A Litany of Failures

It was widely expected that the BoJ would announce something this week after it promised to perform a comprehensive review of its monetary policy. It certainly did deliver a major tweak to its inflationary program, but its implications were seemingly not entirely clear to everybody (probably not even to the BoJ).

 

b-bojcurrency-a-20160131-870x641This picture was taken back when the BoJ first introduced NIRP, but it has the appropriate horror movie atmosphere. Kuroda’s press conferences with these nifty little placards remind us a bit of school. As an aside, the term “quality” evidently got there by mistake. One cannot improve a money’s quality by increasing its quantity and enforcing negative rates (these are a particularly dangerous abomination).

Photo credit: Yuya Shino / Reuters

 

There were many reasons for the BoJ to review its policies. For one thing, they have killed the bond market. Trading volume in JGBs has collapsed, and by pushing yields all along the curve to zero or lower, insurers and pension funds are increasingly in dire straits. Moreover, the BoJ’s purchases of ETFs have made it an outsized shareholder in many listed Japanese corporations. This is tantamount to introducing socialism by the back door.

Last but not least, these policies are simply not working – not by the standards of the planners themselves and not even in the short term (that they cannot possibly work in the long term probably doesn’t need to be belabored). This shouldn’t have surprised anyone, since they haven’t worked in Japan for 26 years running. Why should that suddenly change? The BoJ has not even been able to hit its absurd consumer price inflation target:

 

1-japan-inflation-cpi2xThe annual rate of change of Japan’s CPI. After Kuroda’s money printing program started in 2012, there was a bump in CPI  and consumer spending in 2014 as Japan’s sales tax was doubled. Thereafter CPI returned to negative territory where it has remained stuck for the past five months – click to enlarge.

 

Japan’s citizens should be relieved that the BoJ has failed to ignite consumer price inflation, since they would simply have become poorer if it had succeeded. Consumers need rising consumer prices like a hole in the head, particularly Japan’s aging population. Japan’s economy remains moribund as well though, as both massive deficit spending and money printing continue to fail to exert even the slightest positive effect.

 

2-japan-industrial-production2xIndustrial production in Japan has been shrinking in 19 of the past 24 months – click to enlarge.

 

Normally the diversion of resources into capital malinvestment by means of monetary and fiscal pumping will at least tend to boost “activity” in the short to medium term. This will in turn push up aggregate economic data as well, until the artificial boom collapses again. It seems in Japan not even these pretend prosperity phases can be produced anymore.

According to the playbook of today’s central bankers this is not considered evidence that their policies are failing. Rather, it is considered evidence that they are “not doing enough”. It was therefore to be expected that Kuroda would unveil fresh interventionist measures. These still fell short of the introduction of “helicopter money”, but not by much.

 

A Confusing Announcement

The latest tweak to the BoJ’s program to inflate Japan to prosperity consists inter alia of the central bank committing itself to “controlling the yield curve”, which is somewhat reminiscent of the war-time agreement between the Fed and the US Treasury (the original “Operation Twist”), in which the Fed promised not to allow treasury bond yields to rise beyond a certain threshold. While low, that threshold was at least positive though.

In the BoJ version of this policy the commitment is to keep the JGB yield (i.e., the 10 year government bond yield) at zero (!) and allow yields on longer maturities to rise so as to give the above mentioned insurers and pension funds a chance to earn a paltry return for taking a huge and growing risk. The short end of the curve is apparently supposed to remain in negative territory. A first sign that this caused some confusion was evident in the reaction of the yen:

 

3-yenThe yen at first sold off on the BoJ announcement, but then reversed and rallied sharply (note: this chart shows the reverse of the usual USD-JPY notation – up indicates the yen is getting stronger) – click to enlarge.

 

Obviously, if the BoJ commits to alter its “QQE” program in the above described manner, it could mean that it will buy fewer bonds than it has bought up to now. If the JGB yield target is zero, it is even conceivable that it may need to sell JGBs if/ when JGB yields fall below the target rate. And yet, Kuroda also said that while the size of the QQE program would eventually become variable, the BoJ would keep purchasing bonds at the current pace for the foreseeable future (which doesn’t seem to make sense).

