This BoJ lending, was it feasible only because Japan has run a surplus for so long during the boom times? Or is it just imaginary credit anyway?
I appreciate the general mechanics, but the question is what are the fundamental limits on a central bank? Why can the Fed (for example) not choose to replace the dwindling liquidity itself?
I understand that the BoJ had internal reasons for having a low interest rate (no growth in Japan) but if you assess that this liquidity is keeping the US going, why is it not in the interest of Bernanke to pump in liquidity.
As long as it is bought by someone in exchange for goods it is all fine, and most of the dollars has ended up in the Chinese central banks vaults (though, of course, it is all numbers so there is no real vault with tons of dollar bills). As the Fed has stopped publicising the amount of liquidity they pump (the M3), it is not unreasonable to assume that the Fed is rather worried about the amount they have already pumped. A serious disturbance, as the BoJ raising their interest and disrupting the carry trade, could probably not be met by even more Fed liquidity without seriously undermining the credability of the dollar. In fact the BoJ raising interests could be the strain that breaks the camels (dollars) back, with everyone rushing to sell their dollars.
If this answer made any sense, most of the credit belongs to Jerome, Colman, Bernhard (at moonofalabama) and Billmon. All my international economics comes from blogs, I will soon finish my Bachelor of bloggish economics :)
All misconceptions are probably mine though.
