ZIRP At 20; The ZLB Is A Trap, But Not The One Central Bankers Think It Is

Were they rushed, or were they late? Middle 2000’s consensus put an academic opinion on the latter. The Bank of Japan had been Japan’s central bank since 1882, but it hadn’t been allowed to become a modern one until years into the 1990’s crisis. When speaking on the topic, Economists mostly mean independence and mandate rather than monetary competence. This speaks to the now global problems we all face.

Reforming the BoJ was part of the government’s committed effort to clean up its banking system. Throughout much of the decade, it was asserted how the economy’s big problems all related in some way to its zombie banks. As an agent of the government, BoJ wouldn’t be in a position to respond effectively.

The central bank law was passed in June 1997 becoming effective on April 1, 1998. Before that even happened, Japan’s zombies were already embroiled in another crisis. On November 3, 1997, Sanyo Securities went bust and that kicked off the usual chain reaction of doubt and contagion. Already facing a “Japan premium” for borrowing dollars offshore, it would grow worse as did Japan’s economy which, already weak, easily tracked the downward trend.

What to do?

In March 1998, Governor Yasuo Matsushita was forced to resign after a corruption scandal implicated top officials. Japan’s big banks may have been zombies, but, apparently, they were still busy buying inside information about the central bank’s inner workings. A form of liquidity preferences, I suppose. Though the well-respected Masaru Hayami would take over shepherding BoJ into this new era, it was a thorough mess.

As the Asian flu embroiled Japan, the BoJ became independently unclear. The central bank had before brought the overnight benchmark money rate down to an unthinkably low 50 bps. By September 1998, the bank voted again this time for another 25 bps “rate cut.” Unlike the prior one, there was one dissenting ballot (Eiko Shinotsuka voted against, preferring instead a rate hike on the grounds ultra-low rates were harmful to savers).

By November, the situation was even more confused. Though BoJ would bias interest rates to “under 25 bps”, there would be two dissents; Ms. Shinotsuka still preferring higher rates, joined by Shin Nakahara who wanted them to go even lower.

On February 12, 1999, exactly twenty years ago today, ZIRP was born. But, as usual, it was more of a mess than a clean introduction. Like Bernanke who never actually said the word “taper” in 2013, the Bank of Japan at least at first never actually published the word “zero.”

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Gary Anderson 2 months ago Contributor's comment

Since it is considered dirty to just pump money in without offsetting sterilization in Japan, nothing happened, no inflation at all.