In response to the global crisis, central banks have adopted unorthodox policies. They expanded their balance sheets and broken the zero bound of interest rates. Many investors have been critical of the central bank action on principle, but what has changed recently is that market developments have provided fodder for the ineffectiveness in practice.

Asset purchases did not appear to bolster price pressures in the US, Europe or Japan. Negative rates in Europe also appears to have had little impact on inflation or investment. Lending in the eurozone was gradually improving prior to the introduction of negative rates by the ECB.  

The impact of the unorthodox policies was seen strongest in the currency and asset markets. And now, in light of Japan’s experience even these are being questioned. After first weakening in the immediate response to the BOJ’s surprise rate cut on January 29, the yen has strengthened in eight of the nine sessions coming into today. The Nikkei has slumped 17% since 1 February and finished this week at its lowest level since October 2014. 

Several times since 2008-2009, investors and reporters have thought central bank had exhausted their tools, and the existing tools had reached a point of diminishing returns. Each time, though central banks have devised new tools. That is what unorthodox policies mean.

Once that Rubicon is crossed from orthodox to unorthodox, anything is possible. The credit intermediation function of banks did not operate during the Great Depression, and the Federal Reserve, for example, lent directly to small businesses. During the heart of the Great Financial Crisis, Federal Reserve Chairman Bernanke observed that there are no ideologues in crisis. Indeed, that is the threshold that has been crossed; ideological barriers have eased as monetary officials scramble to avoid more serious economic and financial downturn.