Has monetary policy now reached its limits?

The credit crunch era has been one where monetary policy has been bent twisted and expanded all at once. The opening move in the game of chess was to reduce interest-rates to what were considered to be extraordinary low levels back then. The next was to buy bonds mostly government bonds in what was called unconventional policy back then as Quantitative Easing looked to reduce bond yields. However as time went on and advocates QE sang along to this bit in The Sound of Silence “silence like a cancer grows” then it became well conventional. There were also lending support policies which of course were a critique of ultra-low interest-rates and QE as of course if those two had worked then other polices would not be needed! Obviously official communiques turned their blind eye to such thoughts and logic. We have more recently seen a new phase of interest-rate cuts as more and more central banks have moved interest-rates lower again into negative territory taking many bond yield with them. On that front the chart below is rather eloquent I think.

A negative yield for an oil company. What could go wrong?

As well as actual moves and action central bankers have increasingly deployed what I call Open Mouth Operations where they promise to do things. In spite of the long list of broken promises and failed forecasts they publicly continue with making Forward Guidance which in the UK is at around Mark fifteen as thresholds and dates come and go. In some ways the peak for this sort of thing was this from Mario Draghi of the ECB on the 21st of January.

There are no limits to how far we are willing to deploy our instruments within our mandate

Perhaps he was bopping away to the band 2 Unlimited in the 90s and their biggest hit is stuck in his mind.

The Yen and the Nikkei 225 

This morning has seen this in Japanese markets. From the Financial Times.

The yen surged 2 per cent and equities slumped……..Futures on the broad Topix stock index were trading down 42 points at 1,339. The yen surged 2 per cent to Y109.3 against the dollar.

Actually things went further than that as the Yen continued it surge and has risen through at 108 versus the US Dollar as I type this. Lots of countries and currencies have had an involuntary devaluation as for example the UK Pound £ now buys 158 rather than 162 Yen. If we look for some perspective the FT adds this.

The yen has risen from about Y120 against the dollar this year, despite a shock BoJ move to interest-rates of minus 0.1 per cent in January, hurting Japanese exporters and setting back the central bank’s effort to escape from two decades of on-and-off deflation.

There is obvious FT speak there via the use of “despite” rather than “because of” and the assumption against the evidence that Abenomics will work. That was true even before it became Japanese owned. But let us mark that and move onto equity markets which also continued their move with the Nikkei 225 closing some 3.6% lower at 16,666.

Now with such moves one might conclude that the Bank of Japan had acted and that the half-life of the subsequent equity market rally is now so short that it had fallen by the end of the day. But in fact the announcement was as below.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen……The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank

That was what the apochryphal civil servant Sir Humphrey Appleby would describe as “masterly inaction” as it was unchanged policy. So we note that if the Bank of Japan acts the Yen rises and the equity market falls and if it does not the same happens! The only difference is that acting gives a one day rally for the equity market. We get some perspective on today’s move from Reuters Jamie.

USD/JPY -3%. It’s lost more than 3% on only 5 days since 1998, and only 20 days since Bretton Woods collapse in 1971

There were reasons to act

The obvious one for an inflation targeting central bank was the inflation news this morning. From NHK.

Japan’s consumer price index for March was down 0.3 percent from a year earlier, for the first drop in five months…….Excluding all types of energy and food, the index was up 0.7 percent year-on-year, for a 30th straight month of growth.

As you can see not so good from the Abenomics point of view even if you can manage to live without energy and food. If you find someone like that please let me know! The Bank of Japan was downbeat in other areas.

Comparing the current projections through fiscal 2017 with the previous ones, GDP growth is somewhat lower, influenced mainly by weaker exports that reflect the slowdown in overseas economies. The projected rate of increase in the CPI for fiscal 2016 is lower, mainly reflecting downward revisions in projections for GDP growth and wage developments.

As you can see it is all apparently the fault of Johnny Foreigner or Gaijin and you may note something crushing to Bloomberg which has regularly reported better wage growth is around the corner.

Let us move on from the Bank of Japan which resembles the Titanic and I will leave it to readers to decide whether it is before or after it hit the iceberg.

Other central banks

There was a joint outbreak of “masterly inaction” as the US Federal Reserve, the central bank of Brazil and the Reserve Bank of New Zealand did nothing except put Yes Minister on You Tube. Is that a fluke?

Anyway for the US Federal Reserve it is an utter failure for “Forward Guidance” as in election year the scope for “between 3 to 5 interest-rate” hikes has done a bit more than faded I think.


We are often assured that central banks cannot run out of money yet it would appear that this economic basket case has in fact managed it. From Bloomberg.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases…….Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.

