Bloomberg News

Fed Isn’t Repeating Japan Error, Nomura’s Sheard Says: Tom Keene

October 05, 2011

Oct. 5 (Bloomberg) -- The U.S. has avoided monetary policy missteps that should prevent it from following Japan into a deflationary spiral while Europeans haven’t been so adept, according to Nomura Securities International’s Paul Sheard.

“Japan slipped into deflation and stayed there, and that was due largely to policy error,” said Sheard, global chief economist in New York at the unit of Nomura Holdings Inc. in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “I don’t think those policy errors are being repeated in the U.S., and I don’t see the U.S. falling into deflation and into a long-term nominal stagnation.”

Efforts of the Federal Reserve to keep borrowing costs low have helped stave off concern that the U.S. is starting to look like Japan in the 1990s, when the Bank of Japan struggled to revive the economy, said Sheard, whose firm is one of the 22 primary dealers that trade directly with the U.S. central bank.

Fed Chairman Ben S. Bernanke told a congressional committee yesterday that policy makers stand ready to take additional steps to boost U.S. growth and cautioned lawmakers against budget moves that would harm a “sluggish” recovery.

The central bank announced Sept. 21 that it will replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to support the economic recovery by keeping borrowing costs low. The decision came after the Fed purchased $2.3 trillion in debt in two rounds of quantitative easing.

View on Europe

European policy makers haven’t done enough, and what they have done has been slow in coming and hesitantly administered, according to Sheard.

European Central Bank President Jean-Claude Trichet said at a parliamentary hearing in Brussels yesterday that the bank isn’t in a position to assume governments’ responsibilities. The ECB is scheduled to meet tomorrow.

Officials of the European Union are working on plans to boost bank capital to contain the euro-region’s debt crisis, Antonio Borges, the International Monetary Fund’s European department head, said today in Brussels.

“Policy makers seem to be replicating the mistakes of Japan in the sense that they are not acting quickly, they are not acting boldly and they are not acting across all policy margins they have,” said Sheard, a former chief economist for Asia at Lehman Brothers Holdings Inc. “Markets want policy makers to do something quickly, but it’s very difficult for them to do so.”

--Editors: Dennis Fitzgerald, Paul Cox

To contact the reporters on this story: Cordell Eddings in New York at; Tom Keene in New York at

To contact the editor responsible for this story: Dave Liedtka at

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