Japan is one of the top ten leading economies in the world. It has managed to stay aloof because of the monetary policies it puts in place to manage its economy. The Bank of Japan Governor is usually in charge of the changes at the Treasury. Whenever there is an economic slump, the Bank of Japan increases the supply of money in the market. It tilts the balance of scale and creates inflation.
When the Bank of Japan increases the amount of money in the market, there are obviously certain objectives they want to achieve (Mankiw, 2012). They could do so to stabilize the economy. It may increase inflation in the short term but lead to growth. When there is more money, people spend more in the economy to utilize the opportunity before it becomes scarce again. Due to this, they help the economy to improve in various trade sectors. The increased supply cannot take a long time because too much money in the market may also harm the economy.
The process may also be a strategy to end a long spell of deflation, such as the one that occurred in 2015. It usually hinders investment and economic growth. It is a monetary easing technique to get the economy back on track (Otmazgin, 2014). The decision affects the stock exchange. The effect extends to the strength of the yen among other currencies. It improves the stock market because of the available money to invest in the nation’s projects. It may lead to the yen trading below the dollar on the exchange market. However, it enables the exporters to earn fairly well from their trade. Since Japan exports most of its industrial products, the nation gains strength in the balance of trade in its favor. Although importers have to pay more for their goods, it encourages people to buy locally produced goods. The decision leads to the growth of local industries (Block, Hirt, & Danielsen, 2011).
The above chart shows Japan’s nominal GDP and money supply.
Inflation in an economy slows down growth. It is the sustained increase in the prices of goods and services. It means that during inflation, the yen could buy a lesser amount of goods and services than it had done before the current status. Due to the 2015 decisions of the Bank, the prices of goods in Japan increased generally, and this caused the yen to weaken against the dollar.
The Bank of Japan has also been extending the range of assets it can purchase. It can also purchase bonds and engage in real estate investment trusts. It may also decide to end the current assets purchase programs to enhance trade (Otmazgin, 2014). The acquisition of bonds is also a money supply control decision. The bank has previously purchased bonds for either financial, fiscal deficits, or monetary purposes. The reasons vary with the economic principles and the need for the economy. In 2015, the government needed finance to work out its policies. The purchase of the bonds also increases public debt. Therefore the government’s liability increases. However, in the 2015 case, the bonds were for monetary policy purposes. The government gained by controlling the money in the market.
The government should monitor the decisions accordingly. Sometimes the bank’s decisions may not bear the desired fruits. Therefore, the government should brace itself for any eventualities. When the government puts caps on interest rates, the money supply in the market increases and business improves. The decision cuts down on inflation. It may have to make precise adjustments to control the upside and downside risks (Mankiw, 2012). The strategy that may lead to a weak yen in the exchange market may pose other challenges. For instance, the yen may never recover again. Therefore every decision must be weighed against long-term benefits. The government made such adjustments in 2013 with the new Prime Minister promising to improve the economy. It printed more money and released to the market. It also reduced the interest rates to the banks. However, it has taken a long time to date to strengthen the weak yen.
Another monetary policy includes the management of interest. Banks and financial institutions play a critical role in investment policies. Japan has a vast knowledge of economic principles (Mankiw, 2012). The Bank of Japan sometimes increases the interest rates to banks such that there is limited access to funds due to costs. It did so in 2012. The decision was primarily to control the money in the market. It led to increased prices of goods and services. The scarcity of the yen due to such decisions also slowed down economic growth.
Block, S., Hirt, G., & Danielsen. (2011). Casebook for foundations of financial management. New York, NY: McGraw-Hill/Irwin.
Mankiw, N. (2012). Principles of economics. Mason, Ohio: South-Western Cengage Learning.
Otmazgin, N. (2014). Regionalizing culture. Honolulu, Hawaii: University of Hawaii Press.