Japan's Yosano says quantitative easing may not work

TOKYO (Reuters) - Japan’s economics minister cast doubt on whether a superloose monetary policy known as quantitative easing would revive bank lending and said the government and central bank needed to intervene if the recession deepened.

Measures such as buying commercial paper would tackle the crux of the credit squeeze more effectively than the central bank’s efforts to prod banks to lend by pouring extra cash into the banking system as it did earlier this decade, Kaoru Yosano said.

The Bank of Japan resorted to quantitative easing to pull the economy out of deflation after an asset bubble collapsed in the 1990s. The policy involves flooding banks, scarred by defaults and losses, with more cash than they needed to encourage lending.

The U.S. Federal Reserve has adopted a similar policy after taking its benchmark to between zero and 0.25 percent this month, and the Bank of Japan may have to follow as the global financial crisis pushes the world’s two largest economies deeper into recession.

Quantitative easing would not go to the heart of the problem that has frozen credit markets after U.S. mortgage defaults mutated into a financial crisis, wrecking banks in the United States and Europe, Economics Minister Kaoru Yosano said.

“It may have some psychological effect, but as for whether the money will reach companies, I doubt it,” Yosano told Reuters in an interview.

“When the vicious cycle of fear sets in, only direct measures would make a real difference,” he said, citing the government’s beefing up of a loan guarantee programme and the BOJ’s purchases of commercial paper. One caveat of quantitative easing is that it remains unclear whether it is an effective way to get banks to lend.

Bank lending fell steadily throughout the BOJ’s experiment in flooding financial institutions with cash from March 2001 to March 2006.

Still, Yosano welcomed the central bank’s move last week to cut interest rates to 0.10 percent and adopt measures such as increasing its outright buying of Japanese government bonds and temporarily purchasing commercial paper outright.

“The whole package of measures is having a good psychological effect on the economy both at home and abroad,” he said.

He added that he expected the central bank to do whatever it could within its jurisdiction if the economic turmoil gets even more serious.


The outlook for the world’s second-largest economy looked gloomier than ever on Friday after data showed industrial output tumbling at a record pace and price growth slowing up, supporting the view that the BOJ may eventually have to take some unorthodox easing steps.

Yosano said that the government would also be flexible about considering additional fiscal steps if economic conditions deteriorate further.

“At a time when we are surrounded by so many bad factors (for the economy), no single measure or policy will brighten up the situation.”

Japan has joined a host of nations worldwide unveiling spending packages to underpin their tottering economies.

Tokyo has pledged economic steps worth 75 trillion yen (562.7 billion pounds) to fight the downturn, with 12 trillion yen earmarked for actual spending this fiscal year and next.

The economy contracted in the six months to the end of September, and many economists forecast two more quarters of shrinkage, which would mark Japan’s longest recession on record.

“We cannot rule out the possibility of Japan and other parts of the world facing even worse economic conditions in the second half of next year,” Yosano said, hinting at an even more protracted downturn.

The fate of any more fiscal steps, however, is clouded by Prime Minister Taro Aso’s sinking public support and weakening control over the ruling party, which analysts say is at risk of losing a lower house election that must be held by September.

Some economists also question the impact of the steps so far. Naoki Iizuka, senior economist at Mizuho Securities said the steps, including tax breaks of about 1 trillion yen a year, would push up Japan’s economic growth by less than 1 percentage point.

“The government will be pressured to do more in 2009,” Iizuka said.

Reporting by Yuzo Saeki; Editing by Dayan Candappa and Hugh Lawson