The desperation of Japanese policymakers grows more palpable by the day.Taken together, the confluence of falling economic activity, worsening fundamentals, and a strengthening Yen have overshadowed among the most extreme monetary and fiscal policy measures ever undertaken by a sovereign central bank and government.Now that growth is once again decelerating and failing to meet rosier forecasts of economists and analysts, the question remains, has stimulus hit a wall?Are policies finding the point of diminishing marginal returns, meaning that every additional Yen of stimulus exhibits a falling amount of actual net benefit for the economy?Based on what the data says, the answer is a resounding yes.With the USD/JPY pair briefly falling back below the critical 100.00 threshold, all the evidence points to a worsening outlook ahead for Japan as the nation struggles to overcome the headwinds facing the economy.

Abundant Policy Shortcomings

One of the prevailing problems facing Japanese officials is implementing stimulus that actually makes a difference.In the case of monetary policy, the whole theory behind accommodative activities either through low interest rates or a version of quantitative easing is to spur lending, investment, and inflation.However, in practice and reality, the actual impact has been shown to be negligible in the case of Japan.Starting with lending, bond yields at record lows thanks to negative interest rates and continued asset purchases from the Central Bank has seen loans to the private sector nearly match the Central Bank’ balance sheet expansion.Nevertheless, lending growth has been on the retreat since 2015, with the pace of new loan issuance decelerating rapidly.Furthermore, increased accommodation has not trickled down to wage earners and consumers, underscoring the shortcomings.

The main efforts of the Central Bank and Government are currently directed towards fighting an ongoing deflationary tidal wave that is impacting both growth and consumption.The reason why inflation is such an important target is that it generally spurs spending and growth as consumers and businesses spend and invest in anticipation of rising prices.If prices are rising, general behavioral tendencies indicate that individuals making rational decisions would rather buy now that later when prices may be conceivably higher.The problem with deflation, or prices falling across a basket of goods and services over a defined period of time is that a rational decision-maker would generally choose to postpone major purchases and investments knowing that down the road they may be able to spend less than at present.Deflation is particularly destructive in this context because it delays decisions, further harming economic activity.

Consumption Leads the Way Lower

With wage gains largely absent despite negative interest rates and expanded asset purchases from the Central Bank, the government recently stepped in with its most ambitious fiscal stimulus package ever unleashed.However, this package, like those before it, fails to address the crux of the problem which is on a more micro than macro level.Although the introduction of Abenomics in 2012 was accompanied by a sharp uptick in consumption, since the introduction of higher taxes, consumption has fallen off a cliff and is showing now growth.Aside from the month of February, annualized household spending has shown contraction in each of the reporting periods since the outset of 2016, underlining the challenges facing officials as they attempt to spur growth.While wages are finally starting to show some growth, it may be too little too late to actually have a demonstrable impact on faltering Japanese fundamentals.

So far, the most visible impact of policy has been the weakness in the Yen over the last several years.This benefit of expanding the money supply was widely felt until the middle of 2015 when the currency once again began to strengthen, hurting the nation’s export competitiveness and beckoning more aggressive accommodation to fight off the Yen’s appreciation.The recent slip below the 100.00 levels means that the policies are falling short of restoring optimism in the Japanese outlook despite the best efforts of fiscal and monetary policy to reverse the Japanese economy’s seemingly terminal slide.If the Yen should continue to appreciate over the coming weeks and months, it could not only hurt economic activity across the country, but also plunge Japan back into a technical recession, especially now that growth is once again sliding.

Going Forward

Considering the Bank of Japan has little ammunition left in its fight against deflation following its massive purchases of government bonds, ETFs, and REITs, all hopes for the outlook hinge upon the Government’s recently announced fiscal stimulus measures.Using the Yen as a barometer for sentiment, the announcement was so far been poorly received.The wave of strength in the currency indicates that the Central Bank and Government are losing the fight to save the economy.What may result is more easing of interest rates, plumbing new depths of negative rates, in an effort to spur spending and inflation.However, absent a policy that will help stimulate economic activity on the most basic level with wage growth and consumer spending, the Yen’s appreciation will continue unabated, further plunging the land of the rising sun into darkness.