Has the Japanese monetary experiment failed?

Capital markets feel anxious to see how events develop in Japan. After an aggressive electoral campaign, the Bank of Japan announced it was set to double the country’s monetary base: the yen declined almost instantly, and a few economic indicators showed something of an improvement. But then, it wasn’t long until the uncertainty came back once more.

Big pension funds and life insurance companies with large volumes of Japanese sovereign bonds in their portfolios sold sizeable volumes of them fearing inflation would damage their interests. In fact, one of the goals of the official Japanese monetary policy is to reach a 2% inflation and put and end to the long deflation phase that has all but strangled the economy.

The bond sales increased the levels of volatility and dragged some Japanese banks, too, to join the frenzy once it was obvious that the risk of those assets was going upwards. The winds of that tempest shook the markets.

Confidence over how effective the new policy would be began to vanish and investors retreated from the equity markets. The Nikkei index has now dropped to the same levels as those previous to the implementation of the monetary policy and stock markets around the world have also been hit. The yen has appreciated again, and the benefits ofits short-lived weakening have disappeared for the time being.

Has the Japanese monetary experiment failed? Under the stress of some political pressures, Japan may have rushed into an expansion of its monetary base without all the due protections, but what has happened says nothing about how useful injecting liquidity can be.

During the electoral campaign, Prime Minister Shinzo Abe was belligerent  about the urgency of a central bank intervention. Once in office, it now seems he shouldn’t have been so impulsive. The medicine is correct, but the timing and the dose have proved a trickier matter.

If you are searching for the opposite case, don’t go far: the European Central Bank is behaving in a completely different way for the same reason, that is, politics–German politics.

Under Berlin’s strict watch, the ECB simply cannot implement the policies that would help all members of the Union. This is unfortunate, even more when taking in account that some countries like Spain could lose investing-worth grade without the ECB’s right monetary policy.

The lesson is clear: let central banks to be independent and keep politics out of their decisions.