Japan move shows limit of central bank powers | 2016-09-23 | daily-sun.com

Japan move shows limit of central bank powers

23 September, 2016 12:00 AM printer

TOKYO: 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, reports AFP.
After a hotly anticipated meeting on Wednesday, the BoJ said it would switch its emphasis from interest rates and concentrate its firepower on 10-year 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’ll 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 (it’s barely budged) Kuroda is low on credibility.
“It’s hard not to see the BoJ statement as a further sign that it 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 so-called “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.