Financial markets were surprised by the Bank of Japan’s recent introduction of negative interest rates on some commercial bank reserves. They shouldn’t have been. The BOJ clearly needed to take some new policy action to achieve its target of 2% inflation. But neither negative interest rates nor further expansion of the BOJ’s already huge program of quantitative easing (QE) will be sufficient to offset the strong deflationary forces that Japan now faces. In 2013 the BOJ predicted that its QE operations would deliver 2% inflation within two years. But in 2015, core inflation (excluding volatile items such as food) was ... (full story)