End of line for BOJ has Kuroda talking up fiscal firepower

Bloomberg

Bank of Japan Governor (BoJ) Haruhiko Kuroda’s role as the prime focus for efforts to revive the world’s third-largest economy is coming to an end.
An unprecedented level of concern about damaging side effects of Japan’s multi-decade experiment with ultra-low interest rates has gripped policy makers, regulators and legislators. The key takeaway: fiscal policy is set for a more prominent part during the next economic downturn.
Why the change? A tense meeting in the BOJ’s drab annex building on September 26 helps illustrate the central bank’s predicament. Recognising the importance of public support for any move to cut the -0.1% policy rate, officials sought understanding from representatives of the “Shinkin” regional cooperative banks. But rather than accept more monetary easing may be needed, one key banker tersely warned such a move would intensify pressures on the lenders, and even pressed for a hike, according to people familiar with the exchange.
The pendulum swing away from monetary measures is part of a global shift seeing calls for increased government spending after a decade of easy money inflated asset prices, elevated debt levels and worsened wealth gaps, but did little to generate sustained wage and price gains. It marks a turnaround, with BOJ officials being confident as recently as mid-September that Japan was prepared to accept more deeply negative interest rates.
“When Abenomics started, I wouldn’t have thought about me talking about the importance of fiscal stimulus,” said Koichi Hamada, a member of prime minister Shinzo Abe’s original brain-trust of reflationists, who had advised on the nomination of Kuroda and other BOJ board members. “Monetary policy was very effective right after Abenomics began, but it’s very hard to make a significant impact on its own now.”
Signs of a shift in thinking were evident in remarks by Kuroda following the last two BOJ policy meetings. Five days after the September gathering, the BOJ chief talked up the power of lower short-term interest rates. But five days after the October one, he hailed the effectiveness of “more aggressive” fiscal policy, supported by ultra-loose monetary settings.
Data underscored the economy’s ongoing need for support. Gross domestic product grew an annualised 0.2% in the three months through September from the previous quarter, stuttering from a 1.8% expansion in the April-June period as exports fell amid trade tensions and a shopping splurge before a sales tax increase ran down stockpiles of goods.
Inflation figures for October are set to show core prices rose just 0.4% from a year earlier — still way below the BOJ’s 2% target.
Speculation among economists of extra BOJ stimulus
in the coming months has cooled since the central bank changed its forward guidance rather than take action in
October.
That decision further indicated the high hurdle for additional easing, though BOJ watchers warn that the bank could still move if the US-China trade war takes a turn for the worse or financial markets slide, causing a jump in the yen.