Japan shows that Quantitative Easing is no economic panacea for the Euro

This morning has seen the opening of the major part of the European Central Banks (ECB) Quantitative Easing (QE) programme as it has begun its purchases of sovereign bonds. As it has apparently begun with purchases of the government bonds of Germany it is in danger of a major misfire as the German economy is in rather rude health right now as I discussed only last Monday. It certainly does not need the 2 to 3 billion Euros a week of German bond purchases that have just started. However another piece of news has been released this morning which questions the whole concept of QE. Let’s us therefore move our focus over to the serial QE offender which is of course the land of the rising sun or Nippon.

Today’s GDP data

Bloomberg reports it thus.

Gross domestic product expanded an annualized 1.5 percent in the three months through December from the previous quarter, less than a preliminary 2.2 percent, revised government data show.


So something of an ouch as if we move to our terms reported GDP growth was revised down from 0.6% to 0.4%. If we look into the detail we see that one of the supposed planks of the strategy called Abenomics is not going well.

Japan’s emergence from recession was weaker than first estimated as companies unexpectedly cut investment and drew down their inventories, offsetting a pickup in consumer spending.


So the “investment boom” has not turned up and this is awkward to say the least which is highlighted if we look as this morning’s speech from Bank of Japan Deputy Governor Hiroshi Nakaso and the emphasis is mine

Looking at the Financial Statements Statistics of Corporations by Industry, coupled with an increase in sales, the ratio of firms’ current profits to sales has recently reached around 5 percent for all industries and firms of
all sizes — a high level that exceeds that prior to the global financial crisis.


I do not know what is the Japanese for “fat cat” or for big business looking after itself but it does seem to be the case and this “pork barrel” approach was not supposed to happen. This was supposed to be so different to the problems of the first term of Shinzo Abe.

What is the underlying picture?

These numbers took us to the two-year point of Shinzo Abe’s government and of Abenomics and the economy in the last quarter of 2014 was 0.8% smaller than the last quarter of 2013 and overall the economy is only 1.5% larger. This looks like the struggles of the old Japan – which of course Shinzo Abe represents – rather than a new dawn of reform and accelerating economic growth. Back in May 2013 supporters such as Paul Krugman of the New York Times were lauding the progress.

So the overall verdict on Japan’s effort to turn its economy around is so far, so good


I wonder what they think now as the quote reminds me of the joke made by Steve McQueen’s character in the film the Magnificent Seven.

What is the Bank of Japan doing?

There are plenty of crossovers with the start of Euro area sovereign bond QE today as Deputy Governor Nakaso reminds us.

Let me summarize the transmission mechanism of QQE. The starting point of the mechanism is converting people’s deflationary mindset and thereby raising inflation
expectations through the strong commitment by the Bank to achieve the 2 percent target. At the same time, the Bank has been exerting downward pressure on nominal interest rates through its massive purchases of JGBs in order to encourage a decline in real interest rates and stimulate private demand such as business fixed investment. The idea is that, together with the increase in inflation expectations, this will lead to an increase in inflation rates.


Putting this rhetoric into action the monetary base in Japan was expanded by 10.4% between September 2014 and February 2015. Oh and as QE is something of a debased concept in Japan after all the false starts we have QQE or Quantitative and Qualitative Monetary Easing.

What about the Yen?

This has of course plummeted over the course of the Abenomics project and if we look at the data for the fourth quarter of 2014 there was an impact as net exports grew by 0.2%. But this morning more disappointing news came from the January figures where the current account surplus was a much lower than expected 61.4 billion Yen.

What about wages?

This has been a perennial problem in Japan which Abenomics was supposed to fix and many media outlets have told us has been fixed! However today’s GDP release has revised compensation of employees down from an already rather measly 0.1% growth to zero. Still many are still spinning for Shinzo Abe as this from the Financial Times earlier this month indicates.

Japan wage growth fastest in 15 years……Pay packets were up by 0.8 percent on a year ago…Basic wage growth is particularly important for Abenomics because workers are more likely to spend regular income than a one-off bonus.


So is Japan saved? Er no as those who bother to read further into the article discover.

Real wages were down 1.5 per cent because of last year’s rise in the consumption tax


So if we ignore the hype real wages continue to fall and in a mirror of what happened in Europe much of this is due to government policy. Yes the same governments who are telling us that they are trying to boost real wages!

