What Japan's Economy Needs

He's got a tough job.

Photographer: Akio Kon/Bloomberg

Spare a thought for Haruhiko Kuroda, governor of the Bank of Japan. The bank's heroic efforts to stimulate the flagging economy in recent months have had little effect, and now investors are asking: What else have you got?

The bank's latest announcement is expected this week, but it has already put in place a massive bond-buying program and negative interest rates -- remarkable steps for any central bank, never mind one as traditionally conservative as the BOJ. Now there is a call for an even bolder departure: so-called helicopter money. The idea isn't as crazy as it sounds, but it's no more likely to succeed than the bank's other innovations if there's no broader strategy to back it up.

QuickTake Helicopter Money

In central banking, expectations are crucial. Kuroda has made a habit of surprising investors. (Most recently, he pushed Japan's policy rate below zero shortly after saying he wouldn't.) For a while, this approach can appear to work, because markets react powerfully to surprises. But now when Kuroda says he isn't about to do something -- helicopter money, for instance -- investors think he might, and will be surprised (in a bad way) if he fails to surprise them.

To avoid this trap, central bankers need to be clear about why they're doing what they're doing. The same goes for politicians, by the way: For years, Japan's governments have used their budgets to stimulate the economy -- but often hesitantly and erratically. As a result, their actions have been less effective than they might have been otherwise.

There isn't much doubt that Japan still needs stimulus. Inflation, already well below its 2 percent target, has subsided again -- which increases the real burden of debt and weighs on private consumption and investment. The problem is that the monetary and fiscal measures tried so far have done too little to boost demand.

Is helicopter money the answer? The term can mean different things, but it usually implies unilateral action by a central bank to deliver a kind of fiscal stimulus -- for instance, by sending checks directly to citizens. Such maneuvers face a variety of economic and political obstacles, which in Japan include the fact that they might be illegal.

Kuroda has said the BOJ neither needs nor intends to resort to the measure, but investors aren't quite sure what to believe. The prevailing confusion -- the kind that won't be dispelled whatever the central bank actually does -- isn't helping.

The BOJ's best course is to leave fiscal policy where it belongs -- in the hands of the government. At the same time, it should say that it will support the fiscal measures that Prime Minister Shinzo Abe is planning to announce soon, by affirming that its bond-buying program will be available to help finance the initiative. This implies no new unilateral action by the central bank, and no diminution of the central bank's independence: The government sets the fiscal balance (and chooses the mix of public spending and tax cuts); the central bank chooses whether to finance it.

Central banks, including the Bank of Japan, cannot be faulted for lack of innovation -- but they've reached the practical limits of what they can do by themselves. Whether Kuroda admits it or not, that much is clear.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.