The End of Quantitative Easing: Not Cautiously Solving America’s Economic Slowdown

America’s state in the near future is unclear. It is becoming more and more difficult for the monetary policy helmsmen.

The U.S. Federal Reserve Board (FRB) has decided to terminate, at the end of June, the second substantial quantitative easing plan (QE2), which was enforced on an unprecedented scale starting in November of last year.

The FRB bought $600 billion (about 48 trillion yen) of the U.S.’ national debt and augmented the market’s supply of investable funds. Alongside the goal of supporting the economy during the recession, it was a last resort effort to confine worries about deflation.

The effect was that the long-term investment rate fell and business capital investments were stimulated. Because America’s stock market responded positively, consumer spending also picked up. Deflation anxieties also retreated.

On the other hand, the secondary effects were also large. A big sum of money from the U.S. overflowed into the market, and the prices of such things as crude oil and grains were forced up. Inflation in places such as emerging nations was also conspicuous.

The FRB, for the present, is probably valid in deciding that its duties in the quantitative easing plan have ended.

This time, the FRB, concerning the Federal Funds (FF) interest rates, which aim at stabilizing short-term interest rates, is deferring the zero interest rate policy and denoting the objective as solving urgent issues.

If they rush the “exit strategy,” which would return interest rate levels to pre-financial-crisis levels, it would chill the situation and adversely affect the international economy. They should make sure to time these money-tightening activities prudently.

The problem is that the economic comeback’s vigor is weak. America’s real economic growth rate in the period of January through March of this year, compared to the previous period’s growth rate, has fallen 1.8 percent.

Through the Tohoku region earthquake’s influence, the supply of components from Japan has been hindered, and the American manufacturing industry has been driven to a reduction in production. Also, in the period from April to June, the conditions remained sluggish. The unemployment rate has remained high at around 9 percent.

In the case that the situation decelerates more and more, it remains to be seen whether the FRB can work out an additional plan effectively. The lengthening of America’s ultra-low interest is probably inevitable.

However, in relation to this, Japan must be on alert concerning the voluntary high-valued yen and low-valued dollar. It seems that American officials also approve of exporting the profitable cheap dollar.

The Japanese economy, directly hit by the Tohoku region earthquake, is falling into negative growth. If the high-value yen immoderately advances, car and other products’ export enterprise earnings will go into a slump because of the selling of the dollar, brought on by the American situation. It will become a serious situation that will pour cold water on the reconstruction efforts after the earthquake.

In mid-March, the yen suddenly rose; through Japan-U.S.-European joint intervention, a brake was put on the high-valued yen. The government and the Bank of Japan should restrain the market and deal with hindering the high-valued yen with a resolute attitude.