Japan's measures to combat deflation and revive the floundering economy are insufficient, and the nation instead should concentrate on stimulating inflationary expectations, Moody's Investors Service Inc. said in a special report Wednesday.
The government's current approach has not produced the intended effects and "the simplest, and perhaps the only, way out of deflation is to stimulate inflationary expectations," Thomas Byrne, the U.S. credit agency's vice president, said in the report.
Byrne said a rise in inflationary expectations would prompt households to reduce their savings balances in favor of spending on goods and services, and boost real economic activity over the long term.
However, Byrne cautioned "a radical policy prescription" could heighten credit risks due to disturbances in the government bond market before fiscal consolidation is well entrenched.
Byrne questioned the effectiveness of further credit easing by the BOJ.
A recent staff report by the Bank of Japan opposes monetary easing, Byrne said, arguing Japanese savers are in favor of accumulating safety assets and will not increase consumption even if real interest rates are lowered.
"Japan's bank-dominated financial system limits the current monetary easing measures because credit creation is seen in Japan as a function of the banks even though private equity, venture capital, and high-yield bonds are more flexible than bank loans," he said. "The Japanese authorities do not seem willing to break out of the current policy impasse and economic malaise."
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.