 

4-jgb-yield10 year JGB yield – currently it is quite close to the target announced by the BoJ for its new “yield curve control” policy.

 

What if global government bond markets were to sell off though? In that case the opposite could happen – the BoJ could be forced to buy nigh infinite amounts of JGBs to defend the zero percent yield target. So this commitment to control the yield curve is an open invitation to a combination of utter disaster and shredding whatever is left of the BoJ’s vaunted “credibility”.

This is all the more so if one considers the plainly contradictory second major tweak to the BoJ’s policy – which represents easily the craziest measure since Kuroda’s appointment to the post of BoJ governor, and that is saying something. It consists of a so-called “inflation-overshoot commitment”, meaning that the BoJ promises to expand the monetary base until its 2% inflation target is exceeded and remains “stable” above this target.

This is obviously based on the erroneous premise that the central bank is “bigger than the market”. The assumption seems to be that it will actually be able to keep JGB yields at zero, even if consumer price inflation surges to levels above 2%.

 

kuroda_cartoon_02-20-2015_largeBe careful what you wish for…

Cartoon by Bob Rich

 

In theory it would certainly be possible, since the only limit to how many bonds the BoJ can buy is the number of outstanding bonds – which the government can increase without limit if need be. The BoJ creates the money it buys securities  with literally from thin air, at the push of a button, so it is not constrained by money as such. But it cannot possibly control everything. In this case, the pressure would simply escape through a different valve, namely the currency.

Along similar lines, there seems to be an unstated assumption that a central bank that has so far not even been able to push consumer price inflation rates up by doing everything to debase its currency, will somehow be able to keep price inflation in check if or when it finally does rear its head. It seems more likely to us that a chimpanzee will one day find the answers to all unresolved questions of theoretical physics.

 

physicsJust kidding – of course the cows, chickens and cats are busy with the physics stuff… the chimpanzees have completely different priorities at the moment – click to enlarge.

 

One More Chapter to Come

Ever since Shinzo Abe’s recent election victory, the probability that Japan’s authorities will adopt some form of ”helicopter money” policy has greatly increased – even though direct government financing by the central bank is actually illegal (so far, that is; there have been so many BoJ rule changes since the bursting of the 1980s bubble that getting around this prohibition should pose no problem whatsoever).

We have discussed this in detail in “The Central Planning Virus Mutates”, after serial money printer and roving monetary crank Ben Bernanke visited Japanese policymakers to dispense his advice. Abe himself keeps hinting at “collaboration” between the government and the BoJ. And clearly, just as there is no end in sight to monetary debasement, there is no end in sight to deficit spending either:

 

5-japan-government-budget2x

Japan’s annual budget deficit in percent of GDP: the Abe/ Kuroda era has so far given birth to some of the largest annual deficits of the post WW2 era – click to enlarge.

 

We discussed Japan’s fiscal quandary back in 2013 and 2014. On these occasions we made the case that Japan’s combination of deficit spending and money printing is one of the biggest Ponzi schemes in the world (see “Japan – Worrisome Trends in Government Spending” “Free to Inflate in Peace” and “JGBs – the World’s Strangest Market” for details).

Of course, all the developed welfare/warfare States are running Ponzi schemes, but Japan’s appears closest to reaching its limit. The problem is that the so-called “non-discretionary” portions of its deficit are running away at an ever increasing pace – among them debt service costs and social security spending. The BoJ’s policies are taking care of debt service costs, but this is of course only a temporary illusion – the bill will still come due in some shape or form.

 

6-japanese-government-expendituresA slightly dated chart of the composition of Japan’s government spending. Abe is itching to increase defense spending, so this item is set to rise as well. The accelerating surge in social security spending seems unstoppable – click to enlarge.

 

Given the collective whining for more deficit spending that recently (re)emerged from monetary bureaucrats and their courtier economists at Jackson Hole and and the well-known penchant of Japanese governments for wasting untold amounts of money on “stimulus”, one should certainly expect that even more experimentation is in store.

