This article talks about a “Jedi mind trick” so to speak
that Japan has employed in hopes of turning around their economy. The Idea is that
the central bank has created negative interest rates (it’s as if our discount rate
was negative). These negative interest rates in turn force banks to pay Japan’s
central bank if they want to hold money in the central bank. Hence, this discourage banks from depositing
money in the central bank, however, this ploy only applies under quite extreme
circumstances. Considering this, one can see how it’s a Jedi mind trick, since
it only applies to a few banks, yet most banks have acted as if this applies to
them. More money in the economy has already help Japan lower the value of the yen,
which in turn encourages exporting to other countries. Unfortunately, this
method has not been able to help with Japan’s inflation problem yet. Japan is
hoping to see higher inflation to pay off its whopping 230% debt (that is its
230% the size of the economy). Theoretically, inflation should be right around
the corner since Japan is forcing more money into the economy with this policy
and since Japan is printing more money. The hope is this “Jedi mind trick” will
prevent another period of deflation and get Japan out of its stagnant state.
Apparently Japan's negative inflation rate is strengthening the U.S dollar and lowering inflation because now of lower import cost due to Japan's new policies and other European policy moves.
ReplyDeleteBecause economics is the study of how people make decisions, psychology and "Jedi mind tricks" are important in controlling the economy. This also reminds me of what we've been talking about in class about how inflation depends on the public's expectations of inflation.
ReplyDeleteNegative interest rates seem risky to me. These new interest rates will encourage more lending by banks so that they aren't holding onto their cash, but this often means by lending to individuals and/or businesses of lesser quality credit. While this may stimulate the economy initially, it will be interesting to see how this effects Japan in the long run.
ReplyDeleteThis seems like a very extreme and possibly risky measure. The fact that banks have to pay to hold money in the Central Bank means they will constantly be looking to lend out their money. This may mean times of desperation in which they look for less credit-worthy individuals to simply dump their disposable money so they aren't charging for storing money. I'm curious to see how this situation works itself out over a couple year span.
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