Several foreign investors anticipated an implementation of additional easing from the Bank of Japan; however, the latter has remained undecided on their policy and put off on increasing monetary stimulus.
While stocks in Tokyo dipped, the yen surged 3 percent against the dollar and euro right after the decision was announced at the April 28 policy meeting. Japan’s Nikkei Stock inched lower in excess of 3.5 percent, and the government bonds rallied mainly at the yield curve’s longer end.
Governor Haruhiko Kuroda and his fellow associates decided to take more time to examine the consequences of negative interest rates. Kyohei Morita, chief Japan economist at Barclays (LON:BARC) Plc. Stated that Kuroda clarified that the BOJ won’t let the BOJ be influenced by market demands.
“It’s too early to make another move after implementing the negative rate a couple of months ago,” he said, pertaining at the easing last January. “The important message is that the BOJ will be data-dependent and I expect they will bolster stimulus in July as they review the outlook of inflation.”
The meeting outcome disappointed and surprised the market and economists, as this decision was made despite factors such as the central bank revised down its growth and inflation predictions for the next two fiscal years and announced another postponement of the timeframe for reaching the 2 percent inflation target. Consumer prices also had moved into the negative zone again and household expenses had dropped, and spring wage negotiations had unexpectedly resulted negatively as well.
With discouraged markets pushing the yen higher, exports getting less competitive and share prices declining, the chance for the Japanese growth’s recovery is becoming slimmer.
However, Morita stated that they are relieved by the recent signs of stabilization in the stock markets and foreign exchange despite the growing concern of the central bank regarding a strong yen. Moreover, the governor’s decision is in keeping with previous practice despite the market’s negative feedback, opting to give some time to see the impact of his actions. Beginning in April 2013, his stimulus has helped support bank lending, climbing its highest level since 2002. Kuroda also mentioned that he doesn’t see a boundary to monetary policy.
Looking at the whole picture, including the scenario in which the central bank took the market by surprise with its activism and dragged its policy rates negatively, generating the same consequences as the present, this inconsistent market behavior is common in emerging economies where policy ineffectiveness is a problem. This fickle behavior and policy outcome is unfamiliar in advanced economies, where policy credibility and institutional strengths are considered givens. Emerging economies do not have the aforementioned credibility and strengths established. It is especially shown when central banks lose control of the currency regardless of interest rate movement, in context of unsystematic devaluations mostly.
It should be remembered that central banks that find themselves in this kind of economy can affect results through verbal intervention.
This steers to an important reality—that the BOJ is almost blurring the line dividing effective policy measures from ineffective, if not counterproductive, among the systematically vital central banks.
The Japanese government mentioned of using the central bank stimulus, one of the three arrows, in an effort to pull the economy out of twenty years of unproductivity. Conversely, in practice, the central bank activism which meant negative interest rates and massive asset expenses has been supplemented by inconsistent implementation of unsatisfactory structural reforms and financial actions. As the BOJ opted earlier this 2016 to try more of its unusual monetary policy, the other two arrows failed to fully materialize.
However, its attempt of experimentation yielded implausible results, such as an appreciation of the yen despite interest-rate differentials and asset purchases were expanding even more compared to the rest of the world. This was supposed to expose the central bank to substantial public questioning, politically in particular.
This sort of situation sheds some light as to why the BOJ opted to hold off more policy activism. But the consequence of this drags them into a Catch-22 of contributing to anti-growth asset-price movements regardless of their actions. The BOJ’s policy dilemma should be watched over by other central banks such as the European Central Bank and the People’s Bank of China.
The market’s negative reaction emphasizes the need for a policy handoff, away from the reliance on central banks and rather towards measures involving structural reforms supporting growth, rebalancing of demand, and answering the problem of indebtedness and the improvement of regional and global policy coordination. The BOJ’s experience should serve as a warning to economies that central banks should be serious about the risk of rising policy ineffectiveness.