Are Central Banks Running Out of Ammunition?

A little over a week ago, the Bank of Japan surprised financial markets by adopting a negative interest rate policy. The intention of the BOJ and Governor Haruhiko Kuroda was simple: deliver a shock to the markets that would prop up asset prices and weaken the Yen. Instead, the opposite occurred. Stocks are flat and the Yen had its biggest weekly advance in more than six years. Japanese bank stocks are also being hammered as investors react to the possibility that banks may keep cash reserves to a minimum to avoid penalties, while at the same time exposing themselves to the risk of a swift liquidity crunch. The situation in Japan is just one illustration of monetary policy that has failed to generate its intended consequences. The Federal Reserve has consistently come up short in meeting its 2% inflation target, and developments overseas are calling into question the likelihood of the Fed continuing to tighten as planned in 2016. Traditionally, when something in the economy goes sour, central banks can come to the rescue with easy money, propping up asset prices and spurring expectations of future inflation. The current state of the markets in Japan is proving that this relationship may no longer hold, which has worrisome consequences for not only Japan, but for many developed economies around the world.  

Source: Reuters, Bloomberg