The Bold and the Dumb
What’s happening in Japan? We ask because, in the race to financial catastrophe, Japan is ahead of us. And this week in the Financial Times Japanese prime minister Shinzo Abe gave us an update.
You may recall, dear reader, that Abe came into office on a reform ticket. He had three arrows, he said. One for fiscal policy. One for monetary policy. One for other things that were never clearly identified but nevertheless needed to be killed.
The BoJ’s charming head office in Tokyo
(Photo source: Wikimedia Commons / Author: Katorisi)
As bold as he is dumb, Abe has let his arrows fly. Among his achievements so far, he claims his monetary arrow hit its mark. Deflation is gone from Japan, he says. Now, prices are rising. For the first time since 1997, the inflation reading – at 1.4% in April – is positive.
Abe the archer
(Cartoon by: Pang Li / China Daily)
DIY Central Banking
Wait. In an economy of retirees, living on pension savings, how is that a good thing? Don’t bother to ask, dear reader. And don’t bother to inquire about the cost, either.
The Bank of Japan is using the QE trick. It’s buying $75 billion of Japanese government bonds each month. At this rate, the central bank will have a balance sheet three times larger than the Fed (relative to the size of its economy) by next March.
The authorities are also directly intervening to buy stocks. Why depend on bankers and speculators to juice up your stock market? Do it yourself! According to a report in British newspaper the Daily Telegraph, the Bank of Japan buys about $200 million of exchange-traded funds whenever it sees the stock market index stumbling.
In Japan, as in the US, bond buying is supposed to push down long-term interest rates. Low interest rates encourage borrowing… and bubbles… simultaneously trimming real investment and real output. Result: Consumer prices rise.
Getting the real interest rate below zero in a deflationary economy is an achievement. No matter how close to zero you go, you still have the price level below you. But give Japan’s banzai prime minister credit. When we last looked the real interest rate was about MINUS 0.8% on the 10-year government bond.
