Japan's Inflation Propaganda And Why The BoJ Better Hope It's Not Successful

Tyler Durden's picture

The existing (and ongoing) massive expansion of base money into the banking systems of the US, England, and Japan is without precedent. As Nomura's Richard Koo notes, at 16x statutory reserves, the liquidity 'should' have led to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan.

However, it has not, yet. In short, Koo continues, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. And with no one borrowing money and many actually paying down debt, the money multiplier has turned negative at the margin - because of the severe damage caused to balance sheets when the bubble collapse drove asset prices lower while leaving debts intact (so-called balance-sheet-recession).

This suggests that there is little physical or mechanical reason for the BOJ’s easing program to work. But the program could also have a psychological impact - and Japanese media is on an 'inflation' full-court press currently. The risk here is that not only borrowers but also lenders will start to believe the lies. No financial institutions anticipating inflation could ever lend money at current interest rates. No actual damage will be done as long as the easing program remains ineffective. But once it starts to affect psychology, the BOJ needs to quickly reverse the policy and bring the monetary base back to 'normal'. If the policy reversal is delayed, the Japanese economy (and inflation) could spiral out of control.

 

 

Via Richard Koo, Nomura,

The Money Multiplier... and inflation...

Before Mr. Kuroda was appointed BOJ governor, base money supplied by the Fed under quantitative easing amounted to 16.0x statutory reserves. The corresponding multiples for other central banks were 9.7x for the BOE, 4.8x for the BOJ, and 3.8x for the ECB. If the money multiplier were functioning properly, the money supply would therefore be 16 times larger than it currently is in the US, 9.7 times larger in the UK, 4.8 times larger in Japan, and 3.8 times larger in the eurozone.

 

If such an expansion in money supply actually took place in a short time, it would normally entail a similar increase in prices, leading to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan. The reason why this has not happened will be discussed in detail below.

 

In short, however, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. And with no one borrowing money and many actually paying down debt, the money multiplier has turned negative at the margin.

US and UK have 'not' been a success...

Central bank officials in the US and the UK claim quantitative easing has been a success because it prevented a Japan-like deflation. But, the rate of Japanese wage growth four to five years after the bubble collapsed was roughly equal to the levels now being observed in the US.

Because...

Common to all of these countries is the fact that businesses and households are saving in spite of zero interest rates. They are doing so because of the severe damage caused to balance sheets when the bubble collapse drove asset prices lower while leaving debts intact. Private savings are running at 8.8% of GDP in Japan, while the corresponding figures are 7.0% for the US, 3.3% for the UK, 8.1% for Spain, 8.6% for Ireland, 7.0% for Portugal, and 4.4% for Italy.

 

The fact that businesses and households in these economies are responding to zero interest rates by saving money rather than borrowing and spending aggressively clearly suggests that lending - and hence the money supply - will not expand no matter how much base money the central bank supplies.

 

Growth in private credit has been severely depressed. Even in the US, where conditions are said to be relatively healthy, private credit has yet to recover to pre-Lehman levels.

 

Quantitative easing - whether in Japan, the US, or the UK - cannot directly stimulate the economy or raise the rate of inflation so long as businesses and households refuse to borrow money and spend it.

But still the central bankers try...

Mr. Kuroda and other reflationists would probably argue that the newly announced easing program differs fundamentally from the incremental approach taken thus far because it marks a “new dimension” in aggressiveness. This is correct in one respect and wrong in another. Although Mr. Kuroda argues that the announcement of the current program has had a much greater impact than past announcements, this hypothesis has already been tested overseas, and the medium and long-term results do not support his conclusion.

Ignoring the reality that...

Clearly, the issue is not how aggressively or quickly the central bank eases, but rather the extent of the damage to private sector balance sheets caused by the bubble collapse. These experiences also underline the fact that a great deal of time is needed for businesses and households to repair their balance sheets.

and the empirical proof that...

The limited impact of the bold monetary actions undertaken by the Fed and the BOE suggests we should not expect much from the BOJ’s plan in the medium term in spite of its aggressiveness.

