CENTRAL BANKERS MUST EXPAND THEIR IMAGINATIONS / THE WALL STREET JOURNAL

Central Bankers Must Expand Their Imaginations

Japan is usually on the frontier of monetary policy experimentation. But it seems to be out of ideas.

By Mike Bird

The Bank of Japan 8301 -1.92%▲ announced a raft of new policies Monday, as the coronavirus punishes global growth. Unfortunately these initiatives are old wine in new bottles.

Japan is often at the forefront of monetary policy, with a central bank that began experimenting to try to defeat slow growth and low inflation decades ago. But the decisions it made this week show it isn’t just the tool kit of the world’s central bankers that needs replenishing, but the imaginations of both fiscal and monetary policy makers.

The BOJ said it would purchase an unlimited amount of Japanese government bonds. That might once have been seen as a credible commitment to large-scale stimulus.


BOJ Gov. Haruhiko Kuroda. The bank announced a raft of new policies Monday.
Photo: Shinnosuke Ito/Bloomberg News .


But the central bank isn’t changing its yield-curve control framework, and 10-year bond yields are currently inside the trading band the BOJ aims for. So why any more government bonds would be purchased is a mystery.

Yield-curve control was introduced in the first place because the bank’s rapacious purchases of bonds were turning a once-active market into an elephant graveyard, where trading volumes had collapsed.

The BOJ also announced an expanded corporate-bond purchase program. That can reduce yields on short-term commercial paper a little, but will likely have very limited impact relative to equivalent schemes elsewhere.

The risk associated with longer-dated Japanese corporate bonds never really rose at all this year. The total increase since 2020 began has meant less than a 0.1 percentage point rise in spreads on the ICE Bank of America Japan Corporate Index, compared with around 1.5 percentage points in the eurozone and 3 percentage points in the U.S.

The BOJ has all but exhausted its space on interest rates. It could cut again by a fraction of a percentage point into further negative territory, but the screams of fragile regional banks whose income has been crushed by low rates would grow louder.

Most of the options left are fiscal, and would require the BOJ to cooperate with the Ministry of Finance, which is inclined toward an austere view of state finances. Japan’s 1947 Public Finance Act prohibits direct monetary purchases of government debt.

Lifting that moratorium would allow the BOJ to engage in the same backstopping of government debt that finance minister Takahashi Korekiyo pursued during the Great Depression, or in policies like helicopter money, with direct payments to households financed by the central bank.

Short of such radical moves, it is hard to see what room the Bank of Japan has left to help. It can prevent a blowout in spreads, but that alone will do very little to juice activity when lending is constrained by a lack of reasons for companies to borrow.

Investors who have claimed central-bank ammunition is exhausted have been wrong-footed in 2020. The Bank of Japan’s problem isn’t that monetary policy options are nonexistent. Rather that the current framework—and the imagination required for a new, more radical one—truly is.