Bank of Japan

Lessons learned from Lehman collapse must not be forgotten

In the event of an economic crisis, moves to adopt and implement monetary policy need to be decisively made. The importance of such measures has been recognized once again.

Details were recently released of discussions held within the Bank of Japan following the financial crisis triggered by the collapse of U.S. investment bank Lehman Brothers on Sept. 15, 2008.

According to the released minutes of monetary policy meetings, the central bank was forced to make a tough decision in an extraordinary situation.

In retrospect, the central bank’s slow initial response and piecemeal adoption of policies led to a sharp appreciation of the yen and a plunge in stock prices. It could be said that an important lesson has been learned in relation to the planning of future financial policies.

Following the Lehman shock, the Bank of Japan maintained its monetary policy, with the interest rate kept at 0.5 percent. It decided not to participate in the coordinated rate cut by the U.S. and European central banks on Oct. 8 that year.

Subsequently, the value of the yen soared, and the Bank of Japan moved to discuss reducing interest rates for the first time in seven years and seven months at its Oct. 31 policy meeting.

It was largely expected by market players that the central bank would lower the rate by 0.25 percentage points. However, then BOJ Gov. Masaaki Shirakawa said, “If the functioning of financial markets further declines due to an interest rate cut, it would be like putting the cart before the horse,” demanding the rate be cut by 0.2 percentage points.

It is believed that this was also aimed at leaving open as much as possible the opportunity of an additional rate cut.

Although the votes were split, with four board members against and four in favor, Shirakawa, who chaired the meeting, decided to go ahead with the cut range. With many market players assuming that the central bank was holding back its policies, the move resulted in accelerating the appreciation of the yen and falling stock prices.

It cannot be denied that the central bank’s move to prioritize a logic held within the bank over market views aggravated the situation.

In December, the central bank again cut the policy interest rate by only 0.2 percentage points to 0.1 percent.

The rapid economic decline continued, and Japan suffered major negative growth in the 2009 January-March period.

The yen’s appreciation hit exporters hard, deteriorating the job market and hollowing out the industrial base in Japan. In November in the same year, the government was forced to announce that Japan was in a deflationary situation.

The Bank of Japan adopted a zero interest rate policy in October 2010, about two years after the Lehman shock. One can only think this was too late.

Policy interest rates were low during the time of the Lehman shock, leaving little room left for an additional rate cut. However, if the central bank had not considered a zero interest rate policy to be taboo, could the deteriorating economic conditions have been avoided to some extent?

Since 2013 when Haruhiko Kuroda assumed the Bank of Japan governorship from Shirakawa, the central bank stepped up its bold policy of quantitative easing, and as a result, the economic situation was shifted to a trend of a weaker yen and a stronger stock market.

However, the inflation rate is a long way off the 2 percent target set by the central bank. To work toward completely pulling the nation out of deflation, it will become even more important for the central bank to strive for careful consultation with the market.

Means for additional policies are limited. How can the Bank of Japan deal with another financial shock? During a period of peace, it is hoped that the central bank acts to prepare for such an event.

(From The Yomiuri Shimbun, Feb. 10, 2019)