Now let me add a little dose of sanity as the central bank could create the money to pay for those although of course this might push the exchange-rate even lower. However this is a scenario which many “experts” such as Paul Krugman would tell us is “unpossible” as hyper-inflation only exists according to them in the world of “inflation-nutters”.

Venezuela’s inflation, the world’s highest, is expected to rise this year to close to 500 percent, according to the International Monetary Fund.

This is deflationary hyper-inflation and I guess you are all waiting for the Weimar style wheel-barrow quote.

“It’s a very bad sign to see people running around with wheelbarrows full of money to buy a hot dog,”

Ah a poor diet too?


For the seven years or so central bankers and their media acolytes have been singing along to Paul Simon.

These are the days of miracle and wonder
And don’t cry baby, don’t cry
Don’t cry

However these boys in the bubble are finding it increasingly tough going as their Forward Guidance of better days ahead keeps turning into a disappointing reality. I do not know yet what the GDP number will be for the United States today but it will not be great I do know that. This keeps happening although the US and UK are of course doing better than Japan in this regard. They kicked the can into the future but their own actions delayed and stopped the reforms required to make the future strong enough to pick the can up. Still some have enjoyed it.

A loose affiliation of millionaires
And billionaires and baby


Before the Bank of Japan meeting I broadcast my thoughts on TipTV.




17 thoughts on “Has monetary policy now reached its limits?

  1. There’s something slightly surreal about how the ‘unconventional’ has eventually become errrrr…….’conventional’.

    Our banks are still on life support nearly 8 years after the GFC and yet we have the CB’s and Treasuries around the world telling us we’re in recovery mode.

    This latter point passes the academic sniff tests of economists in ivory towers on public sector pensions but it fails the most rudimentary of logic tests.

    If QE has worked,then why don’t they unwind it?

    If we’re in recovery then why has Joe Public still got less real disposable income than 8 years ago?

    If our banks our solvent then why have we still got ZIRP?

    etc etc.

    My faith in our CB overlords has never been so low especially as they managed to create the crisis and still not see it coming.

    Keep fighting the machine Shaun.Love it.

    • Hi Dutch

      It is simultaneously invidious and something of a perversion of language. We find that “unconventional” and “extraordinary” have come to describe their doppelgangers. It is the same with Greece when the Institutions were tweeting “progress” earlier today. I replied that that was only true if you define progress as a 6 years and counting economic depression.

      Yet again this week has so far shown UK banks mostly with lower profits and abroad banks in countries which tell us that negative interest-rates have not affected them have weakened too.

      I am still going strong.

  2. great article as always. Just as an aside, pension fund liabilities are going to be increasing problems for the government:


    government intervention in the gilt markets has destroyed dB pensions. I’m pretty sure large companies like BT and Shell have been spending billions to prop up their pension funds. All money which could’ve been used for investment.

    • Good point Anteos.

      Also worth considering how much extra money has been going to pay housing costs as they’ve been allowed to rise thanks to QE,ZIRP,FLS,HTB 1+2.

  3. Great blog as usual Shaun.
    I looked at that FT article you mentioned and it included this intriguing bit: “Mr Kuroda’s only change was a minor subsidy to earthquake-hit banks on the southern island of Kyushu, providing them with zero-interest loans and exempting more of their balances from negative interest rates.” I thought it wasn’t possible to run regional monetary policies. Has the Bank of Japan found a way to do it?
    Since last month Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has had a pilot Commercial Property Price Index:
    It complements the Residential Property Price Index MLIT has been publishing since 2012. From their numbers, it seems that the Bank of Japan has had some success in inflating prices of residential and commercial real estate.

    • Hi Andrew and thanks for the property price link.

      As ever the big cities are in the van ( Tokyo & Osaka) and something we have discussed before which is the apparent surge in the price of condominiums. I note however that Warehouse property prices seem to be heading south quite rapidly. Another argument for the Bank of Japan to step up its REITS property purchases so it can rig another market!

      As to the regional issue yes this is veering on fiscal policy and the Bank of Japan does have a track history of this as this on the 2011 tsunami shows.


  4. The policies now being pursued by central bankers are based on sheer desperation of which the BOJ is the poster boy. They are nonsense on stilts.

    As to the efficacy of negative rates I offer a quotation from one Benjamin Bernanke: “No one will lend at a negative interest rate; potential creditors will simply choose to hold cash, which pays a zero nominal interest rate.” There you have it: the ultimate word from the man who had the “courage” to flick the switch on the printing presses.

