemployment rate across the EuroZone is at an all-time high of 12.1% and is higher than 20% in some nations. Frankly, I find it difficult to understand how the central bank governor could claim that the EuroZone would never end up like Japan— where, incidentally, the unemployment rate has never exceeded 5.5%—because Europe was pursuing the right policies.”
Draghi: “Tere is a fiſth reason. As a matter of fact, if you look at the inflation expectations in the euro area and the corresponding inflation rates you would see that in Japan the inflation expectations were disanchored quite significantly, and for a long period of time, which is not something we are seeing here.”
Koo: “While a simple comparison of the yields on Japan’s index-linked government bonds— which are characterized by extremely
low liquidity—and those
on fixed-coupon JGBs may suggest that is the case, questionnaire surveys conducted by the Cabinet Office and the BOJ make it clear that over the past 20 years the general public not only did not feel that prices were falling but actually perceived an increase in prices. Te main reason for this is that the price of utilities and other essential public services continued to rise
FX TRADER MAGAZINE January - March 2014 51
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