As the world’s most powerful central banks meet this week, one thing is apparent: They’re in survival mode. Little else matters for economic policy beyond weathering the coronavirus pandemic. The risk is that policy makers commit to a range of measures without an exit strategy.
This is nowhere more apparent than Japan. On Monday, the central bank introduced a number of crisis-busting policies: abandoning limits on purchases of government bonds, doubling the target for buying corporate debt and commercial paper, and easing the commitment to 2% inflation. The latter puts to rest the career-defining goal of Bank of Japan Governor Haruhiko Kuroda, whose massive expansion of quantitative easing since 2013 had been framed around that objective. Steep cuts in forecasts for growth and consumer prices now make 2% seem unattainable before the end of his second five-year term in 2023.
A global pioneer of zero interest rates and quantitative easing, the BOJ seems focused on simply maintaining basic functions of the economy and the financial system. The Federal Reserve and European Central Bank, whose rate-setters meet this week, are in a similar position. For each, it will be years before they can consider unwinding the plethora of stimulative programs being introduced, let alone worry about inflation and rate hikes.
It's easy to see ultra-easy money and the Fed's array of tools outlasting Chair Jerome Powell's term, which finishes in early 2022. While growth will bounce from an enormous contraction in the second quarter, we’ll still be a long way from fourth-quarter levels. It's worth remembering the Fed didn't raise rates after the Great Recession until 2015 — six years after the economy began growing again. It’s unlikely to do so before 2023 at the earliest, say economists Roberto Perli and Benson Durham at Cornerstone Macro. Only because Christine Lagarde sits at the beginning of her eight-year term as European Central Bank president is there a possibility she’ll see higher borrowing costs.
Cynics have dismissed the BOJ's pledge to buy as many sovereign bonds as needed to keep 10-year yields near zero. After all, the central bank was a very long way from spending the previous ceiling of 80 trillion yen ($745.6 billion). Relentless downward pressure on bond yields globally did most of Kuroda’s work for him. Yet focusing on this new measure risks overlooking the emphasis he placed on fiscal and monetary policy working together. Tokyo has put forward a package amounting to 20% of gross domestic product, which has to be financed. While the BOJ says it won't monetize the nation's debt, scooping up bonds from investors right after the government offloads them comes close — particularly if there’s no longer any pretense of limits on central bank buying. Asian neighbors have few qualms about it.
While officials around the world weigh how quickly to reopen parts of the economy, the damage from containment efforts will persist. The recovery path from the global financial crisis was consistently weaker than central bankers figured. In the pre-pandemic era, it was hard enough for Kuroda to hint at rolling back support measures without markets gyrating. Now that the BOJ is wading deeper into the fabric of Japanese economic life, that task will only get tougher. Kuroda himself may not have to worry about it, but he’s not leaving his successor much of a road map.
Bloomberg
