On July 14, 2006, the Bank of Japan raised its benchmark overnight rate off zero for the first time since introducing the world to ZIRP in 1999. In doing so, the BoJ noted that the Japanese economy in its view continued to ‘expand moderately’ and that risks inside the economy were ‘balanced.’ The central bank also sought to reassure, further commenting that despite one 25 bps rate hike ‘an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.’
These words, all of them, should sound frighteningly familiar, as they are being redeployed in nearly exactly the same phrasing by the Federal Reserve. Whether or not the FOMC votes for a second rate hike today still remains to be seen, as before that ‘news’ there is first the BoJ once more admitting that its prior efforts didn’t actually work. For the record, Japanese officials actually carried out two hikes, a second coming in February 2007 just in time for the open minded to finally see what really had been going on in the global economy.
In other words, the Japanese policymakers made the same mistakes as are being made today. They assumed absence of further contraction was the same as recovery. In the singularly binary model of orthodox economics, if an economy isn’t in recession it must be growing; so if the economy isn’t in further recession and the economy is barely growing or even stagnating then it is assumed that growth is just being delayed. By the middle of 2006, the Bank of Japan believed there were enough signs the economic postponement had ended.
This post was published at David Stockmans Contra Corner on September 21, 2016.