In other words even negative real interest rates may

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Unformatted text preview: savers. More importantly, for forward-looking households, income effects could at least partly offset substitution effects, leading them to step up savings to maintain the real value of their future purchasing power. In other words, even negative real interest rates may be insufficient to overcome today’s all-pervasive uncertainty and lack of confidence. And if domestic demand failed to pick up substantially, it is difficult to see how the expectation of inflation could be maintained. The only channel of transmission left is through the exchange rate. Excess money and large real interest rate differentials vis-à-vis the rest of the world, would lower the currency and this would raise both demand for, and prices of, tradable goods and services. The effects of this may be limited, since Japan, of all the OECD countries, is the least open to the rest of the world. Yet, rising exports could generate a cyclical upswing in activity, as they have done on several occasions in the past. The major risks of depreciation, however, come from possible foreign reactions to what some might well view as a beggar-thy-neighbour policy.9 There is little guarantee, in other words, that getting the expected medium-term rate of inflation in Japan up to, say, 4 per cent, through an a...
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