Today the central bank of Japan announced a further reduction of its key interest rate from 0.1% to a range between 0 and 0.1%. It also announced that it would continue to apply an expansionary monetary policy with some elements of quantitative easing, as we have been seeing in the United States. Furthermore, the Bank of Japan indicates that this policy will most likely continue over the next months given the weakness of the economic recovery and the added troubles due to the recent appreciation of the yen, something that has created significant doubts on the possibility of exports helping in the recovery. In fact, in recent weeks what we have been witnessing is that more countries are trying to influence their exchange rates so as to create a more favourable environment for export growth. But the problem is that not everybody can do this as the same time, so we will have to see how these currency wars unfold.
This policy move also shows how the recovery in most of the industrialized world is still weak and that we are most likely facing a fairly long period of very expansionary monetary policy. As we know, we cannot say the same about fiscal policy, despite the academic debates and some transatlantic differences.