The package of quantitative easing announced today by the new regime at the Bank of Japan is one of the largest monetary injections ever announced by the central bank of a major developed economy. The only rival for that crown is the emergency easing in monetary policy which took place in most economies in late 2008. But today’s BoJ action has not been driven by any short-term emergency. It represents a deliberate change in philosophy, and a complete abandonment of everything that the Bank of Japan has said about monetary policy in the past two decades. Those who believe in quantitative easing certainly have their experiment, writ large in Tokyo.
In effect the new governor, Haruhiko Kuroda, has imported into Japan the whole of the Federal Reserve’s post-Lehman balance sheet strategy, and he will implement it in under two years, instead of the five years or more taken by the Fed. The doubling in the Japanese monetary base over a period of 21 months is in itself remarkable. Taken together with the extension of the duration of bonds purchased from less than 3 years to an average of 7 years, the injection becomes of historic proportions.
The new strategy brings, for the first time, a real prospect of breaking the deflationary psyche which has plagued Japan for so long. But it also brings risks that the strategy might work too well, with inflation expectations unhinging the bond market. Mr Kuroda is trying to pull off a difficult trick, which is “to drastically change the expectations of markets and economic entities”, and to do so in a very particular way. Read more
The Bank of Japan’s monetary policy meeting on Tuesday is the focus of much greater global attention than normal. The Japanese economy is headed into yet another downturn, and the central bank seems likely to admit that its 1 per cent inflation target will not be achieved in fiscal 2014. The meeting will probably end with another round of increased asset purchases, lifting the BoJ’s total purchase programme from Y80trn to about Y90trn-Y95trn.
That, however, is not the real reason why the BoJ is back on the global radar screen. Yet another modest rise in asset purchases, which analysts have termed “QE9″, is unlikely to impress anybody. The real reason for market attention is that there is now enormous political pressure on the BoJ to do something much more dramatic to help the economy break out of its deflationary trap. Read more
Mount Fuji, Japan. AFP/Getty Images
Until recently, Keynes’ notion of a liquidity trap was of great interest to macro-economists, but was viewed by investors as a rare aberration which, outside Japan, could be safely ignored. In the aftermath of the 2008 credit crunch, all that has changed. Many developed economies seem to be falling into a liquidity trap, and may stay there for several years. What does this imply about asset returns? (This blog is a slightly longer version of an article which first appeared in the FT’s Market Insight column on 24 January, 2012.) Read more
Global equities and other risk assets ended last week near to their high water marks for the year. Once again, markets have reacted favourably to the most important indicators for global activity, all of which have been published in the past week.
There have been some signs that higher oil prices have dampened consumer spending in the US, and the global industrial sector has given further evidence of reaching its peak growth rate. But so far any slowdown has been very minor, and not enough to persuade markets that this is anything more than a temporary correction.
In my regular weekly round-up this week, I will comment on the implications of recent data for the major economies. Read more
The sudden surge in the value of the yen to a new all-time high against the dollar is a new headache for the Japanese authorities, just at the moment when they did not need one. In the aftermath of the Kobe earthquake in 1995, the yen temporarily surged by almost 20 per cent against the dollar, and a repeat of that episode now would greatly add to deflationary pressures in the economy. Fortunately, however, the Bank of Japan should be in a position to stop this from happening, and other G7 economies will hopefully realise that this is one area where they can really help Japan. There may not be many occasions where co-ordinated foreign exchange intervention is the right thing to do, but this is certainly one of them. Read more
The Kobe earthquake of 1995 was an immense human tragedy, hitting a region of Japan where building standards were nowhere near adequate to cope with the shock. I am sure we all have very sad memories of a disaster in which more than 6,000 people died. Read more
China’s GDP growth made news this week because, on the official figures, China overtook Japan to become the second largest economy in the world in 2010. But actually, on a different way of calculating the data, this was very old news. Using purchasing power parity, China not only overtook Japan way back in 2001, but it is also quite close to overtaking the US as the biggest economy in the world – if, indeed, it has not done so already.
GDP statistics measure the amount of value added or income in the economy, measured in domestic currencies, over a given period of time. But it is more difficult to compare the GDP in one economy (China) with that in another economy (Japan), because we need to use an exchange rate which translates yuan into yen or vice versa. This is not as straightforward as it may seem. Read more
Today’s publication of the latest FOMC minutes will probably unveil significant downward revisions to the Committee’s inflation and gross domestic product forecasts for 2011, as well as a large upward revision to its unemployment forecast. More interestingly, the minutes will show whether the FOMC is broadly united on the strategy of quantitative easing which it has now adopted. Read more
The major global manufacturing surveys for the month of October have now been published, and they are considerably more buoyant than they had been in previous months. Read more