Unintended consequences...

Perhaps more important was why Japan’s interest rates were so low.

 

Essentially, the private sector had stopped borrowing money because of balance sheet problems, the subsequent debt trauma, and a shortage of domestic investment opportunities.

 

With no private-sector borrowers, Japanese banks selling JGBs yielding 0.6% to the BOJ may find themselves forced to reinvest the proceeds in JGBs given the lack of alternatives. If the replacement bond is likely to yield only 0.4%, the correct option is to continue holding the bond yielding 0.6%.

 

In that sense, quantitative easing in Japan has already reached its limits.

And QE may have run its course...

But the fact that businesses and households in both countries are now refusing to borrow in spite of zero interest rates suggests the impact of lower long-term rates may have spent itself

Because...

The underlying cause of a balance sheet recession is a decline in - and ultimate disappearance of - private demand for funds due to a critical shortage of borrowers.

Yet the quantitative easing policies adopted by central banks in the major economies are all designed to increase the number of lenders...

When the problem stems from the lack of willing borrowers, the central bank’s emergence as a new lender is hardly going to improve the situation.

 

If anything, new lending by the central bank will further weaken private sector financial institutions already hurt by excessive competition.

 

An objective analysis of the BOJ’s easing program in light of other countries’ experiences with quantitative easing suggests investors would be wise to rein in their expectations. There is no reason why the money multiplier should turn positive when private demand for funds is nonexistent despite zero interest rates.

The discussion above suggests that there is little physical or mechanical reason for the BOJ’s easing program to work. But the program could also have a psychological impact...

One notorious minister of propaganda is reported to have said that “people will believe a lie if it is repeated often enough.”

 

In today’s Japan the media—and especially the omnipresent variety shows on TV—cannot stop talking about inflation. These commentators are completely unaware that the money multiplier in Japan is negative at the margin even though rates have fallen to zero. They are simply repeating the simplistic view that aggressive easing by the BOJ will eventually generate inflation.

Hearing this from morning to night will cause some people to start worrying about inflation even though there is no way the BOJ’s policies can directly create inflation. If they start to anticipate higher prices and modify their behavior accordingly, inflation could become a reality.

Moreover, the Japanese media has a tendency to move all at once and in the same direction, causing the lie to be repeated even more frequently. It would therefore not come as a surprise if many people changed their behavior in expectation of future inflation.

The problem is - what if the people start to believe...

The risk here is that not only borrowers but also lenders will start to believe the lies. No financial institutions anticipating inflation could ever lend money at current interest rates. A financial institution that suddenly saw inflation on the horizon could not continue holding 10-year government bonds that yield 0.6%. The resulting rush to sell could trigger a crash in the JGB market, inflicting heavy damage on domestic financial institutions.

 

The question is how the Kuroda BOJ would respond to such a crash. If it began buying more JGBs, the monetary base would expand, stoking inflation concerns at a time when private demand for funds was already recovering and the money multiplier had turned positive at the margin.

 

But if the BOJ sold its JGB holdings in an attempt to quell inflation concerns, bonds would drop further, blowing a large hole in the balance sheets of financial institutions and the government.

 

By that time the monetary base could easily have grown to, say, 15 times statutory reserves. In that case the money supply would continue growing, causing inflation to spiral out of control, unless the central bank reduced the monetary base to about 1/15th of its current level.

 

I suspect that the BOJ would employ all the tools at its disposal to achieve this, including a sizable increase in the statutory reserve ratio, but all of those measures would serve to push rates higher, resulting in large losses for the BOJ and other JGBs investors.

Which could rapidly lead to...

If the government bond market crashed, losses on the BOJ’s JGB portfolio would be subtracted from the money it transferred to the national treasury, adding to the fiscal deficit. And if the portfolio was large enough at the time of the crash, it could even raise doubts about the viability of the Bank’s balance sheet.

