The dilemma facing central banks and policymakers

JAPANESE stocks have been under intense pressure after the Bank of Japan (BOJ) , contrary to market expectations, kept its monetary policy unchanged last week, by holding its negative interest rates at -0.1 per cent and maintaining the size of its asset-purchase programme.

The reason it gave for maintaining the status quo was that it wanted more time to gauge the effectiveness of the negative interest rates introduced in February. In response, the Nikkei 225 plunged 6.6 per cent in two sessions.

This violently negative reaction to the news is not new. Several times over the past eight years since the US sub-prime crisis erupted, markets have shown displeasure whenever central banks try to hold off on the monetary injections. This in turn suggests markets are still heavily reliant on central bank money to stay afloat, which cannot be good news because eventually, the law of diminishing returns must take hold and the marginal benefits wrought from monetary stimulus will lessen…