It remains to be seen whether the move is considered a masterstroke or an act of desperation, once the dust has settled.
The positive scenario is that the cut works and just as importantly, is seen to have worked by markets. There are no formal criteria by which we can say it has worked but increased consumer spending and the return of some meaningful inflation in Japan would be a pretty good indicator.
The danger is that the benefits will stop at a short term lift to equities markets. This will beg the question; is there anything the Bank of Japan has left to try now?
This question of whether the central bankers are close to using the last of their ammunition also applies to the eurozone countries where the European Central Bank led by Mario Draghi has been pumping money out with similar aims to colleagues in Tokyo.
Draghi has already made a significant move in 2016, announcing that further monetary stimulus is being planned for March. The ECB QE experiment shown little real world impact in terms of bringing in healthy inflation or stimulating economic growth. It hasn’t even benefited equity markets to the extent many had expected. The MSCI Europe is now 10% below the level it was at when QE 1 kicked off in March last year. While there is naturally a lag between QE taking place and it coming through into the economy, it is beginning to look like Draghi is banging his head against a brick wall.
Nick Gartside, international CIO for fixed income at J.P. Morgan Asset Management sees the central banks’ hands in both Europe and Japan as being forced.
“We’re only one month into the year and two of the major central banks have already surprised markets: the ECB has signalled more policy action in March and the BoJ has moved to negative interest rates, a policy previously thought of as unthinkable,” he said. “Both central banks are reacting to economic reality. Growth and inflation are meaningfully undershooting targets and more stimulus is needed to get both higher.”
