I've been thinking quite a bit about the BoJ's decision to widen their target yield band this past week. After the hawkish comments from the ECB and then the move last week from the BoJ it seems a lot of market commenters are of the opinion that what we're seeing is a permanent departure from the zero and negative interest rate “experiments” central bankers have pursued over the last decade.
For example, I watched a CNBC clip recently which first acknowledged that Japan had a deflationary problem in recent years which the BoJ had been fighting with very supportive monetary policy, but then went on to call the BoJ policy of negative rates and yield control crazy – implying that there was a more rational course of action they should have been taking.
And it's not just in regards to the BoJ policy, I'm also hearing similar things about the Fed too. But what I'm yet to see is a better alternative to the extremely low interest rates we have seen over the last decade. It seems to me that the only option central bankers had was to accept below target inflation (or outright deflation in Japan's case), or attempt to stimulate the economy with extremely supportive monetary policy. Neither of which are good.
Given that we don't seem to have any better answers it seems to me that it's likely that in a couple of years when this inflationary wave has past and Japan's demographic situation continues to deteriorate that the BoJ will probably need to continue to aggressively stimulate the economy. And I think the same is very likely to be true in Europe and US, although to a lesser extent due to slightly better demographics.
I guess I'm just wonder if I'm missing something here? If central bankers are to take a different stance to monetary policy this decade, can someone help me understand what that would be? If zero percent interest rates were a mistake, what was the right policy? And is there any good reason to think these hawkish moves are likely to persist?
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