After months of feverish speculation about the potential introduction of ‘helicopter money’ – mechanisms to directly inject cash into the real economy by central banks – last Friday’s announcement by the Bank of Japan that it would merely tweak its existing policy (principally by boosting its purchases of exchange traded funds) underwhelmed the markets. 
Traders had rapidly scaled back their expectations of more aggressive action in the days leading up to the announcement after the Bank of Japan sought to quell talk of radical policy innovation by pointing out that so-called helicopter money would not be permitted under Japan’s post-war Public Finance Law.
While the Bank of Japan has signalled a comprehensive review of its policy at its September meeting, leaving the door half ajar for more action from its remaining armoury, there is sense that the country is at an inflexion point where monetary policy has reached its limits and the focus is shifting decisively towards fiscal policy (tax and spending) to reboot the economy.
This has come with today’s confirmation by the Japanese government of a fiscal stimulus package with a headline figure of 28.1 trillion yen ($274 billion), though much of this is in the form of public-private partnerships. Some 7.5 trillion yen is through direct national and local government spending on infrastructure projects and cash payments to low income families.
The shift in emphasis from a heavy reliance on monetary policy (decisions on interest rates and money supply) to synchronised action where this is dovetailed by aggressive fiscal policy (tax and spending) is significant.
Japan has been prepared to operate at the frontiers of monetary policy experimentation, implementing a vast quantitative easing programme and in January taking the markets by surprise by adopting negative interest rates – a measure which has also been very negative for its banking system.
Performance of indices in 2016
Source: FE Analytics
In isolation today’s Japanese fiscal stimulus package represents a major roll of the dice by Prime Minister Shinzo Abe, whose ‘Abenomics’ programme has increasingly been regarded as a busted flush by the markets.
Abe will be hoping that with both monetary easing and fiscal stimulus firing on both cylinders, the Japanese economy can achieve breakthrough velocity and escape its long malaise.
Yet the greater emphasis on fiscal policy in Japan after a period where it has over relied on ultra-accommodative monetary policy, may also prove to be indicative of a broader theme emerging around the globe where fiscal policy steps up alongside loose monetary policy in an attempt to accelerate growth.
As fiscal policy sits firmly in the realm of governments rather than independent central banks, politics is by default starting to become a more important part of the mix again when considering the macroeconomic outlook.
We may yet see this played out in the UK in the coming months, notwithstanding high expectations of a cut to interest rates to 0.25 per cent by the Bank of England this Thursday as a response to the recent shock referendum vote to leave the EU.
The new UK administration led by Theresa May has already dropped George Osborne’s self-imposed target to eliminate the UK deficit by 2020 and the new Chancellor, Philip Hammond, has held out the prospect of a “fiscal re-set” in his Autumn Statement.
That might see reforms to taxation – possibly including cuts to corporation tax to shore up business confidence and attract investment – or reductions in VAT to try and jolt consumer spending with a shopping bonanza.
But in the near term, the focus in the UK is going to be on monetary policy as we await news from the Bank of England this Thursday.
For UK savers and investors, for now it seems there is no end in sight for very poor returns on cash savings as interest rate policy is designed to keep borrowing costs down, but with the potential of additional moves to encourage economic activity through tax and spending policy further down the line.
For prudent cash savers and anyone facing the prospect of an annuity purchase in the near term, there's little pain relief in sight with the prospect of a further UK interest rate cut.
Yet despite years of such agony, according to the last set of Government statistics cash subscriptions still represented 77 per cent of overall ISA subscriptions in 2014/15. Ever lower rates will surely flush some of this out in search of higher yields but that also means investors being lured into riskier assets such as corporate bonds and shares at a time when valuations are rich.
The stimulus party may well continue for some time yet, and it may well develop a more balanced approach between fiscal and monetary policy. But like all great parties that go on for a very long time, there is eventually a price to pay in the form of a nasty hangover.
Jason Hollands is managing director of business development and communications at Tilney Bestinvest. All the views expressed above are his own and should not be taken as investment advice.
