The cut also means that Japan is once again approaching a point where it has a de facto zero-interest-rate policy (ZIRP). With nowhere else for rates to go once ZIRP is achieved, there is a higher probability that the BOJ might have to return to its unorthodox policy of “quantitative easing”—introduced in 2001 and abandoned in 2006—under which the bank attempted to control monetary policy not through interest rates but by targeting current-account balances held with it by banks. Under quantitative easing the BOJ flooded the banking system with liquidity, raising its target for banks’ current-account balances far above the statutory minimum. The policy reflected recognition that zero or near-zero interest rates were insufficient on their own to stimulate Japan’s economy.
Insanity is doing the same thing over and over again and expecting different results. Zero interest rate policy did not help Japan the first time around, and it will not help things the second time around.
I explained some of the reasons why this is so here.