Revolution in the air

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Last week the Central Bank of Japan unveiled its plan to combat the deflation that has plagued Japan for almost 2 decades. Haruhiko Kuroda, the new central-bank governor, announced that the central bank would be expanding its balance sheet to over 1% of GDP a month and promised to double base money in two years. He also announced that the central bank would be doubling its hold of government bonds and raise the average maturity from 3 to 7 years. This plan would hopefully force investors to seek higher yields elsewhere: by investing abroad, which would weaken their currency, or by investing in the real economy, which would boost demand.

This risky move by the central bank might not be enough. Several structural factors are also to blame including a declining population, suppressed domestic demand, insufficient competition in many sectors, and excessive hoarding of cash by risk-averse companies. The author suggests that the government will have to do its part in eliminating deflation by tackling some of these problems head on. For example, the government could tax retained earnings that are not invested, punishing these risk-averse companies for hoarding their cash. He also suggests programs that would encourage women to join the workforce, promote immigration, and open up sectors to more competition.