The Bank of Japan is predicted to leave its base rate unchanged on Thursday just hours after the Federal Reserve cut the fed funds rate for the second time and weeks after the European Central Bank restarted it quantitative easing bond purchases.

Governor Haruhiko Kuroda prompted speculation that the bank may be considering joining its Asian, European and American colleagues in providing economic support when he said that the bank was “more positive” about  adding stimulus at the July bank meeting. He also said the bank could lower its already negative short term rates if economic conditions warrant.

The overnight call rate has been at -0.1% since February 2016.  For the eight years before that it was at 0.1%.  It has not been above 0.5% since September 1995.

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The almost two year US China trade dispute has taken a toll on Japanese exporters and factories adding to the drag from slowdown in global growth.

Japan and its central bank face a unique problem in that its main interest rate has been below zero for the longest period of any major industrial economy. 

The dilemma for the bank is that even if it moved rates below their current -0.1% it is doubtful that it would foster economic activity.

The bank could alternatively expand asset purchases but the purpose of that would be the same, to lower rates.  The problem for the BOJs that lower interest rates function as a stimulus by making cash and loans more available. That works if there is a relative change in access. In Japan’s case by there is no shortage of liquidity. Business are not expanding more rapidly because the demand for their products is lackluster, domestically and increasingly from overseas.  

The yen has strengthened 5.4% against the dollar over the past year, but it has weakened 3.4% in the past three weeks and has moved away from the 100 yen level that analysts consider a red line for the BOJ policymakers.

For Japan and the BOJ about the only sure help for their economy would be a US China trade deal. Unfortunately that is not one of Mr. Kuroda’s options.

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