This week, much attention will focus on the Open Market Committee of the U.S. Federal Reserve, the most powerful central bank in the world, whose actions have global impact. Yet the most informative, and intriguing, policy decision could take place in Tokyo. And the outcome will not only tell us more about Japan’s daunting challenges, but could also signal more clearly what lies ahead for other central banks that continue to operate within an unbalanced macro-economic policy mix.
It is now widely recognized that, for most of the period since the global financial crisis, an enormous and excessive burden has been placed on central banks. Long used to playing a complimentary, albeit critical role, in policies, and mostly behind the scenes, they have taken such a dominant and visible role that they have become “the only game in town.” In the process, these monetary institutions became increasingly committed to experimental measures, from negative interest rates in Europe and Japan, to outsize involvement in financial markets in many countries as the banks deployed their balance sheets for large-scale asset purchases.
Although the central banks remain willing and able to act, questions about the effectiveness of these policies will continue to increase the longer these institutions have to go it alone. Nowhere is this issue more pressing than in Japan.
Under the leadership of its governor, Haruhiko Kuroda, the Bank of Japan has shown considerable enthusiasm for addressing decades of sluggish growth and deflationary threats. Aggressive balance sheet operations have been accompanied by a surprise plunge of policy rates into negative territory. Yet outcomes have been far from satisfactory.
Rather than depreciate the yen to promote exports and import-substitution activities at home, the currency has appreciated as theBOJ’s policies became more aggressive. Adding to the central bank’s woes, bond yields have climbed significantly in recent weeks, turning a hoped-for growth tailwind into yet another potential headwind.
No wonder the Japanese central bank’s policy approach has become more controversial, including among senior officials in Japan. After all, a growing set of indicators suggest that its policies have become a lot less effective, and could even be counter-productive.
This is the complex backdrop for the BOJ’s policy-making committee meeting on Sept. 20-21, which has been billed as a comprehensive review. Initial signals suggest that, despite disappointing macro-economic outcomes so far, the bank’s officials are inclined to do even more, though there still seem to be disagreements about the mix of measures.