Friday, April 24, 2009

Monetary policy and the lower bound in Japan's banking survey

The Bank of Japan released the results of its Senior Loan Officer Opinion Survey on Bank Lending Practices. I find this survey interesting because it reiterates the mechanism by which monetary policy works, and likewise, the limits.

The chart above illustrates the net-demand for loans by Japanese households, firms, and local governments reported in the BoJ's survey. Demand continued to weaken in the first quarter of 2009 relative to the fourth quarter of 2009, although somewhat less quickly. For households, 18% of survey respondents reported moderately weaker demand, 74% were unchanged, and just 6% reported moderately stronger demand (not shown, but listed in the second table of the release).

Demand for loans is an important monetary policy; central banks use the credit market as a conduit to raise or fall aggregate demand (C + I + G + NX). For example, the central bank will cut short-term rates in order to drop longer term rates, like auto rates, corporate rates, mortgages, etc., which usually increases consumption and investment. However, if a drop in short-term rates toward zero does not stimulate aggregate demand - corporate spreads remain elevated or consumers are actively saving - then the central bank faces Keynes' liquidity trap.

According to the bank loan survey, Japan is essentially in a liquidity trap. And monetary policy is not passing through to consumer and firm spending.

The table above lists the reasons for which 6% of banks surveyed reported household demand for loans increased. Lower interest rates - the monetary mechanism - were only "somewhat important" for housing loans and "not important" for consumer loans.

This report confirms that the Bank of Japan has again reached a liquidity trap; lowering interest rates won't stimulate demand. Even for those that reported increased demand, only a portion of it was in response to the monetary policy channel, interest rates; and furthermore, none of that would go into aggregate consumption (consumer loans). Japanese households are famously frugal savers, but they (consumption) are still the biggest share of aggregate demand, 56.5%.

The chart compares Japanese GDP shares to those in the U.S. Consumers are relatively more important in the U.S., at 70.5% of GDP in the fourth quarter of 2007 (I used 2007 to get a better measure of less recessionary shares, and also because the easy-to-download BEA data only goes back that far). However, the Japanese consumer is nevertheless important, an important conduit to growth that has been severed from monetary policy stimulus.

Rebecca Wilder

1 comment:

  1. Liquidity trap. I guess Keynes wasn't too smart. And then Keynes out does himself with the "demand for money" (see Alfred Marshall's money paradox).

    From an macro economic standpoint, lending is accomplished in 2 distinct ways:

    (1) where the utilization of bank credit is used to finance real investment of government deficits;

    (but this doesn't constitute a utilization of savings because financing is always accomplished thru the creation of NEW money),

    & (2) where existing money is transfered from saver to borrower;

    (the growth of the financial intermediaries (non-banks) is not at the expense of the com. banks)

    (money flowing "to" the financial intermediaries (non-banks) actually never leaves the commercial banking system as anybody who has applied double-entry bookkeeping on a national scale should know)

    So, Deleveraging, Disintermediation, and the collapse of the "Shadow Banking System" has had deleterious effects on the transactions velocity of money.

    If you want to jump start the economy re-establish REQ Ceilings and lower them until the CBs are out of the savings business (i.e., the liquidity trap will cease to exist).

    The FED could continue to monetize the Treasury's debt. And if necessary could raise reserve ratios (at the same time they were buying debt oblications) to whatever point necessary to fund the treasuries debt management practices.