Bank of Japan Talking Points:
- Governor Haruhiko Kuroda argued for a mix of fiscal and monetary stimulus this week
- Fair enough, but this is a far cry from claims that monetary policy alone could work
- Could big changes be ahead for the way markets think about the Yen?
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After years of extraordinary monetary stimulus is the Bank of Japan tacitly admitting that the game is up?
Governor Haruhiko Kuroda said Tuesday that the ultra-low interest environment makes any fiscal stimulus in which Tokyo might intend to indulge far more powerful and that a mix of the fiscal and the monetary might be far more powerful than just one or the other.
Taken alone this is an innocuous and perhaps even obvious remark.
But then we come to the context. All 576 trillion Yen’s worth of it (US$5.3 trillion). For that is the staggering, GDP-topping amount to which the BoJ has expanded its balance sheet in its attempt to stimulate domestic pricing power.
Much Expended, Little Achieved
Not enough context for you? Consider the negative interest rates, the yield curve control, all ramped up for years and to what end? Well, looking at the latest data, consumer prince inflation in Japan was running at an annualized rate of… 0.2%. It hasn’t been anywhere near the BoJ’s 2% target since 2015. Yes, Japan has managed to shake off the outright deflation which has dogged it for long periods this century. But a 0.2% price rise isn’t much of a buffer is it?
Now of course Japan is not alone in this. Inflation has been stubbornly weak for much of the post-crisis period across developed economies. Record monetary largesse has failed to stimulate it elsewhere too. New International Monetary Fund head Kristalina Georgieva called last for a far more active role for governments in boosting growth.
But Japan does stand alone in the scale of stimulus attempted and the clear paucity of result achieved.
‘Powerful Easing’ No Longer Enough
What’s more Kuroda used to aver almost whenever he got near a microphone that ‘powerful monetary easing’ would be more than sufficient to hit that target. ‘Just give it time’ was the approach.
Well that tune certainly seems to be changing, with acceptance now public that the central bank could probably use a little help. Of course, the markets have doubted for ages whether that target was reachable. Some Japanese central bankers and academics have even joined them. We wondered earlier this year whether the clear fact that stimulus wasn’t delivering might force a shift.
What comes next is of course the major question, and it doesn’t have a clear answer. Any shift in the BoJ’s target would be seismic for the markets and might well see the Japanese Yen gain huge support, at least initially, as a wave of risk aversion supports such haven assets.
Further out a lower, more realistic inflation target might see the currency more inclined to move on its own domestic economic data than it is today. Right now, those numbers hardly matter in monetary policy terms. For as long as inflation remains subdued the BoJ is compelled by its own logic to keep the taps wide open.
This story bears close watching through the trade and Brexit hubbub. Japan was a leader in extraordinary monetary stimulus and an early test case for the uneven results it has delivered everywhere.
Is Kuroda now cast as reluctant author of the guide book to walking away?
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--- Written by David Cottle, DailyFX Research
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