Japan changes economic direction.

During its policy meeting (July 13, 2006-July 14, 2006) the Bank of Japan (BOJ), Japan's central bank, will most likely raise the country's short-term interest rates for the first time in six years. During the period, the BOJ has kept interest rates at near zero ostensibly to stimulate economic growth. This period was marked by falling prices-what many economists think of as 'deflation', a serious economic problem. According to International Monetary Fund (IMF) statistics, prices declined an average of 0.5 percent between 1998 and 2005. Japan's 'deflation' was the subject of monetary hand wringing, much of it highly visible in the international financial press.

Economic growth in Japan was fairly low, and the savings minded, cash averse Japanese consumer failed to cooperate with the monetary strategy that flooded the economy with cash so that consumers, supposedly, would borrow for things such as mortgages. The cash flooding policy, incidentally, has a name: "Quantitative easing," it is called.

So, two momentous events mid-July 2006 for Japan: Prices have accelerated to the point where 'deflation' is officially over, and the BOJ, in a less publicized move, is adopting a quite different monetary policy.

The new policy, according to a July 13, 2006 posting on the Dow Jones Market Watch website, is called the "forward looking statement approach." It works this way, the BOJ, like the United States (US) Federal Reserve (and other central banks), will "signal" its intentions well in advance of taking action. This means that consumers and businesses will be able to adjust their borrowing in a timely manner, and manage cash flow more adroitly.

Market Watch also presented an idea developed by a global bank's chief economist to the effect that it is a misconception to think that quantitative easing was directed at consumers. "The main purpose of the injection of the money over a two or three year period was to avoid the banking crisis risk, so in that sense it worked quite well."

It follows, then, that the supposed 'deflation' was not properly characterized either. 'Deflation' has long been associated with a prelude to depression, and the economic literature does, in fact, say one does not necessarily follow from the other.

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