Ja­pan move shows limit of cen­tral bank pow­ers

The Myanmar Times - - International Business -

JA­PAN’S cen­tral bank has re­vealed yet an­other ex­otic weapon to gen­er­ate growth, but scep­tics say all it shows is that the ar­moury is empty and a long bat­tle against de­fla­tion is be­ing lost.

With the Euro­pean Cen­tral Bank ap­par­ently set to em­bark down a sim­i­lar path and the Fed­eral Re­serve tread­ing very lightly, some an­a­lysts are say­ing the Bank of Ja­pan’s move is an ad­mis­sion of de­feat and a warn­ing of the lim­its of cen­tral bank power.

Af­ter a hotly an­tic­i­pated meet­ing on Septem­ber 21, the BoJ said it would switch its em­pha­sis from in­ter­est rates and con­cen­trate its fire­power on 10year gov­ern­ment bonds.

Gover­nor Haruhiko Kuroda said the bank would buy as many or as few of these bench­mark in­stru­ments as nec­es­sary to en­sure the yield – the in­ter­est rate paid to hold­ers – re­mained steady at around zero.

He also pledged he would cut back on the num­ber of longer dated bonds the bank holds. That should re­duce the price of long-term se­cu­ri­ties, which, in turn, should in­crease their yield.

This so-called steep­en­ing of the yield curve is the lat­est ef­fort to con­vince Ja­panese con­sumers that the price of goods and ser­vices will rise in the fu­ture.

The idea is that if peo­ple think prices will rise, they will rush out to spend their money, caus­ing ac­tual price rises.

But the prob­lem, say an­a­lysts, is that af­ter more than three years of boot­lessly in­sist­ing that in­fla­tion is com­ing back, Mr Kuroda is low on cred­i­bil­ity.

“It’s hard not to see the BoJ state­ment as a fur­ther sign that it is run­ning out of ideas,” said Ge­orge Mag­nus, an ad­viser to UBS Group AG, Bloomberg re­ported.

Ja­pan has been grap­pling with stagnant or fall­ing prices for much of the last quar­ter of a cen­tury, since an as­set and stock bub­ble popped af­ter decades of soar­away growth.

The prospect of things be­ing cheaper next month dis­cour­ages con­sumers from spend­ing their money right now, mak­ing com­pa­nies re­luc­tant to in­vest and pres­sur­ing a coun­try’s eco­nomic growth.

The gov­ern­ment – through its so­called “Abe­nomics” growth plan – and the cen­tral bank have been tin­ker­ing with their mone­tary and fis­cal pol­icy for years in a bid to en­cour­age peo­ple to open their pock­et­books.

Com­pa­nies are not go­ing to start spend­ing their cash piles – ei­ther by in­vest­ing or boost­ing wages – un­til they think there are con­sumers will­ing to buy the goods and ser­vices they are sell­ing.

“Ul­ti­mately, the BoJ does not op­er­ate in a vac­uum,” said a re­search note from Daiwa Cap­i­tal Mar­kets.

That is where the struc­tural re­forms promised – but not re­ally de­liv­ered – by Abe­nomics should come in.

The bad news for other developed economies is that Ja­pan is ahead of the curve.

It may have been the first place to en­ter a pe­riod of pro­longed de­fla­tion, but wob­bly per­for­mances from Europe and the United States in re­cent years have sent their economies in the same di­rec­tion.

Both the Fed­eral Re­serve in the US and the Euro­pean Cen­tral Bank have im­ple­mented ul­tra-low in­ter­est rates and quan­ti­ta­tive eas­ing. Nei­ther has seen im­pres­sive re­sults.

The Fed’s lat­est salvo was to do noth­ing.

In an opin­ion piece on Bloomberg News, Lisa Abramow­icz said last week’s moves show the lim­its on cen­tral bank power in the ab­sence of any po­lit­i­cal lead­er­ship.

“To­gether the Fed and the BOJ have made clear that they have gone about as far as they are able or will­ing to go to fill in the gap left by in­ac­tion by law­mak­ers world­wide,” she said.

“In short, these cen­tral bankers are es­sen­tially throw­ing in the towel with re­spect to search­ing for ever more cre­ative so­lu­tions.

“Even if these bankers don’t ex­plic­itly back away from their ef­forts, they’ve reached their lim­its. It’s the politi­cians’ turn now.”

Photo: EPA

Bank of Ja­pan Gover­nor Haruhiko Kuroda talks to jour­nal­ists fol­low­ing a two-day mone­tary pol­icy meet­ing in Tokyo last week.

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