The Bank of Japan really “Pumps It Up” this time

It was only on Wednesday evening that many were observing the end of Quantitative Easing at least in the United States. However it turns out that the central banking world was not even able to wait another 35 hours before they sang along to MARRS.

brothers and sisters
pump up the volume
pump pump it

The Bank of Japan stepped into the fray and acted as if it was on the implied advice of Paul Krugman of the New York Times who had expressed the view below only on Monday.

But I still worry that Japan may fall into the timidity trap.

What is the timidity trap? Well he helped us out back in March.

Suppose that the economy really needs a 4 percent inflation target, but the central bank says, “That seems kind of radical, so let’s be more cautious and only do 2 percent.” This sounds prudent – but may actually guarantee failure.

I do like the bit about really needing 4% inflation! What would happen to the weak path of real wages in Japan or the ability of consumers to consume? As it is household spending has fallen by 5.6% on a year on year basis in rsponse to higher inflation. Apparently the output fairy will turn up and make everything okay in an Alice In Wonderland fashion.

In terms of the timing it was as if the concept of Quantitative Easing had issue those famous words of The Terminator

I’ll be back

Although I have to confess that not even Arnie operated in such a short time-span

What has the Bank of Japan done?

The annoucement is shown below.

The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).

Billions are so yesterday in terms of monetary expansion in Japan and have been replaced by trillions as we wonder if they will “boldly go” to coin a split-infinitive into quadrillions. In case you were wondering where the money would go here are the details.

The Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 80 trillion yen (an addition of about 30 trillion yen compared with the past).

You may note that the Bank of Japan is a little vague about the size of the increases which may be 10-20  trillion. For a nation usually obsessed with accuracy and precision the Bank of Japan is somewhat odd when it behave like this.

Also we are seeing an effort along the line of Operation Twist used by the United States and to some extent by the Bank of England.

The average remaining maturity of the Bank’s JGB purchases will be extended to about 7-10 years (an extension of about 3 years at maximum compared with the past.

This is the sort of thing that central banks usually announce when they cannot think of much else to do. But I think that the Bank of Japan here is trying to give th eimpression that it is going “all-in”. Whilst there is some yield to be found pushing JGB yields down from the ten-years current 0.45% seems particularly pointless to me.

At this point you may think that the Bank of Japan is planning to do quite enough and then “Get Busy” by Sean Paul started blaring over the loudspeakers and we got these too.

Woman Get busy , Just shake that booty non-stop
When the beat drops
Just keep swinging it
Get jiggy
Get crunked up

Why not ramp the equity market?

The Bank will purchase exchange-traded funds (ETFs)…… that their amounts outstanding will increase at an annual pace of about 3 trillion yen (tripled compared with the past). The Bank will make ETFs that track the JPX-Nikkei Index 400 eligible for purchase.

After all we cannot live in a world where holders of equities have a fall in prices can we. Let me call this a Kuroda Put Option.

Why not ramp the real estate market too?

I guess this seems perfectly reasonable to anyone who is in the process of ramping the equity market.

The Bank will purchase Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about  90 billion yen (tripled compared with the past).

A Summary

As has been sugested to me on twitter (h/t Andrew Hawley) it seems that Billy Idol was rather prescient.

In the midnight hour she cried- “more, more, more”
With a rebel yell she cried- “more, more, more”
In the midnight hour babe- “more, more, more”
With a rebel yell- “more, more, more”
More, more, more.

Is it really all about the equity market?

Regular readers will be aware that one of my themes is that in the modern era central banks have what I consider to be an unhealthy obsession with equity market levels. It was not so long ago that a central bank acting like a hedge fund and buying equities would look really extreme whereas now it seems not far off normal.But in Japan the government of Shinzo Abe shames this enthusiasm and from the Japanese establishment we saw one more move last night. From Reuters.

Japan’s $1.2 trillion Government Pension Investment Fund on Friday announced new allocations for its portfolio, which include raising domestic stock holdings to 25 percent from the current 12 percent.

So it will buy more and so will the Bank of Japan and for those who did not get the hint this happened today. From the Financial Times.

Tokyo stocks surged to a seven-year peak……the Nikkei 225 jumped 4.8 per cent to its best level since early November 2007.

However Japanese pensioners and indeed the taxpayers who back the Bank of  Japan may wonder about the wisdom of buying after a large rally!

What about the Yen?

It would be fair to say that it has dropped like a stone with words like plummet and crashing being appropriate. As I type this it has passed 111 to the US Dollar and 140 versus the Euro and has also passed 178 versus the UK Pound. So anything purchased abroad has just got more expensive and that includes commodities and oil as they are invariably priced in US Dollars.

Was there a trigger for this?

If we ignore the political dimension and just look at the economic there was this.

The consumer price index for Ku-area of Tokyo in October 2014 (preliminary) was 102.2 (2010=100), down 0.1% from the previous month, and up 2.5% over the year.

