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Bank of Japan Governor Masaaki Shirakawa attends a news conference at the central bank in Tokyo on Oct. 5.

ISSEI KATO/Issei Kato/Reuters

Break out the party hats and balloons. The Bank of Japan has taken the markets by surprise, lowering its policy interest rate to a range of zero to 0.1 per cent and vowing to leave it there until deflation is defeated.

As the old level was already 0.1 per cent, this is what analysts like to call a symbolic gesture of little real value.

It follows in a long line of tepid half-measures adopted by Japanese officials over the past 15 years to wipe out economy-killing deflation. Speaking of which, the deflation rate of at least 1.5 per cent means that real interest rates are comparable to those in the U.S. Which helps explain why the yen remains so strong and actually rose again today, even after the Japanese went to zero.

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The BoJ also outlined slightly bolder quantitative easing plans, including a temporary fund to buy government bonds but also corporate debt, exchange-traded funds and Japanese REITs. The amount being set aside for such unusual intervention in the private-sector part of the market is a relatively paltry ¥1.5-trillion. But the stage is now set for a more aggressive Bank of Japan (that's not an adjective you typically see beside this central bank) to become a major market player if the economy keeps struggling just to tread water.

The real solution to the mess, outlined years ago for the Japanese by Ben Bernanke, of all people, is to print scads of money and re-inflate their economy. They should adopt a formal average inflation target and do whatever is necessary to achieve it. Which will mean spending trillions more than the BoJ currently contemplates.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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