Let’s Do More of What Doesn’t Work

It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don’t work. It is regarded as evidence that there hasn’t been enough spending and printing yet.


Bank of Japan (BOJ) Governor Haruhiko Kuroda speaks at a news conference at the BOJ headquarters in Tokyo June 11, 2013. REUTERS/Yuya ShinoBoJ governor Haruhiko “Fly” Kuroda: is that a windshield I’m seeing?

Photo credit: Yuya Shino / Reuters


At the Bank of Japan this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn’t a superior economic system after all. Then this happened:


1-NikkeiThe Nikkei Index from 1989 to 2003. Japan’s seemingly never-ending boom coupled with forever rising stock prices, carefully administered by Tokyo’s powerful bureaucrats, suddenly became an intractable bust – click to enlarge.


This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn’t such a good idea after all. That was not the conclusion of Japan’s movers and shakers though (or anyone else’s, for that matter). Instead it was decided that what was required were better planners, or at least a better plan.

For decades Japanese policymakers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of “policy paralysis” – after all, these efforts were obviously just not big and bold enough!


Going Big and Failing Again

After the reelection of Shinzo Abe and the installation of Haruhiko Kuroda as BoJ governor, the BoJ decided to simply continue doing what it has always done – more than 20 years of utter failure notwithstanding. However, in deference to the admonitions of the Bernankes and Krugmans of this world, it increased the size of its meddling by an order of magnitude:


2-BoJ assetsAssets held by the Bank of Japan: since Kuroda has started this “QE on steroids” program in 2012, the central bank’s balance sheet has grown in parabolic fashion – click to enlarge.


In short, over the past four years the BoJ has thrown all remaining caution to the wind, with the declared goal of reviving Japan’s economy and creating an annual “inflation” rate of 2%. However, it seems now that even that was not enough just yet!

As an aside to this: no-one knows or can sensibly explain what lowering the purchasing power of one’s currency by exactly 2% p.a. is supposed to achieve. There exists neither theoretical nor empirical evidence that could possibly support the notion that it is a desirable goal. It is just another Keynesian mantra. Central bankers have basically pulled the 2% figure out of their hats.

The BoJ has certainly succeeded in devaluing the yen’s external value and impoverishing Japan’s citizens accordingly. It has also created a short term windfall for people buying Japanese stocks. To give you a rough idea how its “success” has manifested itself otherwise, here are a few charts illustrating the situation. The first one shows the quarterly annualized growth rate of Japan’s machinery orders (note the most recent figure, which has been released only last week):


3-japan-machinery-orders@2xThe most recent data point of the BoJ-engineered “recovery”: machinery orders plunge by 14.4% – click to enlarge.


And here is the monthly growth rate in manufacturing production – a sector that due to its export prowess was supposed to be an especially great beneficiary of Kuroda’s destruction of the yen:


4-japan-manufacturing-production@2xJapan’s manufacturing production, monthly annualized growth rate – the December data haven’t been released yet, but in light of last quarter’s machinery orders, production growth will likely be back in negative territory – click to enlarge.


In light of the enormous decline of the yen’s exchange rate since 2012, one would normally expect that the BoJ has at least succeeded in achieving its bizarre goal of raising the consumer price inflation rate to 2%. Well, it did – for exactly one month. However, that was mainly due to a hike in the sales tax, so it can actually not be attributed to the BoJ. Japan’s consumers have been very lucky so far – the planned assault on their wallets has turned out to be a complete dud as well:


5-japan-inflation-rate-mom@2xJapan’s consumer price inflation rate, month-on-month. No dice, so far – click to enlarge.


The Time for More Insanity has Come

Stock markets around the world have recently swooned, with the Nikkei delivering an especially weak performance. After assuring everyone that the BoJ saw no need to add to its already enormous debt monetization program, Mr. Kuroda seems to have been convinced by recent market volatility that is was time to move on from an insane monetary policy to even more insane monetary policy. As Reuters reports:


“The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

“What’s important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” BOJ Governor Haruhiko Kuroda told a news conference after the decision.


(emphasis added)

Obviously, the BoJ cannot allow Draghi to get away with imposing policies that are even more crazy than its own. So it has now caught up with the lunatics running the monetary asylum in Europe. It is actually quite amusing that this admission of the complete failure of the policies implemented to date apparently caused stock markets to rally. JGB yields declined by more than 56% (!) on the day to a mere 10 basis points, and the yen got kneecapped, surrendering much of the gains it has achieved in recent weeks.


6-JGB, one day chartJGB yields plunge by 13 basis points to just 10 basis points – a loss of 56% in just one trading day – click to enlarge.



7-JPYThe yen is murdered, surrendering a large part of the gains it has made since early December – click to enlarge.


As to the BoJ’s commitment to “achieve inflation”, it may well end one day with price inflation going from zero to infinity in the space of a few months. Kuroda should be thankful that Japan’s citizens haven’t lost confidence in the currency yet in spite of his efforts; one of these days they will, and then it will probably be “game over” in a flash.

