Liquidity trap? What Liquidity trap?

More evidence that the so-called liquidity trap is not a trap at all:

The yen hit a fresh 2-1/2 year low on Friday and was vulnerable to more losses on bets the Bank of Japan will ease monetary policy aggressively at a meeting early next week.

The dollar broke above reported options barriers at 90 yen to reach 90.21 yen on the EBS trading platform. It was last nearly flat at 89.81 yen.

The U.S. currency has gained around 14 percent against the yen since early November, but further gains were expected if Japan’s central bank takes measures beyond the market’s central expectations in an attempt to stave off deflation.

Sources familiar with the BOJ’s thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will consider making an open-ended commitment to buy assets until 2 percent inflation is in sight.

Yes, the BOJ may do less than expected (and I’m still skeptical):

Such an plan would exceed market expectations, which have centered on the BOJ setting a 2 percent inflation target at its two-day meeting that ends on Tuesday and possibly increasing its asset-buying program.

“A lot is priced in for next week’s BOJ meeting. If asset purchases by the BOJ were unlimited that could lead to significantly higher levels in dollar/yen and euro/yen levels,” said Peter Kinsella, currency strategist at Commerzbank. “Levels past 93 to 95 yen within the next two to three weeks is not unreasonable.”

But some analysts warned the BOJ could undershoot expectations and this could see the yen rebound.

But even the recent stock and forex market reactions to hints that the BOJ might move ahead are a pretty big problem for theories of monetary policy impotence at the zero bound.  (I’m looking at you MMTers, Wallace Neutrality fans, Krugman/Woodford expectations trappers, Cochrane FTPLers.)

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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