 

The inflation fears and the talk of large losses at the central bank could then undermine confidence in the Japanese currency. Japan’s national debt now stands at 240% of GDP, domestic industry is being hollowed out, the population is aging and shrinking amid falling birthrates, and even the trade balance has fallen into deficit.

 

The chief reason why people continue to use the yen in spite of these bleak fundamentals is that the BOJ has earned their trust with its anti-inflationary actions.

 

If the BOJ recklessly stokes inflation, triggering a crash in the JGB market and heavy losses on the Bank’s bond portfolio, public confidence in both the currency and the central bank could evaporate overnight.

And don't rely on 80 year old 'proof' since it is different this time...

Mr. Kuroda’s methods have frequently been compared to those of the 1930s-era finance minister Korekiyo Takahashi, who championed a successful policy of BOJ underwriting of government debt issues. But Japanese people in those days could not move money freely overseas. The authorities today need to be especially careful inasmuch as almost anyone can move funds abroad with a telephone call or a few clicks on a computer screen.

Be careful what you wish for...

No actual damage will be done as long as the easing program remains ineffective. But once it starts to affect psychology, the BOJ needs to quickly reverse the policy and bring the monetary base back to a level more in line with the value of statutory reserves.

If the policy reversal is delayed, the Japanese economy could spiral out of control at a time when base money equal to many times statutory reserves is sloshing around in the market.

Moreover, the act of scaling back the monetary base must be carefully calibrated so as to minimize damage to the JGB market. The BOJ, Ministry of Finance, and Financial Services Agency should also have contingency plans in place in the event that easing triggers a crash in the yen or the bond market.

Full article below...

Richard Koo Quantitative and Qualitative Easing 2013 04 16

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lolmao500's picture

Well there's inflation... by depreciation which is really a crime against the people... Abe and Kuroda should hang high.

 If the money multiplier were functioning properly, the money supply would therefore be 16 times larger than it currently is in the US, 9.7 times larger in the UK, 4.8 times larger in Japan, and 3.8 times larger in the eurozone.

 Even more than that since the money multiplier is usually above 1...

DormRoom's picture

The Fed will likely exit QE by the end of this year.  The G7 still needs a large Central bank to increase its monetary base and flood the world with cheap credit (yen carry trade) to support global growth, after the Fed exits.  Europe can't do it because of political complications.  Thus Japan.

The biggest investment assumption by goldbugs is that the Fed will continue QE for a few more years, but with the sudden collapse of gold prices, it may signal that the Fed is exiting by the end of this year.  A 7 standard deviation move in gold prices implies something is up, and the end of US QE maybe nigh.

 

Clint Liquor's picture

Stocksuckers will suffer much more than Gold bugs if the FED quits QE. And of course, Bond holder will be crushed as rates rise without FED support.

blindman's picture

but if they leak the rumors and front run them the
machines can be used to steal everything. let's see
how they do since no one will do anything to stop it.

Perseid.Rocks's picture

Well that's kind of like a perpetual motion machine for the money creators. The Fed creates the money and applies it, thus leading the sheep a certain direction, then it sells first and everyone but them sustain a catastrophic loss. Repeat 2 or 3 times and all money everywhere ends up with the Fed (and whoever they tell in advance). I think I'll sit that one out.

 

Lore's picture

DormRoom

You talk in approved textbook terms, like a student, so your nickname may be appropriate.

The elites made the decision to pull the plug 40 years ago.  It's just taken this long for causal relationships to run their course. You want to see the future?  Look to the BRICS Development Bank. QE is just a mechanism for allowing western bankster elites to reach lifeboats.  When you hear real, meaningful talk about ending QE, you had better not have any money left in Western banks.

JamesBond's picture

you are so on the mark with this analysis.

 

 

jb

DormRoom's picture

Bond holders will not necessarily get crushed, if the BOJ continues to buy up massive quantities of US Treasuries.  Yes, it is a big IF.

Ballin D's picture

If the fed is buying 90% of US bonds, that means the BOJ can be buying no more than 10%, even if they were the sole other source of interest and were buying 100% of the leftovers. The BOJ continuing to buy at these quantities would be largely irrelevent if the supply is increased tenfold overnight.

