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Wednesday, December 26, 2012

Japan breaking new ground in monetary policy

In his essay Missing The Big Japan Story - Tim Duy's Fed Watch, Professor Duy provides an in depth analysis of the implications of likely changes upcoming to that country's monetary policy.

He states that

"something much more significant is afoot - the possibility of explicit cooperation, albeit perhaps forced cooperation, between fiscal and monetary authorities.  The loss of the Bank of Japan's independence to force the direct monetization of deficit spending is the real story."

and that the result of this is that

"Japan might very well be heading toward the end-game of permanent zero interest rate policy:  Explicit monetizing of deficit spending.  That is the real story here - it goes far beyond just inflation targeting."

The result of this monetization would be government created demand for products and services.  Of course, to be beneficial in the long run, such government spending should be directed toward technological progress instead of simply funneling money to vested interests.