    The central banks are trying to grapple with a World that is not only getting older, and therefore consuming less, but whose rate of population growth is tailing off generally, which further compounds the issue of low growth. Reading Robert Gordon’s book: “The Rise and Fall of American Growth” you can see how we may have already entered a period of lower growth than before purely due to fewer inventions than in previous periods and this makes the situation even worse.

    By pressing what are in effect the wrong buttons the giants of central banking have been busy over the last twenty years making a difficult situation even worse by trying to correct what are structural issues by counter cyclical monetary policy. It won’t work.

    • I’ve been a bit late to the demographics of our current problems.

      I think because it’s glossed over by the CBers and the media,it’s easy to dismiss it.

      The more I read on here and Paul Hodges blog,the more I realise my mistake.

      Thanks for the heads up on the book Bob.

    • “No one will lend at a negative interest rate; potential creditors will simply choose to hold cash,….” – why do you think the authorities are reducing the highest value currency notes and circulating discussion papers amongst themselves re cash abolition?

      Aging demographics do not provide falling demand, this is a myth, remember your basic economics – man has finite needs but infinite wants.

      That only ends when you die. In aggregate the more people have the more they will want so the fall in demand from those dying will fail to cancel the increase in demand from those remaining. Demand continues to increase, albeit slowly in western economies even with their aging populations.

  5. Has monetary policy now reached its limits?

    dont be silly !

    QETI , helicopter money , interest free house loans

    1000 year mortgages , and the wholesale ownership of the stock market by CBs….

    Lookig like state control Soviet style soon

    anyone for a “free” market? hahhahahha

    what could go wrong ?

    ( well lots actually )


    • ‘Lookig like state control Soviet style soon’

      Yep,just keep buying up all the dud collateral and we may arrive at Stalinism via the back door.

  6. Hi Shaun,

    Once again the Bizarro world of Economics has my uneducated little head in a spin. Is there perhaps some graph or index that can help me get my head around the idea of “extraordinary” applying to a set of circumstances that has lasted nearly a (lost?) decade?

    I shall sit here patiently polishing my instruments and awaiting deployment.

  7. Abe and Kuroda with their three arrows remind me of the late Lord Sutch and his promise to abolish winter.
    They are trying to trash the yen and it won’t go down,all the established rules of economics appear to be wrong.
    Or is something else going on the Nikkei dived but the Dow and S&P like the yen when they fall they immediately spring back up.
    Theme, stocks must always be supported currencies like the dollar the yen the euro and pound must remain in a relative range. Gold price must be held in range or the paper currency fraud might be exposed,this can be verified by open interest on the comex or crimex as some refer to it.
    The economies are bankrupt (if you cannot pay back what you owe you are technically bankrupt)
    Everything is rigged they celebrated the downfall of communism they are in the process of recreating their own brand of state control of financial markets.
    They are transferring wealth from the general population to those at the top they vehemently refuse to change course .
    They are not changing course because they are benefitting from the transfer and the public are too illiterate to realise it.
    Young people are know indebted for their university education their housing costs buying is astronomical due to the Banksters and the DB pension schemes have been destroyed by these same policies.
    Yet they tell us the same lies about recovery…”if you tell a lie….tell a big lie…..tell it often then people will believe it”

    • Hi Private Fraser

      I think that Lord Sutch probably was nearer success than those two. I find falls in the Nikkei and Topix intriguing because there are good reasons to think they should not be happening.
      1. The Tokyo Whale that the Bank of Japan is becoming.
      2. The way the state pension fund GPIF is buying more equities.
      3. The Yen is being driven higher by money repatriation some of which should be going into the stock market.

      And yet this year it has struggled especially if the falls after the market close today (another 500 Nikkei points) are still there when the market re-opens next week.

  8. Hi Shaun,

    Shell corp bonds at -0.68% look excellent compared to BTPs with a negative yield. I’d bet that Mario isn’t buying negative yield BTPs with his own money.

    Some central bankers tell us inflation is under control. We should add “under control” to the lexicon with a description “rigging the market through QE and bond purchases so that the market prices do not reflect realistic value”

    And this inflation nutter believes rigged markets are dangerous because they fail to give early warning – which may result in big, painful corrections

    • Hi Expat

      Good point! I think pretty much everyone will be agreeing which of Shell and Italy they would rather own that bond from. Although perhaps not Anatole Kaletsky.

      “But Italy is resuming its historic role as a source of Europe’s best ideas and leadership in politics, and also, most surprisingly, in economics.”

      Mind you the phrase “track record ” does come to mind as he seems to get prominence which makes it something else to be added to my financial lexicon which has had quite a busy day.

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