Haruhiko Kuroda – The Pressure to “Do More” Rises


BoJ Leaves Policy Unchanged, but What Comes Next?

The Bank of Japan has employed QE programs since March of 2001 (in February of 2001, it still claimed that “QE will be ineffective” – it was right then, for the last time). These have had no effect apart from making a Keynesian government spending orgy possible that is unique in terms of its size in the post WW2 developed world. It is also unique insofar as it hasn’t yet blown up.

QE was briefly interrupted in 2006, when the BoJ reduced the monetary base by 25% within a few weeks (this barely affected the money supply, although we have to add the caveat that Japanese money supply data are not directly comparable to Western ones).


2 percent kurodaKuroda demonstrating the loony-tunes 2% fetish of modern central bankers to journalists

Photo credit: Haruyoshi Yamaguchi / Bloomberg



After the GFC, governor Masaaki Shirakawa (白川 方明) reluctantly restarted QE; he was essentially convinced that monetary policy flim-flam of this sort would be useless, but a lot of pressure was exerted and he ultimately gave in. Following Shinzo Abe’s election, it was clear that a more pliant BoJ leadership would be appointed, and not surprisingly, under governor Haruhiko Kuroda (黒田 東彦), the BoJ has essentially decided to “go all in”.


1-BoJ assetsThe earlier QE programs that began in 2001 were considered “radical” at the time. We’re not sure what kind of adjective would be most fitting to describe the current exercise. “Completely lunatic” will probably do – click to enlarge.


Yesterday, the BoJ decided not to add to its existing monetary pumping program, but voted once again to maintain the parabolic pace in asset purchases already underway. The entire exercise is based on the widely accepted, unproven, and utterly absurd neo-Keynesian shibboleth that the purchasing power of money must decline by 2% per year, as anything less is not considered “price stability”.

As we have pointed out before, the notion that the central planners should ensure “stable prices” goes back to Irving Fisher – back then, it produced the roaring 20s and the subsequent depression. The idea that “stable prices” should involve a steady low level (boiling frog type) destruction of purchasing power is of more recent vintage, but hardly an improvement on the original nonsense. As Reuters reports:


The Bank of Japan held off on expanding its massive stimulus program on Friday, despite pushing back the timing for hitting its inflation target by six months, blaming the delay mostly on energy price falls rather than any weakness in the economy. While BOJ Governor Haruhiko Kuroda maintained his optimistic outlook, two board members dissented to the bank’s baseline scenario that inflation will reach 2 percent by 2017 – exposing a rift between pessimists and optimists in the nine-member policy board.

At Friday’s rate review, the BOJ maintained its pledge to increase base money, or cash and deposits at the central bank, at an annual pace of 80 trillion yen (432.1 billion pounds) through aggressive asset purchases.

“This is what I would call decisive inaction on the part of the BOJ. They played this very much by the book, not leaving any room for confusion by waiting until after the market opened for its afternoon session,” said Stefan Worrall, cash equities manager at Credit Suisse in Tokyo.

Markets took the decision in stride with the Nikkei stock average rising to its highest in more than two months on news the government will compile an extra budget of over 3 trillion yen.

The central bank, however, will remain under pressure to expand its already massive asset-buying programme as slumping energy costs, weak exports, and a fragile recovery in household spending keep inflation well short of its 2 percent target, analysts say.

In a twice-yearly outlook report issued on Friday, the BOJ cut its forecasts and projected 0.1 percent inflation for the current fiscal year that began in April, followed by 1.4 percent inflation next year. It also pushed back the expected timing of achieving 2 percent inflation by six months, now projecting that price growth will hit the target in the latter half of the next fiscal year ending March 2017.

Kuroda said there was no discussion on easing policy at Friday’s meeting and stressed that Japan’s economy will recover moderately as global demand picks up, staying on track to reach 2 percent inflation.


(emphasis added)

Since literally every single forecast of the BoJ under Kuroda has failed to come true, we can probably rest assured that its current forecast will suffer the same fate (similar to the Fed, the BoJ couldn’t forecast its way out of a paper bag). In the end, the central bank may well own the entire stock of debt issued by the Japanese government, plus half of the stock market for good measure. The government will then finally owe all of its debt to itself. Presumably, Keynesian Nirvana will have been attained at that point. It remains to be seen where the yen will trade if/when that happens.


