BOJ Showing Liquidity Trap Holds Warning for ECB: Japan Credit
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Investors who predict the European Central Bank will start buying government bonds this week to fight deflation shouldn’t expect too much if Japan is any guide.
The Bank of Japan’s experience is a real-life example of the Keynesian economic theory of a liquidity trap, in which money printed by a central bank is hoarded in anticipation of further deflation rather than invested. Japan’s 10-year yield dropped to a record 0.2 percent today and similar maturity inflation-linked debt signals consumer price increases of 0.7 percent, failing to meet the BOJ’s 2 percent target.