TOKYO, July 14 — Economists applauded the Bank of Japan’s interest rate increase, the first in six years, as a long-awaited signal that Japan’s $4.6 trillion economy is finally getting back on track.
They said that by moving pre-emptively on Friday, long before a return of inflation is likely to become a threat, the central bank was also hoping to demonstrate that it was watching prices carefully, and was therefore up to the task of stewarding Japan’s economy, the world’s second largest after the United States.
Economists said the bank’s main concern in raising rates was restoring its own reputation after a series of policy mistakes that deepened Japan’s economic troubles during more than a decade of stagnation.
These errors have haunted the bank as it tries to win respect on a par with the Federal Reserve and the European Central Bank.
This last quote is truly amazing. What happened in the end was a version of Gresham´s Law applied to Central Banking, where bad CB´s drive out the (once) good ones.
If one looks at what was going on at the time it´s hard to imagine reasons for “applause”. The charts illustrate.
In Ryan´s post there are many references to Bernanke´s advice to Japan. We can only wish Bernanke would be thinking the same way about the US over the past few years. Maybe lecturing others is much easier!