Up is the new down again.

An Inconvenient Truth

Let me use the words of Deputy Governor Nakaso again.

Given that Japan’s crude oil imports in fiscal 2013 amounted to almost 15 trillion yen, a back-of-the-envelope calculation shows that with the decline in crude oil prices from about 100 dollars per barrel up until last summer to the recent level of about 50 dollars per barrel, the oil price decline represents an increase in annual income to Japan’s economy of more than 7 trillion yen.


Actually he is channelling a point I have been making for several months. But do you see the flaw? He had just spent several pages of his speech explaining how higher prices and 2% annual consumer inflation is good for Japan! So he is completely contradicting himself and in fact offering quite a good critique of the policy of the Bank of Japan. However he then gets himself in quite a mess.

This is why, from a longer-term perspective, falling oil prices will have a positive effect on economic activity
and will push up prices.


Up really is the new down here isn’t it?!


There are many similarities between Japan and Germany. They are exporting nations with ageing populations for example and now they have very similar government bond yields. So you might think that a policy which has not worked in Japan would be unlikely to work in Germany. This seems not to have bothered the ECB much as it starts down that road.

The irony is that like Germany the immediate future for the economy of Japan looks positive as I discussed on the 16th of February.

The fall in the price of oil albeit one which has bounced back a little to around US $60 per barrel should give the economy of Japan a push forwards as 2015 progresses.


To this we can now add the six-year low in the price of Iron Ore which took place last week which should benefit Japan and this was picked up in today’s business survey. The Eco Watchers Survey moved out of negative territory in February and the outlook was positive too.

The problem is that the boost has been provided by falling prices – oil and commodities – as it has in Germany. So raising prices via QE will have the reverse effect and slow the economy? Even worse QE in Europe may take the credit for an economic boost which was happening anyway and it may slow!


11 thoughts on “Japan shows that Quantitative Easing is no economic panacea for the Euro

  1. If you want to stimulate the economy, give the money directly to the people, especially the poor.
    If you want to redistribute wealth upwards, or stuff the balance sheets of financial institutions, it’s QE that you want.

    The rest is lies.

    • hmm, give to the poor like the liberal personel tax relief seemed to have no effect but I expected little as CPI doesn’t measure food and fuel (!)

      give it to the rich and you’re stuffing that horse again to feed the sparrows at the back end .

      Frankly we should look at the 1930’s again and build something big , like the Hoover Dam , something that will give back afterwards

      we don’t need more stone heads or pyramids !


      PS: yes our HMG will have to do this , private enterprise is too busy fleecing the public to care …..

      Think of what 375Billion could have brought us ……

  2. Hi Shaun, do you not think the problem with Japanese QE is that there hasn’t been nearly enough of it?

    Shouldn’t Japan listen to Prof. Krugman and “Second that Emotion”? Surely massive QE will roll back the deflationary influences and it’ll be a “Merry Christmas, Mr Lawrence” of high inflation and the growing wages to keep up, which everyone agrees would be a good “Index of Possibilities”. And if not, they will they just be left with “Ghosts”?

    Enough of the New Romanticism, do you know what proportion of the JGB market the BoJ now owns?

    • Hi Andy

      Well if we go back to an earlier musical era and do some “Dicovering Japan” then Reuters reported this on the JGB market last November.

      “The BOJ already owns Japanese government bonds (JGBs) worth 200 trillion yen ($1.76 trillion), or 24 percent of all public debt in issue. Last week, it raised its annual bond-buying target from 50 to 80 trillion yen. Assuming public spending remains stable, another 7 percent of all outstanding JGBs will succumb to the central bank’s gravitational pull next year. If yen-printing continues at this pace, the BOJ could own half of Japan’s government bonds by 2018.   ”

      I am not sure what more QQE in Japan can achieve after all JGB yields are so low anyway.Of course investors in Japanese shares would welcome it.

      • “The BOJ already owns Japanese government bonds (JGBs) worth 200 trillion yen ($1.76 trillion), or 24 percent of all public debt in issue. Last week, it raised its annual bond-buying target from 50 to 80 trillion yen. Assuming public spending remains stable, another 7 percent of all outstanding JGBs will succumb to the central bank’s gravitational pull next year. If yen-printing continues at this pace, the BOJ could own half of Japan’s government bonds by 2018.” – So a ways to go before the BOJ catches up with the BOE then!!!! (30% of all public debt owned by BOE)

  3. Hello Shaun,

    regards “This is why, from a longer-term perspective, falling oil prices will have a positive effect on economic activity
    and will push up prices.”

