As the Bank of Japan tilts at windmills like Don Quixote is that our future too?

One of the longest running themes of this blog has been the economic situation in Japan which has quite a few features which are unfamiliar in the rest of the first world nations. Indeed so much so that her economy was likened a couple of years to the ability of a bumblebee to fly. If you look at the laws of aerodynamics you think that it should not be able to and yet the evidence that it can is regularly found in gardens,parks and the countryside. Personally in spite of recent problems with the bee population I feel that they will be flying around long after the inconsistencies of the Japanese economy have overwhelmed it.

More More More

Regular readers will be aware that I have used the lyrics of this hit for Andrea True Connection to describe how the supporters of policies such as Quantitative Easing will respond to the disappointing economic results of their efforts. I always felt that rather than conclude that the policy is a disappointment they would instead conclude that what had happened was that it had not been applied with enough size and vigour. So as you can imagine I approach the announcement of what will no doubt be called QE9 by the Bank of Japan with a wry smile. Particularly if we recall that it had started QE8 as recently as September 19th. So not only are we getting “More,More,More” but there is also a noticeable shortening of the half-life of such programmes.

What did the Bank of Japan announce?

The Bank decided to increase the total size of the Program by about 11 trillion yen, from about 80 trillion yen to about 91 trillion yen in order to make financial conditions for such economic entities as firms and households even more accommodative by further encouraging a decline in longer-term market interest rates and a reduction in risk premiums.

If we analyse this we see that the “even more accommodative” is on my more,more more theme. Also we see that they want even lower market interest-rates which if we note that her ten-year bond yield is only 0.77% I wonder what level they want. I have mused before as to whether they will drive some yields into negative territory. Also the 11 trillion Yen is an unusual amount with the Bank of Japan usually moving with 5 trillion or 10 trillion units. This implies that it was under pressure.

Perhaps because it feels under pressure the Bank of Japan decided to deploy some harsh language too as it called today’s measures.

further pursuing aggressive monetary easing……….pursue powerful monetary easing

The trouble is that like the policy itself the language is getting repetitive as if you look at the statement from September 19th the only addition is the word aggressive.

Why is it doing this?

It is best summed up here.

The timing for Japan’s economy to emerge from the leveling-off period and start recovering is expected to be delayed from the previous projection, mainly reflecting the fact that overseas economies have moved deeper into the deceleration phase.

Also longer-term the Bank of Japan is worried about the possible effects of this.

the Bank this time presumes that the consumption tax, which currently stands at 5 percent, will rise to 8 percent in April 2014 and 10 percent in October 2015, following the passage of the consumption tax-related legislation

Whilst this may well be needed to help with the fiscal deficit we saw from Spain’s September retail sales numbers (-12.6% year on year) what a rise in a consumption tax can do. An extreme example,but the underlying principle holds. Also even the Bank of Japan is increasingly biting its lip and considering this issue which is slowly building and is another theme of Japanese economic life.

Japan’s economy currently confronts the long-term structural challenge of declining trend growth rates amid the situation of a rapidly aging population.

The Bank of Japan is also having to face the fact that (unlike in the UK) “powerful monetary easing” has not helped it hits its inflation target.

The year-on-year rate of change in the CPI is expected to hover around 0 percent for the time being……….the year-on-year rates of change in the CPI in fiscal 2012 and 2013 are revised downward from those in July.

For those who have not followed the situation Japan has had negative to zero inflation for some time now or disinflation. The Bank of Japan targets an inflation rate of 1% (even it thinks the usual central bank target of 2% is out of reach) but is not getting anywhere near achieving it. for example the annual rate of change of Japanese consumer price inflation was -0.3% in September. Although in an example of the phrase “any port in a storm” the rise in the consumption tax will help raise prices in 2014 and 2015.

Japanese Industrial Production

We saw data released from  Japan’s METI today and this may well have added to the Bank of Japan’s desire to act as the numbers were once again poor.

Industrial Production in September decreased 4.1% from the previous month, showing a decrease for the third consecutive month. It showed a decrease of 8.1% from the previous year. The index in September was 86.5(seasonally adjusted).

And we also got some detail on what had caused this.

Industries that mainly contributed to the decrease are as follows: 1.Transport equipment, 2.General machinery, 3.Iron and steel, in that order

Even if we try to make an allowance for the territorial dispute with China in the East China Sea these are weak numbers.


There is so much ground to cover here. Let me open by considering a type of Keynesian liquidity-trap where should it exist monetary policy becomes ineffective. If we look at what borrowing rates are it is going to be hard to drive them much lower.

