Deleveraging and Monetary Policies


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    Deleveraging refers to the economic activity of hastily selling one’s assets in order to pay debts owed by a company or a state. However, it is a dangerous economic tool that can have serious repercussions on the stability of a country bearing negative outcomes from the attempt. According to the article “Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007” by Kazuo Ueda, the economy of the United States has been in turmoil after the Great Recession, which occurred in 2007, but it was stabilized in 2009. For comparative purposes, the author is used Japan as an example of a country whose economic progress has been disrupted for about two decades due to the wrong application of the deleveraging tools. The article focuses on the reduction of debt funds through effective application of this monetary tool and offers economic advice from agents for cautionary implementation due to the negative macroeconomic feedback expected.
    The main aim of deleveraging is to stabilize financial imbalances in a country’s monetary structure. In Japan, the move to deleverage was necessary in order to ease the government’s foreign and local debt risk. The government has been receiving large chunks of debt capital from the bank of Japan, which has led to an ugly deflationary situation. In order to carry out successful deleveraging process, proper measures that would have helped in the speedy recovery of the economy of Japan are described in the article.
    In the case of the United States, the author suggested that application of the deleveraging process meant a higher financial risk to its economy, which is more market-based than that of Japan. The act of deleveraging, according to Ueda, can cause significant drops in the price of assets within a country as deflation rates drop due to financial instability. The market-based economy in the U.S. would, therefore, feel more pressure as private investors suffer severe financial losses from the deleveraging process.
    The response by the bank of Japan in the 1990s was slow, and as a result, the negative feedback from the deleveraging process is a case study for comparison in the article. The Ueda states that the role of the central bank in any country is to stabilize the value of its currency, especially at a time when the values of assets in the country are fragile. The outcome of Japan’s central bank slow response to the economic instability after the deleveraging process is the sluggish economy witnessed two decades later. The severity of the deleveraging process in Japan is repeatedly used in the article to depict the economic recession from poor implementation.
    In order to control the negative feedback from the actions of deleveraging, the United States is a reference in the article citing proper measures in comparison to Japan. After the Great Recession in 2007, policymakers in the United States set priority on the stability of assets price in the country to control inflationary tendencies. The central bank in the U.S. established a regulatory minimum where the price of assets was not to go below, and, thus, deflation of the U.S. dollar was controlled. The effect of this measure was to stabilize the economy, a move that has so far benefited the financial stakeholders in the country. The bank policy is a measure properly detailed in the article for countries that plan to deleverage.
    The article cites political stability in the United States as another factor that worked in favor of the deleveraging, helping to revive their economy. The United States faced the repercussions of deleveraging at a time when their political stability was good, enabling them to deal with the harsh economic period in the country with support from all government stakeholders.
    Professor Kazuo Ueda in his article covering deleveraging and monetary policies skillfully presented the successful case of the U.S. and failure of Japan to apply the measures to stabilize the economy. The U.S. central bank was able to recapitalize and control the negative feedback from deleveraging due to joint efforts by the private investors, the central bank and the government. Unlike in the U.S. case, efforts of the central bank and the government in Japan led to skyrocketing inflation.
     

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