Japan is currently undergoing one of the most significant central bank policy reconstructions in recent times. The Bank of Japan are ambitiously striving for 2% inflation while broadly expanding their balance sheet in an attempt to tackle long-term deflation.
The central bank has embarked upon a rapid expansion of the balance sheet. The body have also increased the scope of asset purchases to include bonds and delving into negative interest rates. Inordinate central bank asset purchases have been made in an attempt to stimulate growth.
Japan’s GDP is estimated to grow 1% next year. For the first time Japan will use the System of National Accounts 2008 to calculate GDP, a methodology the United States and the United Kingdom have been using for years. The new calculation will include; research and development costs, purchases on defence equipment and royalties. Revamping the formula used to calculate GDP pushes Japan closer to their goal of 600 trillion yen nominal GDP.
One of the main hurdles Japan must overcome is the damage that has been done over years of deflation. The creditability of the nation’s policy makers is under scrutiny. The proposal to reach 2% inflation is not only a bid to tackle deflationary woes but also to confine to industry norms and to therefore win over the trust of investors.
Unfortunately, estimations have not been realised. Japan’s economy is growing at an annual rate of 1.3%, which conveys moderate growth. Investment in commerce dropped 0.4% from the quarter before, showing a slow-down in stimulus.