Japan’s central bank must wake up to economic realities
With two of the world’s three largest economies fighting to regain footing, Tokyo should take a more proactive stance
Two of the world’s major central banks met last week and decided to do nothing. The US Federal Reserve held interest rates constant, a decision that was in line with market expectations. The Bank of Japan, however, undermined market hopes of further stimulus despite data showing the country had fallen back into deflation. The yen surged but Japanese equities slumped. The plunge was later followed by stock markets around the world including those in the US. The strong yen presents a perilous challenge to Japan’s central bank and the Shinzo Abe government, which have been engaged in a multi-year fight against deflation and to promote growth.
The US Fed’s rate rise in December looks increasingly a mistake. Its decision last week was no doubt supportive of market sentiments, but it still opened the door to further rate hikes in the summer. With inflation tame and growth weak, the Fed could have offered greater assurance that further interest rate rises would only be considered if such data proved more robust.
But while the Fed might have erred by omission this time, the Bank of Japan has been criticised for inaction. As Japan grapples with another bout of deflation, its central bank was widely expected to commit to further easing. Less than two years ago, it surprised financial markets by aggressively expanding quantitative easing to lift inflation and stimulate growth. But now, bank governor Haruhiko Kuroda said more time was needed to gauge the effects of quantitative easing with negative interest rates. The bank’s decision to put monetary policy on hold has opened itself to multiple criticisms: it is too slow and acts only after the fact; and its commitment to easing and fighting deflation is being questioned.
The world economy is on a precipitous path as many major emerging economies contract and China’s growth slows significantly. The US is one of the few bright spots. With two of the world’s three largest economies fighting to regain footing, Japan’s central bank should take a more proactive stance.