Central banks don’t need new tricks

The new central-banking toolkit looks a lot like the old one.
European Central Bank (ECB) President Mario Draghi drew President Donald Trump’s ire after remarking that he’s prepared to act forcefully to combat slowing growth and receding inflation. What was remarkable about Draghi’s comments – beyond the fact that Trump even paid attention to them – is how undeterred he is by already negative rates and the recent retirement of quantitative easing. You go to war with the army you have.
He might as well have been speaking for officials at the Bank of Japan, who set interest rates on June 20, the Bank of Korea and even the guardians of Australia’s famous business-cycle-is-dead expansion. There may even be a lesson for the Federal Reserve, which wraps up its meeting last week: If a rate cut is coming, why wait for July? But with just a few months left on the clock, Draghi has the scope to speak with impunity.
For all the fashionable talk about central banks being out of ammunition, there was no sense Draghi feels in any way constrained. If circumstances require you to sound decisive and, just as critically, follow through with action, then go for it. He sounded like a younger Haruhiko Kuroda.
In his early years as BOJ Governor, Kuroda acted with force, dramatically expanding the BOJ’s balance sheet soon after taking office. He did it again and later dived into negative rates despite public assurances in the preceding days that he had no intention of doing so. He was successful for a while – in no small part because he mastered the art of surprise. Still, he struggled to truly shake Japan out of its “deflationary mindset.”
That term is more often associated with Japan than Europe. Yet the remedies sound familiar: rate cuts that push the price of money deeper into negative territory, asset purchases and enhanced forward guidance – that is, the ability to convey how long borrowing costs will stay at certain levels.
Not that the pre-owned-vehicle nature of policy should deter Kuroda. The BOJ is facing the risk of a global economic downturn without having returned policy to some semblance of post-crisis normal, as my Bloomberg News colleague Toru Fujioka notes. That Japan’s floodgates are already open doesn’t necessarily help Kuroda; ironically, it probably hinders him.
The BOJ feels stale. It’s perhaps little surprise that the yield on Japan’s 10-year government bond reached its lowest level in three years after Draghi’s dovish comments, when Kuroda mouthed his own version of “ whatever it takes” earlier this month. By doing nothing for this long, the BOJ governor risks sounding and looking unresponsive to very real economic shifts.
Kuroda emphasised that he can act swiftly if needed. No economist surveyed by Bloomberg forecasts the BOJ will ease policy, though many see some action coming. Why not get on with it?
Japanification may seem like a bad word these days, but the phenomenon bore some of the most creative monetary-policy maneuvers in modern central banking.
—Bloomberg

That means Kuroda doesn’t need to bother coming up with new tricks. The old ones could work just as well, with the right timing, magnitude – and a little luck.

—Bloomberg

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America