Japan Monetary policy

Bank of Japan’s move

I was correct that the Bank of Japan would relax its inflation target to 2% from 1%. The new target creates a lot of room for monetary easing and it is necessary to bring the Japanese economy out of the deflationary state since 1990s.

To Japan, the impact of the new inflation target is already happening: Japanese Yen depreciating, Japanese exports increasing, and Japanese stock market rallying …

So what that policy means to the rest of the world? I think two things will likely happen. First, there will be a lot of carry trade – People will use the easy money from Japan and move them to oversee. The money will mainly rush to China and to the U. S. In China, easy money is to build business. In U. S., easy money will go to equity market.

Second, the Japanese easy monetary policy will further push back the normalization of interest rates in the U. S. and in the Euro zone, and will even force these major economies to revisit their inflation targets. If U. S. adopts an inflation range control (1 – 3%), rather than set-point control (2%), then the uptrend of U. S. equity market has more room to go.

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