Next week, Japan’s central bank will formally review its monetary-policy strategy for the first time since 2016. Relatively little is expected from that review. Worse still, relatively little is expected of Japan.
Even those skeptical of the oft-repeated talking point that central banks have exhausted their ammunition must admit that the Bank of Japan is at the very least out of ideas. Japanese bond yields are now marginally higher than they were at the beginning of 2020 across almost every part of the yield curve. Average interest rates on loans are functionally unchanged. Core consumer prices have been declining for six months.
Reducing interest rates any further into negative territory is pretty much a no-go, because of the deleterious effect on the profits of banks, and regional banks in particular. Having reached the end of its rope with conventional monetary policy by the time of the global financial crisis, the BOJ seems to have reached the limits of its own comfort with unconventional policy too.
Virtually no one really believes the central bank has any hope of hitting its target for 2% inflation sustainably any time in the near future.
Some inside the BOJ seem to understand the problem. Goushi Kataoka, a BOJ board member who has consistently pushed for greater stimulus, said last week that the central bank needs a new strategy.
What that might be is a more difficult question. A frank and honest assessment of where Japanese economic policy stands—and a retrospective view of the successes and limitations of Abenomics—would be required. Between late 2012 and late 2019, the Bank of Japan facilitated the best period of nominal gross domestic product growth in a generation, but the expansion still wasn’t in line with the central bank’s goals.
The missing component was fiscal support, rather than further monetary expansion. Contrary to perceptions, Japan’s budget deficit declined almost continually as a proportion of GDP through former Prime Minister Shinzo Abe’s time in office. Two poorly considered sales-tax increases worked directly against reflation efforts.
Most of the responsibility for preventing Japan from returning to the morass of nominal stagnation therefore belongs to politicians. But Japan’s central bankers need to admit that, rather than saying yet again that they believe they have the tools they need themselves. Options such as helicopter money—giving cash directly to citizens, rather than simply swapping assets with them—are of uncertain legality and would require clear cooperation from the government.
The best element of Abenomics, despite its flaws, was a degree of consensus between the Bank of Japan and the prime minister’s office on economic ambition. Without similar coordination and an honest acceptance of the limits to what the BOJ can do alone, Japan’s stagnation is likely to resume.
Write to Mike Bird at [email protected]
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