japan<u+2019>s central bank is proving to be deep in the realm of experimental policy , going beyond classic economic theory. but with global rates unexpectedly edging up, it is also finding out that there is a difference between theory and practice. on thursday, the bank of japan for the first time took to buying an unlimited amount of government bonds at a fixed rate, a move it flagged in its monetary-policy refresh unveiled in september. after interest rates rose broadly in the past week following donald trump <u+2019>s election, the boj was signaling it intends to keep rates very low. yet the buying operation failed because the central bank offered a rate higher than the going market rate<u+2014>no bids showed up. mission accomplished without firing a shot. at first blush, the fallout since mr. trump<u+2019>s victory would seem to benefit japan. the stubbornly strong yen has fallen 4% and, at 109 to the dollar, is at its weakest in more than five months. but it has also sent yields on japan<u+2019>s 10-year government bonds above the 0% target that the boj set in september as part of its yield-curve-control program. bank gov. haruhiko kuroda likely knows that a weak yen is probably not enough to reach the goal of 2% inflation, still a distant target. thus the attempt today to keep yields pinned down. keeping yields ultralow sets the stage for what may be the next leg of japan<u+2019>s deflation fight. the bank of japan<u+2019>s recent rhetoric has taken a turn lately to focus on encouraging more coordination with the government and fiscal spending, a strategy that may also gain some political tailwinds from mr. trump<u+2019>s example. keeping government bond yields in negative territory opens up fiscal space, since increased deficits won<u+2019>t add to the government<u+2019>s interest costs. japan is at the forefront of becoming a case study in economist christopher sims<u+2019>s theory on how the quantity of money alone can<u+2019>t drive consumer prices and demand. however, the government balance sheet<u+2014>including tax and expenditure policy, together with interest-rate policy<u+2014>could move the needle on inflation. mr. sims laid out the nuances of how monetary and fiscal policy can interact at the fed<u+2019>s jackson hole conference in august. fiscal expansion can replace ineffective monetary policy at low rates, and deficits must be financed by future inflation, not taxes and spending cuts. this approach, rather than an <u+201c>outdated monetarist, one-dimensional<u+201d> way could be a better map for policy makers, he said. in japan, mr. sims suggested, this could be <u+201c>achieved by explicitly linking planned future increases in the consumption tax to hitting and maintaining the inflation target.<u+201d> mr. kuroda paid attention. in the boj<u+2019>s latest outlook report, the central bank ran a policy-mix simulation to assess the impact of <u+201c>large-scale<u+201d> fiscal stimulus and <u+201c>powerful<u+201d> monetary easing on domestic private demand. prime minister shinzo abe will need to take the cue. until then, as mr. kuroda struggles to keep his yield curve under control, such fiscal experiments may remain theoretical . write to anjani trivedi at anjani.trivedi@wsj.com
bank of japan keeps rates ready for something bigger  - wsj
anjani trivedi