We should also point out that there is actually no deflation in Japan. There never has been and very likely, there never will be. Here is a chart of Japan’s narrow money supply M1, which consists of currency and demand deposits:


8-Japan-M1Japan’s narrow money supply M1 since the 1950s. What terrible, terrible deflation! – click to enlarge.


Reuters then unquestioningly parrots the official “reasoning” for why falling prices are allegedly “dangerous” (never mind that prices haven’t really fallen in Japan anyway – at best they were stable for a number of years) – readers are evidently supposed to just accept these unproven assertions as if it were perfectly obvious that they are true:


“In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise.”


This shows how utterly divorced from reality today’s mainstream economists and central bankers are – not to mention how lazy financial journalists are, who never seem to question this nonsense. The above assertion even flies into the face of economics 101. People buy less when prices decline? Since when? In what universe? Japanese consumers are allegedly waiting since the 1990s for “prices to fall further”? To call this utter bullsh*t feels almost like an insult to bullsh*t.

We guess the billions of people in the world who keep buying smart phones, computers, TV sets and all the other things that are continually falling in price in spite of the ministrations of central bankers must represent the “exception from the rule”.


9-apan-consumer-price-index-cpi@2xJapan’s consumer price index has recently reached a new multi-decade high. Shouldn’t the central bank be glad that prices have actually been stable for so long? – click to enlarge.


In his press conference Kuroda uttered the following:


“Kuroda said the world’s third-biggest economy was recovering moderately and the underlying price trend was rising steadily.

“But there’s a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people’s deflationary mindset,” he said.

“The BOJ decided to adopt negative interest rates…to forestall such risks from materializing.”


Perhaps Kuroda should instead have pondered what risks are likely to materialize on account of the imposition of negative interest rates. We have already discussed this topic extensively in the context of the ECB’s decision to introduce negative rates, but here is a brief reminder:

Neither zero nor negative originary interest could possibly exist in an unhampered free market economy. Time preference cannot become zero or negative. Conceivably it could become zero if one were to fall into a black hole (it is theorized that no time passes there), or if scarcity were completely eliminated one day and no economic or technological progress would be seen as possible anymore. Neither of these hypothetical cases will ever be of practical importance.

Other than that, the only thing artificially imposed negative rates will achieve is to destroy what is left of the economy – they will slowly but surely transform prosperity into poverty. As Ludwig von Mises has warned:


“Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption. The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction.

Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple.

What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”


As we have always said in these pages, the cunning plan of the mad hatters running the world’s central banks seems to consist of making people richer by making them poorer. One can safely assume that they haven’t really thought this one through.



It appears to us that the ever more desperate monetary policy measures adopted by the BoJ are coming closer and closer to crossing a point of no return. In other words, the BoJ seems to be entering what is popularly known as the “Keynesian endgame”. Once the threshold beyond which confidence is finally lost is crossed, the long maintained sophisticated fiat money Ponzi scheme and the associated three card Monte played between central banks, commercial banks and government treasuries will come to a screeching halt.

Naturally, we cannot tell you where this threshold precisely lies or how quickly said “endgame” will be playing out. Nor do we know with any precision what gyrations we may yet see as the situation evolves. We do however know that Kuroda’s decision has brought the world another step closer to the end. It would be a dangerous error to believe that such policies can be adopted without inviting severe consequences.

Kuroda is a member of a small coterie of central planners running the worlds currency systems, who are completely divorced from reality and are playing with the savings and lives of millions. They are implementing extremely risky experiments and evidently haven’t even the faintest inkling of what the ultimate outcome will be.

Unfortunately, none of us can do anything to stop them. It is therefore vitally important that one make a plan for oneself. It is quite ironic actually: the very people the economy depends on the most with respect to wealth creation are also most likely to be terrified by these developments. Consequently they are likely to withdraw more and more from genuine wealth creation activities. They will simply be far too busy trying to save themselves while it’s still possible.




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



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3 Responses to “The Bank of Japan – Ringing in the Endgame?”

  • Iggy:

    All homage to Pater T.

    The BOJ’s NIRP is mostly smoke and mirrors. The BOJ will continue to pay interest on 220.6trn yen of excess reserves at its status-quo IOER rate of +0.1%. The next 40.3trn yen of reserves will earn 0% interest. Only reserves in excess of 260.9trn yen will be subject to the negative rate of 0.1%. Total reserves as of 12/31/15 were about 253trn yen. The negative rate will not kick in until they exceed 260.9trn. IOW, the BOJ’s NIRP will merely reduce (very gradually) the net amount of IOER that banks earn on their excess reserves.

  • Treepower:

    Even the otherwise literate Gillian Tett of the FT is guilty of trotting out the standard Deflation is an Evil Spiral meme. It really is remarkable how ubiquitous and entrenched it is, considering its palpable and empirical falsehood.

  • No6:

    When the end comes and the witch hunt begins I can see Kuroda pleading not guilty by reason of insanity.

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