Signs were there of falling inflation and these numbers include the consumption tax rise. So we can conclude that this was certainly part of the Bank of Japan emerging like a squadron of kamikazes from its eyrie.


There is a category on both this blog and my time at Mindful Money for Japan’s Economic Situation where you can see that I predicted this. By that I mean the bit where the Bank of Japan turns into Agent Smith from The Matrix Revolutions crying “More! More! and the failure of Abenomics phase one. After all what has happened this morning is a clear confession of failure.

I have two further thoughts for you and the first is how quickly the reported end of QE mophed into an expansion of it. The second is this from a country which in official meetings hates to use the  word no.

Accelerating the pace of increase in the monetary base by a 5-4 majority vote…….Increasing asset purchases and extending the average remaining maturity of Japanese government bond (JGB) purchases by a 5-4 majority vote.

Perhaps the four dissenters (quite extraordinary in itself in Japan) are fans of the song the Gambler by Kenny Rogers.

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run

Just a thought

So Sweden cuts interest-rates with a “strong” economy and Russia raises them with a “weak” one! The credit crunch keeps inverting things.


11 thoughts on “The Bank of Japan really “Pumps It Up” this time

  1. So in essence…
    a) print notes
    b) buy everything
    c) cross your fingers and hope for a miracle.

    What could possibly go wrong? 😨

    • Hi Zak

      Central banks these days do not get involved in anything so tiresome as actually printing the notes. Instead it is all electronic money creation but in essence you are correct.

      Oh and for context the monetary base in Japan was 252.5 trillion Yen as of the end of September.

  2. Oil falling. Capital flight. Russia is raising interest rates to prevent further currency falls, which should cause higher inflation.
    The point of interest rate rises in a strong economy is counter-cyclical control to reduce the harmful effects of boom and bust. Almost the entire first world central bankers seem to be overlooking this economics-101 topic. Hang on to your hats, the next bust might be real rough.

    • Hi Expat

      That is because central banks have wedded themselves to various asset price booms and are completely unwilling to accept even the concept of a bust. Look how quickly they responded in the media when equity markets took a dive.

      Now we see that whilst the Fed has withdrawn from QE (for now anyway) The ECB and in particular the Bank of Japan are stepping up to the plate.

      My theme that we will be weaker when we face the next bust gathers pace….

      • Yes we will. But the 0.01% will benefit. William Ash wrote that banks used the 1930s depression to foreclose on swathes of family farms. I’ve heard it suggested that the oligarch class used the mid 90s currency collapse as an opportunity to buy up assets cheaply, from desperate & hungry sellers.

  3. Hello Shaun

    As Newt said in the Aliens film

    “It wont make any difference ”

    Again and Again I see reported that this or that Central bank will do this and this will happen ….. and then it does not.

    The BoJ is getting a bit desperate , is it not ?

    I dont think inflation is what they want , after many years of hearing that inflation id the big bad wolf , only Germany seems to believe it . Also if its inflation , why stuff the money into banks and watch them hang onto it , cheap capital to gamble with ?

    If they wanted inflation put up fares and taxes and keep doing it …..

    Or just increase the money supply with “stimulus cheques ” – get 5K for Christmas !!


    • Hi Forbin

      I think that the desperation point at the Bank of Japan is shown by the fact that the vote was only 5-4. So unless Shinzo Abe is going to change its board membership again this now looks a last throw of the dice.

      Also if you look at what 60/70 trillion Yen per annum was achieving then adding another 10/20 trillion we get not very much. For those who do not follow Japan properly the surprise must be how litle inflation has been created so far and how it looks as though it is fading.

      As it happens I think this move makes the next Consumption Tax rise (to 10%) more likely.

      Oh and as to our Greenspan discussion, gold fell another 2% yesterday….nearly as fast as the Yen.

  4. Great column, Shaun. The Japanese residential property price index (RPPI) was updated to July two days ago, and showed a lower rate of decrease, going from -1.8% in June to -0.7% in July. This was due to the condos price index, which increased by 8.2% in July as opposed to 4.8% in June. In July 2014 the monthly increase in the condos index was 2.0%, but the July annual change was boosted by the July 2013 monthly change of -1.2% dropping out of the index. So Japanese QE does seem t be having some success in creating a British-style housing bubble in the condo market.

    • Hi Andrew

      It seems that central bank policy revolves around financial markets these days with equities and house prices competing for the top of the list. I think of it as admitting defeat in that there is an intellectual retreat here, not that they admit it!

      Thanks for the numbers which do indeed suggest that the Japanese may be hoping for a British style house price boom or for starters an end to the falls. The catch of course is that one of the ways Japan got into this mess was via a house price boom and consequent bust,

  5. Good stuff again Shaun,
    It’s hard to believe that Japan’s bubble burst in 1991. Over 23 years of foot-to-the-floorboards policies – and getting nowhere. Incredible.

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