Often these days I find that the themes of this blog come together as a job lot rather than singly which I take as a compliment. One of my contentions over the past 18 months or so is that negative interest-rates and bond yields are spreading and we will be seeing more and more of them as time progresses. Regular readers will recall that I took this message to the Reform think tank last September and may also be interested to know that “think tank” is now in my financial lexicon. Meanwhile in the land of the rising sun or Nippon there has been a further development.
Let me illustrate from a speech by the head of the Japanese LDP Shinzo Abe.
We want to conduct monetary policy boldly, by taking into account the possibility of revising the Bank of Japan Act
Some care is needed here as “bold action” from Japanese politicians and officials is in my financial lexicon but revising the central banks legal structure had my antennae on full alert.Then Abe san explained. From the Japan Daily Press.
Shinzo Abe, the leader of the opposing Liberal Democratic Party (LDP) and most likely next Japanese Prime Minister, made a statement on Thursday that he wants the Bank of Japan to encourage lending by setting its interest rates to zero or sub-zero.
He has also called for “unlimited” monetary easing from the Bank of Japan which is an interesting concept for an organisation that is in the middle of so-called Quantitative Easing number 9 which replaced the former QE8 after only about six weeks. Apparently the extra 11 trillion Yen represented by QE 9 is not enough for Abe san who has called it “meaningless”. No wonder he also wants to change the Bank of Japan Act!
However he was not finished as Abe san also added this according to the Financial Times.
the central bank and government should agree on an inflation target of perhaps 2 or 3 per cent.
So we end up with something of a concerted plan which goes as follows. To escape the ( so far two) Lost Decades that Japan has suffered Abe san feels that she needs higher inflation (currently the Bank of Japan is aiming at 1%) which he feels will require both negative interest-rates and unlimited QE.
Put another way we are now on the ground of one of my other themes which is that proponents of extraordinary monetary measures will in extremis -a situation they invariably find themselves in sooner or later, usually sooner- take the “More,More,More” route.
Put another way these are the sort of policies that might have come out of the mouth of the Japanese economist Richard Koo. He is treated by so many people as near to an economic saint which might lead the unwary into thinking that his policies must have been tried and found to have worked! As I have not yet actually heard Mr.Koo approve I will call the plan Koo-like as his view on such matters was summarised in my view some years ago by Luther Vandross.
never too much, never too much, never too much
How did we get here?
The years since 1990 have been difficult for Japan but she also has strengths and the debate has raged as to how well or badly she has done. However the Great Eastern Earthquake of last March gave those wanted more of a fiscal stimulus at least some of what they wanted and led some to predict that her economy would then pick up. However on Monday we learnt this.
Japan’s Gross Domestic Product had fallen by 0.9% in the third quarter of 2012 compared to its predecessor and it was only 0.1% higher than a year ago. Those trouble by her domestic demand issues which include me so little respite in private consumption falling by 0.5%. To continue the Talking Heads quotes “same as it ever was”. However even more worrying was the fact that exports had fallen by 5% on the previous quarter. Whilst the islands dispute with China will have influenced this it was still a large drop. We can also add in that there was still some evidence of fiscal action as public investment was 4% higher than in the previous quarter.
What has happened since?
Japan’s Cabinet Office calculates a consumer confidence index which since the third quarter ended has fallen (from 40.4 in September to 39.7 in October on the unadjusted series). Also the machine tools orders index fell by 6.7% in October on a year earlier. This is a number which is closely watched due to fact that we receive it early and also due to the fact that it gives us a guide as to what developments we can expect from Japan’s manufacturing sector. With Japanese industrial production having slumped by 8.1% in September compared to the same month in 2011 this is an even more moot point than usual.
What about surveys?
The Markit Purchasing Managers Index told us this.
In contrast, manufacturing output declined to the sharpest degree for 18 months as volumes of incoming new orders fell at a marked pace. The Composite Output Index (covering manufacturing and services) therefore continued to post below the 50.0 no-change mark and signalled a modest rate of contraction. The index registered 48.9, up from a reading of 48.4 in September.
So as you can see there was still a slowdown albeit at a reduced pace.
There are a lot of issues here but if we stop for a moment and consider whether they are likely to build we see that they are as there is little sign of any improvement in the economic outlook in Japan. Also the LDP is by no means guaranteed to win the Japanese election. But over the credit crunch we have found that suggestions of further easing tend by a process of osmosis seep through a political class over time. It would also appear that financial markets are of the same view as the Yen has weakened against the US dollar since the pronouncements were made and is now at 81.12. Also the Japanese stock market has had a good couple of days in response to this and has got back above the 9000 level on the Nikkei 225 at a time when other stock markets have fallen.
Let me give you some thoughts on the likely outcome.
Can Japan raise her inflation rate to a 2-3% range?
This is an often much misunderstood debate as the Bank of Japan has in recent times reaffirmed its commitment to a 1% inflation rate and beefed up its efforts to achieve it as I have described above. However it is failing to make any real progress. So a plan to hit a 2% or more target would to my mind involve a real surge in QE and official interest rates pushed below zero too, possibly significantly so. One more time Japan’s economy will become the world’s crash test dummy.
What will this mean for the Bank of Japan’s independence?
It will not have any. This may provoke a wry smile as for many years it was not considered to have any but one of the changes of the credit crunch era has been that at times it has resisted political pressure. Furthermore I read quite a bit into the words of Deputy Governor Nishimura.
and in its maturity has come to fit itself perfectly to the new age.
He was in literal terms discussing the architecture of the Bank of Japan’s main building but I think we can translate the code.
Oh and it will probably lead to one more change as one of the curious implications of the credit crunch era is that it is the nations who have central banks buying their own countries bonds who have not have negative bond yields! Quite contrary in a way is it not? I am excluding Switzerland because she is buying other countries bonds. But as I consider Japan’s “currency twin” I can only shake my head at a ten-year government bond yield of 0.45% and wonder if it may yet be a race between the currency twins as to who takes their countries official interest rates into the negative zone.
And once one of them decides “To boldly go where no one has gone before” to use a famous phrase, how long do readers think it will be before we join them?
Just for the avoidance of doubt I am discussing negative interest rates acrosss the board as opposed to taxes which mimic that effect or rates just for foreign players.