    I think he meant “push OIL prices up”

    which will cause another slow down, not that I’m in the camp that we are in boom times .

    Rinse and repeat

    It seems we need to pay the middle classes more as they will spend more on services than a few top dogs ever can

    it also is apparent the top dogs are intent on taking the whole pie and don’t want to share anything

    Can any GOP afford to pander to these supa riche anymore ?

    And given that QE has been tried and tried again and the effects are , to say the least, almost impossible to see for the real world , should we keep doing it to support the Matrix fantasy that if the stock market and assets prices fall to real world levels , the world is doomed ?

    When does the last wheel fall of this wagon ?


    • Hi Forbin

      The Deputy Governor’s speech went on and on and on about an inflation target of 2% per annum but then failed to give any convincing argument as to how this boosts the real economy. Of course it does help with public-sector debt…

      They will keep rolling the wagon forwards even if all the wheels fall off.

      Meanwhile I am sorry to report that the popcorn at the supermarket was 5 pence dearer this week.

  4. Great column, Shaun, as usual. I wanted to apologize for leaving comments on your blog in the past saying that Japan had its own Harmonised Index of Consumer Prices, similar to the euro area’s Monetary Union Index of Consumer Prices or the UK CPI. When I checked today, after reading your blog, I could only find a Japanese HICP being published by the US Bureau of Labor Statistics, by its Division of Foreign Labor Statistics. From an article by Jessica Sincavage, “International Comparisons of Harmonized Indexes of Consumer Prices”:
    it appears from this that what the BLS publishes as the Japanese HICP is simply the Japanese CPI excluding imputed rent. The target population isn’t changed, and since the Japanese CPI excludes one-person households it is quite different from the target population for the Eurostat HICPs. As you know, a lot of countries that do not have their own HICPs essentially exclude owner-occupied housing from their CPIs. When, like Russia and Ukraine, they also update their index baskets annually, the result is likely something closer to an HICP than this so-called Japanese HICP.
    The US HICP that I have been sending you really is a special index that they calculate, trying to match the Eurostat methodology as far as possible. As far as I can see, the only thing the US BLS does not do to conform with the Eurostat definition is update the US HICP basket every year, which would be quite onerous. Instead the basket is updated every other year, like the US CPI. If say, the actual inflation rates in the UK and the US were the same, this would mean that the US HICP would tend to show slightly more inflation than the UK CPI, but the difference would be very small, probably less than 0.1 percentage points.
    I have often complained that Canada is the only country in the G-7 without its own HICP, but it now seems that Japan doesn’t have one either.

    • Hi Andrew

      Thank you for these updates which I am sure that others apart from me enjoy and value. One of the lessons of the credit crunch era is how different in practice many economic variables that in theory are the same turn out to be! If someone calculated consumer inflation under the different methodologies for a given set of changes I think that the general population would be surprised by the deviations in the numbers published.

  5. Hi Shaun
    I don’t think QE has anything to do with the ‘real’ economy ( if there is such a thing anymore). Its to do with debt and savings and on a global basis. I suspect the timing of the ECB QE has more to do with ( roughly) the same quantity of tightening in China.
    Some of the banking and non-financial debts were socialised, the government debts need to be monetised . At the same time the imbalance of ‘western’ debts and ( mainly) asian savings needs to be reduced.
    Somewhere in the murky depths of the Vampire Squid there is a ledger being used by the CBs. In this ‘fiat quantum space’ there is a plan of sorts to keep the show on the road. And if a by-product is to keep filling the boots of the 0.1% then so much the better, after all the Squid will take a nice cut out of that as well. Unfortunately the losers in this game are the 99.9% in the ‘west’, particularly felt by the declining rump between the ‘gammas and deltas’ and the alpha plusses, approx 40% of the population. Ah well, sacrifices have to be made, don’t you know.

    • Hi JW

      The band continues to play unaware that it is on an economic version of the Titanic. The ledger shows that extraordinary amounts of QE have or are about to be expended but for what? A few equity market highs and some record low bond yields..What about France with a ten-year bond yield of 0.55% tonight?! Poor old HAL 9000 would be convinced it had been lied to again…..

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