The BoJ’s Kuroda Wheels Out the Heavy Artillery
“Almost the entire rich world is stuck in a zero interest rate liquidity trap situation, and I think everybody is haunted by the possibility that there’s no way out of it. If Japan shows a way out of that, it will be very encouraging.” – Greg Ip, U.S. editor of the Economist
This is big, really big. In fact, according to the analysts at Nomura, the Bank of Japan’s (BoJ) aggressive bond buying program will be 5-times larger than the Fed’s QE as a percentage of GDP. And, while the Fed has purchased a mere 25 percent of gross government bond supply (US Treasuries), newly-appointed BoJ chief Haruhiko Kuroda plans to buy an eye-watering 72.9 percent.
Do you think that will be enough to push down long-term interest rates?
You’re darn-tootin’ it will. It’s also going to send equities to the moon, which it already has. Take a look at this from last week’s Wall Street Journal:
“Japan’s Nikkei Stock Average soared to a fresh multi-year high as investors cheered the Bank of Japan’s latest monetary easing measures.
In Tokyo, the Nikkei rose to its highest level since August 2008 after the Bank of Japan announced a set of bolder-than-expected monetary easing measures under new central bank Governor Haruhiko Kuroda Thursday as part of its commitment to end deflation. The index ended up 1.6% at 12,833.64 after rising as high as 13,225.62 in early trading.
“Foreign investors now have no choice but to buy Japanese stocks,” said Kenichi Hirano, market analyst at Tachibana Securities. “Europe remains mired in debt and employment problems, while U.S. shares are looking very pricey. Japan is the most undervalued market in the world, offering the best chance for equity price appreciation.” (“Nikkei Soars on BOJ Easing Moves”, Wall Street Journal)
Nothing like a little free money to ignite the risk trade, eh? Naturally, the announcement sent the yen plunging to new lows clearing the way for a surge in Japanese exports. The BoJ’s action has also sparked heated protests from trading partners who accuse the bank of initiating a currency war. The experts are waiting to see if Kuroda’s floodgate strategy will touch off another round of competitive devaluation or, perhaps, capital controls. We’ll have to wait and see. Here’s more from Nomura:
“Today’s news from the BOJ was highly significant and has broad implications for global asset markets. Much like QE1 and QE2 in the US, we expect that the impact of it could filter out through global assets. To put it crudely, the price of assets, in toto, is a function of the amount of money in the system, divided by the number of assets. Increase the numerator without comparably increasing the denominator and the price must rise. The skill, of course is estimating which assets, and by how much.”
Sure, if you pump a bunch of cash into financial assets, then stock prices rise. That’s the great lesson of the last four years, right? (3 rounds of QE have pushed all 3 major indicies to record-highs) But what effect will Kuroda’s bond buying binge have on deflation, after all, some of QE’s most strident critics have said repeatedly said that increasing reserves at the banks will not boost demand, activity or growth. Here’s how Nomura’s chief economist Richard Koo sums it up in a recent newsletter:
“I worry that recent moves in the forex market have been driven solely by announcements regarding quantitative easing and not by the relative changes in actual money supply.
This is an indication that many forex market participants remain unaware that the relationship between the money supply and the monetary base has since 2008 (and since 1990 in Japan) morphed into something very different to what the textbooks predict.
Prior to these bubbles, base money and the money supply tracked each other almost perfectly across the industrialized world. Knowing one of these variables, it was easy to assume what had happened to the other. Since the bubbles burst, however, this relationship—like the one between base money and inflation—has collapsed.
Behind the breakdown of both these linkages is the fact that the private sector, which is dealing with balance sheets impaired by the collapse of an asset bubble, has not only stopped borrowing but has also been paying down debt, prompting the money multiplier to turn negative at the margin at times.
That is why central bank monetary policy has lost so much of its potency in Japan and other developed economies in the postbubble era.” (“Koo on BOJ’s massive QE”, pragmatic capitalism)
This probably sounds more complicated than it is. What Koo is saying is that printing money doesn’t do jack if there’s no transmission mechanism to get it into the real economy. In other words, if the money gets hung-up in the financial system, all it does is push up stock prices, push down bond yields and inflate the value of myriad other goofball structured debt-instruments like MBS, CDOs, and ABS. Here’s a couple charts from a post at Asia Confidential that help to explain what Koo is talking about:
“The velocity of money is one of the best indicators that deflation is getting the better of the Fed. Since the financial crisis, the Fed has flooded the economy with printed money, trebling the so-called monetary base. That base consists of highly liquid money, such as coins, paper money and commercial bank reserves with the central banks. US monetary base – March 2013.
Under normal circumstances, increasing the monetary base to this extent would be highly inflationary. But the problem is that this money is not making its way into the economy or changing hands (money velocity). That’s why money velocity in the U.S. has dropped to a more than 60-year low.
Rising money velocity indicates that the same quantity of money is being used for several transactions. It’s turning over, signaling a robust economy. Declining velocity, on the other hand, indicates money isn’t changing hands and that the economy is anything but healthy.” (“Protecting Yourself From Japanese Insanity”, Asia Confidential)
Bottom line: If demand for loans remains weak (because households and businesses are still deleveraging and paying down debt), then credit’s not going to expand, and the economy’s going to continue to sputter.
