BOJ’s backfire hangs over central bankers as IMF meetings start

Bloomberg

The world’s central bankers, already hitting limits of their effectiveness on growth and inflation, are now contending with another risk: that additional stimulus could produce lackluster results and undercut investor confidence.
The Bank of Japan’s decision in January to take interest rates negative has sent bond yields tumbling, while doing little to curb a surging yen that’s squeezing the world’s third-biggest economy just when it needs a weaker currency. That’s put even more monetary and fiscal stimulus on the agenda at a time when Japanese households and companies are increasingly doubting the program.
“Japan is bringing bad news to the world,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG and a former BOJ official. “It’s demonstrating that massive monetary easing doesn’t work for everyone. Any additional stimulus may invite criticism from other central banks.”
The decline in credibility in Japan is a warning sign for central bankers and finance ministers who gather this week in Washington for spring meetings of the International Monetary Fund and World Bank, as well as a Group of 20 session.
If policy makers around the globe fail to gain traction soon with their actions, that risks a relapse into too-low inflation and even weaker growth, possibly roiling financial markets and increasing the threat that Japan-style stagnation spreads to more advanced economies.
The failure of policy to revive prices and growth in Japan would be a warning to all developed economies that need to break out into a cycle of investment, hiring, and slightly higher inflation.
“You’ve had a combination of this massive crisis that causes prolonged, weak growth and layered on top of that a series of other shocks that undercut any optimism,” said Ethan Harris, co-head of global economic research at Bank of America Merrill Lynch in New York. “It is dangerous to be in this situation for so long because it becomes self-fulfilling.”