Budget 2013, also known as “Abenomics,” the central bank’s much-anticipated plan to jumpstart growth by slashing interest rates, has been given a boost with the Bank of Japan’s top economist announcing that it would be gradually cut over the next couple of years. He also gave an update on the Bank’s inflation analysis, which shows that deflation was already at the start of the year.
However, while the Bank’s decision to cut rates from its historic record low of zero was welcomed, this came with a catch: That all of this will be achieved without a new stimulus.
A key part of the plan is to reduce long-term interest rates below zero by late next year. While this would be effective for many people, who would save what they have saved and invest what they have invested to boost overall growth, it would probably result in a smaller economy.
But this is hardly the end of the plan, which the Bank’s first governor, Haruhiko Kuroda, put forward back in March. The Bank’s next governor, Yukio Kuroda, was also a member of the original team that developed this plan.
He called for cutting rates to boost growth by around 0.5 percent by 2020. The Bank’s current policy statement puts a target range on interest rates in a range of 0 to 3 percent. In this regard, the first target range would actually be lower than the average 2.5 percent rate that Japan has been at since the 1970s, and higher than any lower range that the central bank set in October.
As we have previously reported, the Bank was very cautious in its outlook for the economy and its outlook for inflation. It set a 2 percent inflation figure at the outset of the year, then later decided on a target of 2 percent in March and April as well as a 2 percent target in June.
Now, the Bank has published an updated economic outlook for 2013. As you can see in the chart above, the economy is now projected to grow by around 1.2 percent in 2013. In the next few years, it expects the economy to grow at around 1.5 percent per year. This is a big boost for most private people but will certainly be difficult for those at the bottom of the income earners to keep up with. That’s largely due to the fact that the cost of living is likely to rise.
In short, the Bank’s announcement yesterday, is nothing but a further attempt to shore up consumer confidence.
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