Week of April 1, 2024
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
Japan just ended what has been one of the most radical experiments in monetary policy by any central bank. Over more than two decades, the nation pinned interest rates below zero. Now with inflation and growth showing some vigor, Japan is scaling back aggressive bond buying to keep long-term rates close to zero. It’s not totally abandoning its yield curve control, but is taking steps to allow rates to reset higher and eventually allow the market to determine their ultimate level.?
Japan’s economic malaise first started in the 1990s on the heels of a housing and stock market crash. As its economy hit a prolonged recession, policymakers tried varying levels of monetary support to get back on track. As growth continued to flounder, the monetary policy experiments grew more innovative. Quantitative easing – money printing to buy bonds – grew more aggressive. Forward guidance – sharing targets to help anchor inflation expectations – transformed from an academic concept to routine market communication. And negative interest rates – charging banks to deposit funds with central banks – pushed banks to lend.
How well has it worked? It is hard to tell. Inflation has been above the Bank of Japan’s 2% target for about two years, which hasn’t happened in decades. Annual wage increases were also at decade highs. It is great news that the economy has escaped deflation, but have the long-term prospects for Japan changed?
The country still has a rapidly aging workforce. If it is to raise its productivity and sustain growth and inflation targets, we believe it will likely need to overhaul immigration policies to fix some of that. Maybe the best conclusion is that Japan’s monetary experiments helped buy time. More work is needed on solving the tougher structural issues to prevent a return to the deflation dilemma.
Sources: Bloomberg, Financial Times, 2024.
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