Helicopters starting up

There was the unmistakable sound of helicopters being wheeled out of hangars by the Bank of Japan this month. Markets had expected a commitment to negative rates combined with a tweak to the bonds purchasing program to steepen Japan's yield curve.

Instead, Governor Haruhiko Kuroda announced a more aggressive commitment to a 2%- plus inflation target and a target for the 10yr yield: bonds will be purchased to keep the latter 'around the current level' of 0%. This is a commitment to negative deposit rates: holding the 10yr yield at zero stops negative short rates from spreading out along the curve, and that upward slope should help banks and insurance companies survive as long as those negative rates are required. It also doubles down on the QE 'portfolio effect'. Should Japan one day succeed in generating growth and inflation, holding the 10yr at zero implies an increasingly negative real yield, and an ever-greater incentive to sell bonds and buy real assets. Most importantly, it is the clearest signal yet the BoJ wants the government to take on more debt and spend aggressively. When the outer bounds of what is possible with monetary policy is reached, you need a fiscal policy that creates a genuine prospect of inflation, in turn providing the fuel for low rates to work through the portfolio rebalancing channel. Only then do the two arms of policy reinforce one another.