The central banks of Japan and the United States have taken emergency monetary easing steps. It can be said they demonstrated their determination to underpin the economy, which is deteriorating as the infectious disease caused by the new coronavirus spreads further.
The U.S. Federal Reserve Board has decided to drastically slash its benchmark interest rate by a full percentage point, the first time in about four years and three months that the central bank has effectively returned to a zero interest rate policy. The Fed will also resume quantitative easing under which it will purchase U.S. government bonds and other assets from the market.
The Bank of Japan has also decided on additional monetary easing with a focus on measures to support corporate financing. The central bank will raise the upper limit on its purchases of corporate bonds and related assets by 2 trillion yen, while extending loans to financial institutions at an interest rate of zero percent, thereby encouraging them to finance companies. Moreover, the BOJ will double its annual cap of purchasing exchange-traded funds to 12 trillion yen.
It is understandable that the central banks announced these emergency measures with the aim of easing concerns over the future of the economy by supplying large quantities of funds to the market.
The Fed announced the additional action on Sunday evening local time, an unusual time for the central bank. This was apparently because it was strongly aware of the Asian market, which would start trading for the week before other markets. The BOJ acted in concert with the Fed, moving up a monetary policy meeting that had been scheduled for Wednesday and Thursday.
Nonetheless, stock indexes in major markets continue to be volatile. Both central banks should be tenacious in implementing countermeasures.
Six major central banks, including the BOJ and the Fed, have also joined hands in expanding the system of lending dollars to banks at low interest rates.
Since last week, more and more investors have been selling not only stocks but also U.S. government bonds and other assets to convert them into dollars. As investors try to secure dollars, some financial institutions and investment funds have found it more difficult to obtain the currency. The central banks' joint step indicates they are alert to the situation.
The latest rate cut and expansion of asset purchases by the Japanese and U.S. central banks will lower interest rates when companies borrow money from banks or issue corporate bonds. There is no doubt that these moves will benefit companies in need of funds.
Monetary policy, however, plays the role of stopping the bleeding to prevent an increase in bankruptcies and other negative consequences by providing financial support to businesses.
What is important is how to take advantage of this monetary easing.
For companies to become willing to make capital investments and carry out other spending, they need to see signs the coronavirus epidemic is being brought under control.
It is hoped that governments around the world will put top priority on curbing the spread of the virus and treating seriously ill patients.
With the flow of goods and people stagnating, it is inevitable that the economy will slow down for the time being. To overcome this difficult situation, it is essential to implement measures to support production while at the same time stimulating consumption.
Major countries should consider compiling bold supplementary budgets and other measures as soon as possible and implement them.
-- The original Japanese article appeared in The Yomiuri Shimbun on March 17, 2020.
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