Friday, October 31, 2008

Bank of Japan

The Japanese central bank lowered their benchmark interest rate (overnight call rate) to 0.30% today. Obviously, inflation is not their major concern. In fact, prices are finally rising in Japan. Their mishandling of the 1980s banking crisis lead to a significant deflationary period: for almost 4 years, annualized CPI was negative. Therefore, real interest rates were higher than nominal interest rates. This has a crippling effect on industry. The Bank of Japan responded by lowering rates to essentially zero for a considerable length of time. Also, please take notice of how the stock market reacted and the timing of the moves.

The "Real" Interest rate calculation is not robust, just a rough estimate:

Call Rate - CPI = "Real" Rate

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