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IB Macroeconomics IA
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IB Macroeconomics IA for econ HL course. Officially graded 13/14
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Japan's cash balance surges by a fifth to record in MarchDate: April 1, 2021
TOKYO, April 2 (Reuters) - The amount of money circulating in Japan soared by a fifth to hit a
record in March as central bank pumped out cash to cushion blows to the economy from the
COVID-19 pandemic.
The average balance of monetary base, or the amount of cash in circulation and deposits at the
BOJ, rose 20.8% in March from a year earlier to 613.4 trillion yen ($5.5 trillion), marking the
fastest annual gain since February 2017, central bank data showed on Friday.
The increase was driven largely by a surge in the BOJ’s purchases of short-term securities and
demand for its loan scheme aimed at channelling funds to COVID-hit firms.
Financial institutions’ deposits parked at the BOJ also soared, climbing 25.1% to a record 492.5
trillion yen.
Many analysts expect the BOJ to keep its money spigot wide open as Governor Haruhiko
Kuroda has stressed its near-term focus would be to support the pandemic-hit economy.
Japan’s economy is gradually recovering from pandemic-induced pain thanks to robust exports,
though a slow vaccine rollout and climbing coronavirus infections, particularly in the city of
Osaka, cloud the outlook.
Critics have urged the BOJ to focus more on the rising costs of its prolonged easy monetary
policy, such as the damage done by ultra-low interest rates to bank profits.
The central bank decided last month to address the side-effects of its prolonged monetary easing
with a review of its tools, which have led to plans to trim its bond purchases from April.
Source: Reuters
Commentary:
This article is about Japan using expansionary monetary policy (EMP) to support its “Pandemic
hit” economy. Monetary policy is the manipulation of interest rates by the central bank to
influence the level of aggregate demand (AD). In this scenario, the Bank of Japan (BOJ) adopts
EMP to ‘boost’ AD.
, Figure 1 shows the Japanese economy in a recessionary gap (point T) due to the
“pandemic-induced pain” as there is not enough total demand in the economy to make it
worthwhile for firms to produce at potential GDP (Yp) ( Ye (equilibrium real GDP) < Yp). This
scenario is due to a decrease in consumer and business confidence and therefore lower
expenditure and investment, attributed to the lockdowns imposed across Japan forcing people
to self-isolate. The lack of expenditure and investment further affects businesses as some have
difficulties making profits and others are forced to shut down due to the absence of demand. As
a result, lower output demand requires less labor for production, which has increased
unemployment above the natural rate.
As consumer spending (C) and investment (I) decrease, AD falls as it is the total demand for
goods and services in an economy at different price levels. So, the BOJ adopts EMP to increase
AD in the economy. They influence interest rates by increasing the supply of liquid money in
circulation through their loan scheme and the “purchase of short-term securities” (STS), a
process called open-market operations.
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