Many of the doomsayers think that the BoJ’s experiment is going to end in disaster mainly because Japan’s debt-to-GDP is so big (245 percent), their legacy obligations to their aging population are so great, and the lower yields on Gov debt is going to make it harder for the government to attract investors. At some point, they think, investors will jettison JGBs which will send yields rocketing higher while the yen goes off the cliff.It could happen, but don’t bet on it. The immediate impact of the BoJ’s action will be a weaker yen, higher stock prices, more pressure on emerging market exports, tighter yields on Eurozone debt (which will further deepen the EU Depression) and a ton-of-money shifted into US Treasuries, which has already happened. (Since Thursday, the yield on benchmark 10-year USTs has dropped precipitously which means cheaper mortgage rates for new homebuyers. In other words, it might be time to buy that $1.2 million 1,300 ft “fixer” in Mill Valley.)
This is really an ambitious plan. The BoJ is not just buying government bonds (JGBs) either. It’s also planning to buy exchange-traded funds (ETFs) and real estate investment trusts (J-REITs) “at an annual pace of 1 trillion yen and 30 billion yen respectively.”From the BoJ website: “The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner…”
According to economist Noah Smith at Noahpinion: “60-70 trillion yen is about $600-700 billion, which is about the size of America’s recent “QE1″ and “QE2″. Japan will basically do an new “QEx” every year.”
Wow. Kuroda is really wheeling out the heavy artillery for this one. But will it work? Will the BoJ really be able to hit its inflation target of 2 percent without cracking the bond market and reducing the yen to a smoldering pile of rubble?
Economist Joseph Stiglitz thinks so. Here’s what he said in a recent post at Project Syndicate:
“Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal, and structural policies…..There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed.” (“The Promise of Abenomics”, Joseph Stiglitz, Project Syndicate)
Surprisingly, the conservative editors at Bloomberg News agree with Stiglitz, but for all the wrong reasons. Here’s a clip from an article which appeared on their website on Sunday:
“Kuroda’s program of additional quantitative easing is enormous. The BOJ’s balance sheet is scheduled to expand by 30 percent of gross domestic product between now and the end of 2014…..
Abenomics will also include further fiscal expansion and a program of supply-side reforms to spur private investment and growth. He needs to think again about the second and get moving on the third.
… Abe should put much greater emphasis on medium- and longer-term restraint. After years of indecisive and ill-timed fiscal stimulus, Japan has become far too vulnerable to a fiscal calamity, and even now rising debt-service costs are a threat to more productive forms of government spending. Abe has said fiscal expansion isn’t forever, but he should signal greater resolve to address the debt issue. An increase in the sales tax due later this year should go ahead, and plans for longer-term spending cuts should be announced and, so far as possible, enacted promptly.” (“Japan’s brave new monetary era”, Bloomberg)
Have you ever read anything more ridiculous in your life? Abe’s 10.3 trillion yen fiscal stimulus package is the best part of the whole deal. It will focus on upgrading dilapidated infrastructure (bridges, tunnels, roads, railroads etc) and —according to government estimates–the additional spending will raise GDP by 2 percent while creating 600,000 new jobs. How can you beat that? Of course, the Bloomberg editors don’t like the idea of building a better country or putting people back to work. What they’re interested in is “medium- and longer-term restraint”, which is a euphemism for excruciating “reforms” and numbskull hairshirt policies that have failed so spectacularly in Europe for the last 4 years. This is madness. The only chance Japan has of reviving growth and defeating deflation is by putting money into the pockets of the people who will spend it instead of dumping more dough into a blackhole financial system that only rewards the crooks and criminals at the top of the capital foodchain.
There’s only one reason to be optimistic about Japan’s new economic policy, and that’s because it includes a sizable fiscal component that will rev-up spending, push up wages, lower unemployment, increase growth and end deflation. The rest of the plan is just more of the same bond buying lunacy.
But don’t expect to read about the fiscal part of Abe’s plan in the MSM, because you won’t find it anywhere. You see, the big banksters and corporate honchos who control the propaganda outlets don’t want you to think that it’s okay for the federal government to spend money on public projects. That’s a big no-no. They think all the money should be diverted to privately-owned businesses so the “job creators” can rake in bigger profits and live high-on-the-hog. In any event, I managed to dig up one article on the topic on Reuters Tokyo titled “Japan’s extensive infrastructure casts doubt over targets”. The piece explains what’s going on behind the QE smokescreen:
“Japanese Prime Minister Shinzo Abe aims to spend more than $100 billion on infrastructure in the next 15 months to help revive his country’s economy … Infrastructure spending tops Abe’s economic agenda alongside nudging the central bank into more aggressive steps to end deflation. Since he took power in December, Abe has earmarked 10 trillion yen ($107 billion) for new infrastructure and upgrades over the next 15 months – half of it funded by government debt…
(Abe) has suggested spending similar sums every year for a decade …With the private sector and local communities expected to match government investment, this would add up to 200 trillion yen ($2.16 trillion) over 10 years – or roughly 40 percent of GDP.” (“Japan’s extensive infrastructure casts doubt over targets”, TOKYO – Reuters)
$100 billion in fiscal stimulus “every year for a decade”?
Whoa. That’s probably enough cash to shake off the deflation bugaboo and put the economy back on the road to recovery. No wonder the media wants to keep it under wraps. It might just work!
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at email@example.com.