EC Why Japan Went NIRP: No More Doubts About QQE

When real household spending fell by 4.6% in April 2014 it was cause for concern. That was the first month after the tax hike hit and the decline in spending was much larger than anticipated (by economists, at least). Despite the heavy toll, Bank of Japan officials remained (outwardly) wholly unconcerned over what was believed a minor setback on the road to raging inflationary success. With so much “stimulus”, including of the fiscal kind, there was no way Japan’s economy would fail to respond.

While spending had declined, “inflation” had ticked to its highest level since February 1991.

Japanese consumer prices showed that inflation picked up in April [2014], excluding the sales tax increase that started at the beginning of the month, government data showed Friday. The data was a welcome sign in the central bank’s battle to increase inflation to 2 percent.

Economists were overjoyed if somewhat cautious.

“Consumer spending has declined as expected in April, but this is likely to be minor blip and will not affect the ongoing recovery,” Martin Schulz, of Fujitsu Research Institute told the BBC.

“Both consumer spending and retail sales will start rising in the latter half of the year.”

By August 2014, Bank of Japan Governor Haruhiko Kuroda was quite confident and positive despite weakness in spending that persisted well beyond April 2014 (May was actually much worse).

In April last year [2013], the Bank of Japan introduced quantitative and qualitative monetary easing (QQE) to achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about two years. The last time I addressed you here was only a year ago. At that time, I mentioned that there was a positive turnaround in three areas since the introduction of QQE: in financial conditions, expectations, and economic activity and prices. Since then, QQE has been steadily having its intended effects, and the positive turnaround in the three areas has continued. Japan’s economy has been on a path suggesting that the 2 percent price stability target will be achieved as expected.