Specifically, firms’ funding costs have been hovering at low levels, with the average contracted interest rates on new loans and discounts — both the short- and long-term rates — registering a level of 1 percent

But even if the Bank of Japan succeeds in driving them even lower will it do any good? I have to say that I suspect not. The problem with this part of that theory though is that fiscal policy should be very effective. However we get another problem as Japan has a considerable fiscal deficit and a  public debt to economic output ratio that even exceeds that of Greece. So that hasn’t really worked either.

The Japanese economist Richard Koo has more faith in a fiscal stimulus and feels that this is needed to offset her high level of private-savings. the trouble is what if the Japanese save even more in response to this? It would be in many ways logical with current trends in population.

So in spite of the grand declaration of a “Measures Aimed at Overcoming Deflation” by the Japanese government and the Bank of Japan I expect there to be a QE10,11,12….. as time goes by. This leads me to wonder if we are on the same path and accordingly I will end with this from The Vapors one more time too.

I’m turning Japanese

I think I’m turning Japanese

I really think so

They at least must be grateful for all the publicity the Japanese economy has given them.


7 thoughts on “As the Bank of Japan tilts at windmills like Don Quixote is that our future too?

  1. Hi Shaun, you have long argued QE in the UK has a strong inflationary effect; I happen to agree. Can you explain why Japanese QE hasn’t been inflationary? Or would the economy just have been in deeper deflation without it?


    • Hi Andy

      A strong factor here in recent times at least has been the strength of the Japanese Yen. Whilst many countries have seen QE associated with a fall in their currency the Yen has strengthened.At the start of 2008 it took 110 Yen to buy one US $ and now it takes 79.5. So the rally has protected Japan from much or all of the rises in oil and commodity prices.It really can start to mess with your mind if you think that it has protected Japan from these rallies which were in part created by Japan’s QE….

      If we move to domestic inflation then the nature of her economy with its higher savings simply does not seem to have so much of it. I often wonder if psychology gets involved here and in some way we are more prone to it. Perhaps if you have had inflation you become influenced by that. But the strongest influence has been the Yen I think.

  2. Hello Shaun,

    I agree there’s going to be a lot more QE for us.

    I am just waiting to see what the PM is going to say next quarter – I’,, put mu neck on the line and state I believe we’ll see small beer growth – 0.2% to 0.5% if we;re lucky.

    I don’t think anyone one’s going to point out that the BoE forecast and the Governments one was for , what was it 1.2% or 2% this time last year ??

    Cant see way nobody brings up all the bad forecasts these bodies make and make ’em sweat ….. guess there must be some tin foil hat conspiracy going on!

    As for Japan , I thought this time there’s supposed to be growth as she rebuilds after all those disasters she’s had ?

    oh well…..


    • Hi Forbin

      As to the Bank of England a year ago they told us we would have just over 1% economic growth right now as compared to zero over the past year. By their poor standards thats none too bad,although mind you they were predicting over 3% growth for 2013! Back to growth in the following year always being high in official forecasts.

      And whilst checking I found this confirmation of my point about how the GDP numbers have been manipulated.

      “Changes to the ONS methodology for
      measuring real GDP, described in a box on pages 20–21 of this
      Report, mean that for given paths of nominal spending and
      prices observed in the economy, measured real growth has
      been, and is likely to be in future, about 0.3 percentage points
      per year higher than under the previous methodology”

      Does anybody feel wealthier as a result of this re-writing of history.

  3. Hi Shaun

    I think you are right about the chance of a QE forever scenario for the UK. Also what happened to those who told us that Japan would boom after the tsunami and earthquake? Has anybody said sorry for being wrong?

    There is a danger we will see the same with Hurricane Sandy in the US I think.

  4. Hi Shaun,

    I am very puzzled why the post Tsunami stimulus hasn’t worked. In fact, you have to wonder what the figures would have looked like without the stimulus!

    Why do the Japanese save so much? Is their social security system poor?

    Do their savings take the form of Japanese sovereign bonds? If so, I guess it wouldn’t help much if they started spending because foreign investors may demand higher yields, as I understand they are fiercely proud and protective of their country so are presumably happy to accept poor returns on savings.

    Although, come to think of it, they are still getting above inflation interest rates, so maybe they aren’t as badly off as English savers are?

    • Hi noo2

      You are right to point out that the Japanese do at least get a real return on their savings as any positive return beats negative inflation. However whilst they have large stocks of savings built up they are not saving like they were and only 2% of income is now saved. So a crunch may be coming.

      Yes they do own a lot of JGBs although domestic ownership has dropped from 95% to 93% it is still very high.

      But the times they are a changing..

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