2-japan-core-inflation-rateBoJ “inflation target” non-success


What is truly baffling to us is how everybody apparently accepts this “2% inflation” shibboleth without question. Have you ever seen an article in the mainstream financial press in which even a single one of the people quoted was wondering out aloud what the purpose of this policy is supposed to be? We haven’t – all that is ever discussed is when, or if, the elusive “target” will be achieved. Meanwhile, the real incomes of Japanese consumers have nosedived due to the devaluation of the yen. Hint: they won’t improve if price inflation actually does heat up.

Evidently though, the “pressure” on Kuroda to add to his lunatic printing orgy by instituting additional crazy policy measures is rising. NIRP comes to mind as one possibility, as well as the purchase of municipal and corporate debt, the purchase of a wider basket of equities, and last but not least, the purchase of foreign government debt securities (that would do wonders for the yen).


3-japan-interest-rateBoJ policy rate – next stop NIRP?


Fiscal Madness

It is clear that the Japanese government continues to spend like a drunken sailor – and why wouldn’t it, the BoJ makes it possible after all. This has had no positive effect for 26 years running, but people apparently still believe it will. Recall that Reuters mentions the following above:


“Markets took the decision in stride with the Nikkei stock average rising to its highest in more than two months on news the government will compile an extra budget of over 3 trillion yen.”


Evidently, few people in the world are more credulous than today’s so-called “investors”. Here are a few charts illustrating the fiscal situation. First up, government spending in absolute terms:


4-japan-government-spendingJapanese government spending. In case you’re wondering, yes, this is an all time high.


Next, the annual budget deficit as a percentage of GDP:


5-japan-government-budgetJapan’s annual budget deficit as a percentage of GDP


And here is the total public debt as a percentage of GDP – all these data look a lot worse as a percentage of revenue, but at least the rising interest cost is beginning to flow back into the government’s coffers, as it pays interest on a lot of its outstanding debt to itself these days!


6-japan-government-debt-to-gdpJapan’s public debt to GDP


And what is the result of all these conniptions? Reuters again:


“Japan’s economy contracted in April-June and may shrink again in July-September because of weak exports. Core consumer prices, which exclude volatile fresh food but include oil costs, fell 0.1 percent in the year to September, a second monthly drop, and household spending slid even as job availability hit a two-decade high.”


Or in chart form (this is the annual GDP growth rate, which doesn’t show that the last quarter actually saw a contraction of 1.2% annualized, or 0.3% q/q):


7-japan-gdp-growth-annualGDP, annual growth rate – perhaps not surprisingly, the trend has actually worsened hand in hand with record QE and record deficit spending


So what is the obvious answer? They must do more of the same!


MoarLike Moses coming down from mountain Sinai with his stone tablets, Kuroda parades his “moar” tablet here.

Photo credit: Yuya Shino / Reuters



Although Kuroda denied that the BoJ discussed more easing at yesterday’s meeting, we have little doubt that he is just waiting for an opportunity to set even more central bank lunacy into motion. After all, the government is already committed to spending even more – and it is simply politically impossible to raise taxes to pay for its spending – not to mention that it would tank the economy. Moreover, the so-called “non-discretionary” portions of Japan’s government expenditures are the ones that are rising at the far and away fastest pace (especially social security spending due to the aging of the population), so even if it did not enact supplementary spending bills, its spending would still continue to rise inexorably. It will probably see no room to cut it until the bitter end.

In the meantime, the yen has been beaten up so much already, that it is probably time for a rebound, at least in the short to medium term, especially if a problem with global “risk assets” should develop (this always results in yen repatriation and the closing out of yen-financed carry trades). But sooner or later, the rising pressure will look for an escape valve and the currency is the most likely candidate for this role.

Japan has “muddled through” for a very long time, due a set of very unique contingent circumstances, ranging from massive capital accumulation in the past to a highly homogeneous society that is in some respects a bit reminiscent of an ant-hill, especially in its constant striving for consensus. Most people can no longer imagine that this ongoing experiment will one day blow up, simply because it has lasted for so long already. However, this is precisely what will happen unless these madcap policies are stopped and reversed.


8-YenThe yen – due for a rebound in the short term, but still the likely longer term victim of Japan’s fiscal and monetary policies – click to enlarge.


Charts by: St. Louis Federal Reserve Research, TradingEconomics, StockCharts