In other words, the next step – helicopter money – undoubtedly remains on the table.  What other way is there to expand this obscene debt-berg even further?

 

7-japan-government-debt-to-gdp2xJapan’s government debt/ GDP ratio since 1980 – click to enlarge.

 

Conclusion – A Race Toward the Cliff

The world’s central planners are in a trap of their own making. Their policies have  done so much damage that even the pretend prosperity of capital-consuming artificial booms can no longer be summoned – apart from the creation of ever greater and ever more dangerous asset price bubbles.

It has been obvious for some time that the world’s politicians and central planners are either too obtuse or simply unwilling to admit that economic growth cannot be conjured into being by top-down interventionism in the form of monetary pumping and deficit spending. The absurd pronouncements made at G-20 meetings confirm that magical thinking prevails among policymakers everywhere (see: We Can All Relax Now – G20 Politicians Will Produce “Growth” and The Gasbag Gabfest for some color on this collective elitist hallucination).

Japan is at the forefront of the race toward the cliff, mainly because its bubble economy bit the dust in 1990 already and its bureaucrats have been busy trying to “rescue” the economy for a decade longer than those elsewhere. Japan is a rich country;  its people have accumulated a lot of capital back when its economy was much less hampered than it is today, and it is still home to a highly productive and creative private sector. This has allowed it to muddle along for a very long time now, but time may be beginning to run short.

Similar to other Western-style regulatory democracies, the political-bureaucratic class of the country – in an effort to justify its existence and to create income and sinecures for its cronies – has first regulated and taxed said private sector to death, and then tried to subsidize it back to life. The BoJ’s and Shinzo Abe’s policies are essentially nothing but this subsidization writ large (very large).

What does the “race toward the cliff” actually entail? The core problem as we see it is that the technocratic elites, in a mixture of desperation and misguided faith in false economic doctrines, are crushing the market economy. The so-called “third way” between free market capitalism and socialism is failing, and from the perspective of the planners, the logical solution is a flight forward in exactly the wrong direction, toward a centralized command economy and total control (after all, they would have little to do and enjoy no political power in a truly free society).

 

larson-lemmings-2All of one mind… (well, maybe not all of them)

Cartoon by Gary Larson

 

The Western intelligentsia, with prominent Keynesian economists in the forefront, believed until the very last moment that the Soviet Bloc’s economy was not only viable, but would actually overtake the capitalist economies. Mises had shown in 1920 already that this type of economy was literally impossible – and he had done so on the basis of sound economic theory. There was an intensive debate over the socialist calculation problem that lasted well into the 1940s, which the socialist falsely claimed to have won (their arguments had gone through endless contortions until they ended up proposing “market socialism”, essentially the crowning absurdity. “OK, we have no market, so we will play market”).

In reality, Mises’ contentions have never been refuted. It is to be suspected that some failed to really understand them, which would certainly make refuting them rather difficult. Those in the socialist camp were ultimately reduced to pointing to the fact that the Soviet Bloc did exist, hence a socialist economy had to be possible (they overlooked a few crucial details, such as e.g. the fact that market prices existed elsewhere in the world). And yet, even though Mises’ theoretical disquisition has in the meantime been confirmed by incontrovertible empirical evidence as well, the belief in the efficacy of central economic planning and interventionism continues to fester in nominally capitalist countries.

Ludwig von Mises has made quite a few remarkable predictions, and there is one major forecast that has yet to come to pass (although one could probably argue that it already has in places like Greece and Cyprus).  It concerns precisely this issue – he considered the “third way system” to be just as non-viable as socialism, since it would inevitably drift ever further away from a free market system (see also our most recent missives on this topic: “How the Welfare State Dies” and “The Coming End of the “Third Way” System”).

Mises argued that every failing intervention would beget fresh interventions to “fix” these failures. Eventually, everything would come under bureaucratic command and we would no longer be in a “third way” system, but in some type of Zwangswirtschaft (literally translated, a “coerced economy”). The actions of modern-day central banks certainly represent a vivid illustration of this process.

