The Bank of Japan has been forced to retreat from further emergency stimulus after a blizzard of criticism at home and abroad, and warnings that extreme measures may now be doing more harm than good.
The climb-down by the world’s most radical central bank is the latest sign that the monetary experiments since Lehman crisis may have run their course. The authorities have not exhausted their ammunition but are hitting political and legal constraints.
The yen surged 3pc against the US dollar in the biggest one-day move in eight months and equities skidded across Asia after the Bank of Japan (BoJ) failed to take fresh action to stave off deepening deflation, catching markets badly off guard.
Governor Haruhiko Kuroda dashed hopes for ‘helicopter money’, warning that direct monetary financing of spending would be ‘illegal’.
Mr Kuroda insisted that the BoJ still has plenty of firepower and can at any time push interest rates even deeper into negative territory or boost bond purchases beyond the current $74bn a month. ‘If additional easing is needed, we will do so promptly,’ he said.
The reality is that negative rates (NIRP) have backfired badly on every front. They have prompted bitter protests from banks and money market funds caught in a squeeze.
The yen has appreciated by 10pc since the BoJ first embarked on the policy in January, the exact opposite of what was intended. The rising yen – ‘endaka’ – is pushing Japan deeper into a deflation trap and undercutting the whole purpose of ‘Abenomics’.
This post was published at David Stockmans Contra Corner on April 29, 2016.
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