Monetary easing policy and stable growth: a theoretic approach

Abstract

After the 2008 global financial crisis, the regulatory tightening, coupled with the spontaneous reaction of financial institutions to avoid risks, prevented increases in money supply in circulation even under the large-scale reserve supply. The reason of non-achieved 2% inflation target is attributable to such factors as, the increasing Marshallian K, the reluctance of financial institutions to give loans to small and medium firms, the weak loan demand, and the permanent income decline stems from the public concern on Japan’s fiscal crisis. The 2% inflation under the balanced budget principle as a long-run target over a half century is the only practical solution for the fiscal crisis, by halving the real burden of the government debts in 33 years. Constitutionalizing the 2% inflation target is a way to enhance the public confidence towards the future and boost the consumption. The negative interest rate policy adversely affected money supply increase, since it is practically a tax on financial institutions which narrows their profit margins, depriving the capacity of risk taking from them. As money supply in circulation cannot be controlled by the BOJ only, closer collaboration among government agencies such as the MOF and the FSA are required to promote financial institution’s growth money supply. Enhancing the growth rate is Japan’s policy objective of the top priority. The role of monetary policy is to prepare a foreseeable future with a stable value of money to promote technical progress as the source of the growth. The key to promote stable growth is opening profit opportunities to challengers to new technologies. The barrier for Japan’s growth is the vested interests built on the old technologies which slows down political decisions to change regulations. The right growth strategy is to destroy the vested interests built on old technologies through prompt deregulation, promote free and open competition, and provide profit opportunities to challengers to new technologies.