 

Charts by: TradingEconomics, BarChart, BigCharts, Japanese MoF

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Japan’s Planners Ratchet up Monetary Experimentation”

  • Pater,

    Would you not say that it is statistically and arithmetically impossible that ALL “world’s politicians and central planners are either too obtuse or simply unwilling to admit” that what they are doing has been and still is detrimental to society?

    After all, like someone said, if they were genuinely misguided, they would also make mistakes in our favour every so often.

    g

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • America Goes Full Imbecile
      Credit has a wicked way of magnifying a person’s defects.  Even the most cautious man, with unlimited credit, can make mistakes that in retrospect seem absurd.  But an average man, with unlimited credit, is preeminently disposed to going full imbecile.   Let us not forget about this important skill...  [PT]   Several weeks ago we came across a woeful tale of Mike Meru.  Somehow, this special fellow, while of apparent sound mine and worthy intent, racked up...
  • Retail Capitulation – Precious Metals Supply and Demand
      Small Crowds, Shrinking Premiums The prices of gold and silver rose five bucks and 37 cents respectively last week. Is this the blast off to da moon for the silver rocket of halcyon days, in other words 2010-2011?   Various gold bars. Coin and bar premiums have been shrinking steadily (as have coin sales of the US Mint by the way), a sign that retail investors have lost interest in gold. There are even more signs of this actually, and this loss of interest stands in stark...
  • Credit Spreads: Polly is Twitching Again - in Europe
      Junk Bond Spread Breakout The famous dead parrot is coming back to life... in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” - mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while...
  • Gold Divergences Emerge
      Bad Hair Day Produces Positive Divergences On Friday the ongoing trade dispute between the US and China was apparently escalated by a notch to the next level, at least verbally. The Trump administration announced a list of tariffs that are supposed to come into force in three week's time and China clicked back by announcing retaliatory action. In effect, the US government said: take that China, we will now really hurt our own consumers!  - and China's mandarins replied: just you wait, we...
  • Industrial Commodities vs. Gold - Precious Metals Supply and Demand
      Oil is Different Last week, we showed a graph of rising open interest in crude oil futures. From this, we inferred — incorrectly as it turns out — that the basis must be rising. Why else, we asked, would market makers carry more and more oil?   Crude oil acts differently from gold – and so do all other industrial commodities. What makes them different is that the supply of industrial commodities held in storage as a rule suffices to satisfy industrial demand only for a...
  • Chasing the Wind
      Futility with Purpose Plebeians generally ignore the tact of their economic central planners.  They care more that their meatloaf is hot and their suds are cold, than about any plans being hatched in the capital city.  Nonetheless, the central planners know an angry mob, with torches and pitchforks, are only a few empty bellies away.  Hence, they must always stay on point.   Watch for those pitchfork bearers – they can get real nasty and then heads often roll quite literally....
  • Lift-Off Not (Yet) - Precious Metals Supply and Demand
      Wrong-Way Event Last week we said something that turned out to be prescient:   This is not an environment for a Lift Off Event.   An unfortunate technical mishap interrupted the latest moon-flight of the gold rocket. Fear not true believers, a few positive tracks were left behind. [PT]   The price of gold didn’t move much Mon-Thu last week, though the price of silver did seem to be blasting off. Then on Friday, it reversed hard. We will provide a forensic...
  • Cryptocurrency Technicals – Navigating the Bear Market
      A Purely Technical Market Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing...
  • The Fed's “Inflation Target” is Impoverishing American Workers
      Redefined Terms and Absurd Targets At one time, the Federal Reserve's sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.   Fed Chair Jerome Powell apparently does not see the pernicious effects...
  • Merger Mania and the Kings of Debt
      Another Early Warning Siren Goes Off Our friend Jonathan Tepper of research house Variant Perception (check out their blog to see some of their excellent work) recently pointed out to us that the volume of mergers and acquisitions has increased rather noticeably lately. Some color on this was provided in an article published by Reuters in late May, “Global M&A hits record $2 trillion in the year to date”, which inter alia contained the following chart illustrating the...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com