And this doesnt account for the fed unwinding its current holdings, which will have to happen if they ever want to (or have to) reduce the money supply.

Scarlett's picture

and where exactly will the japanese get the money for that?  By printing?  This money printing is slowly creeping into inflation, as the gov't employees bring their counterfeit money into the economy.  The entire deficits of JP, US, UK are slowly creeping into the economy; the question is how long until money velocity moves.

Ignorance is bliss's picture

More importantly the government will label the Fed a domestic Failure and start printing it's own money without interest. Ergo...the fed will print or dissolve into history.

NoLongerABagHolder's picture

"Bond holder will be crushed as rates rise without FED support"

This is sure mis-informed. The last two times QE ended..... rates TANKED. Don't you recall ole Bill Gross saying the same thing you just said..... and being wrong?

http://pragcap.com/bill-gross-sells-us-government-bonds-does-it-matter

http://seekingalpha.com/article/296928-hyperinflation-where-is-thy-sting-case-for-the-long-bond

Second link shows a chart that has rates after the end of QE 1 and QE 2......

Not sure why it will be different this time.

 

Clint Liquor's picture

You don't seriously believe the FED quit buying US Debt during those periods, do you?

overmedicatedundersexed's picture

were's the beef? in MD our local food stores have raised the price of beef 50% over last year..sea food up- baked beans for all...people look at beef shake their heads and look lost, as in what can I feed my family with.

hidden inflation within a depression, and a news media that see nothing.

NoLongerABagHolder's picture

Beef is up..... great!  Cotton is down! The CRB is down a ton since the chaos of the crisis.

Although your meet might be more expensive, peoples LARGEST expense (housing) is down a ton.

REAL disposable income is higher today than ever: http://research.stlouisfed.org/fred2/series/DSPIC96

Folks are just choosing to use it to pay down debts it seems.

NoLongerABagHolder's picture

So QE 1 aqnd 2 end and rates TANK. So the fed was buying, and QE stopped, but they must have bought 2-3 times as much for the rates to tank?

Right. That sure makes a lot of sense.

The data is what the data is. Rates plummeted BOTH times QE ended. Gross was wrong. You will be too.

Room 101's picture

Your theory implicitly assumes thet the Fed can lower it's purchases of debt.  As the Fed is far and away the largest purchaser of treasuries, their exit from the market would likely cause the interest rate on treasuries to jump, thus increasing debt costs for the US treasury. To me, it looks like the Fed is in a pickle.  Continue QE and destroy the currency or stop QE and risk sovereign default. 

While I personally hope they pick stopping QE, I don't see that happening. More likely is that they'll announce an end to QE but will be lying. "Mystery purchasers" will suddenly be buying treasuries by the wheelbarrow full.     

tango's picture

I agree and have said for some time that the FED has boxed itself into a corner.  It can't afford to keep it going indefinitely and it surely can't afford to stop buying (market crash, higher rates, bigger deficit).   The ONLY way is to force banks to buy sovereign debt (like the EU) or invest our bankrupt pension funds in sovereign debt, I mean treasuries.  LOL

smlbizman's picture

yep the bus can never go below 55....

DocinPA's picture

Bingo.  Obama will NOT stop spending and the 'Pubs won't raise taxes.  Therefore, deficits will continue and the only way to finance those is, as you properly note, Teh ChairSatan.

 

 

Herodotus's picture

When QE stops, Social Security checks stop, or soldiers' paychecks stop, or both.

Where else would the US Treasury get $1,000,000,000,000 that they lack to pay its bills?

 

kito's picture

Dormroom, I'm speechless.......

Room 101's picture

....@kito: speechless?  I find that hard to believe. 

You have the floor, sir. 

This just in's picture

Uhm...

 

Paper (GLD, et al) is draining away at never before seen rates.  Big players are taking back their physical gold, thank you very much.

 

A storm approaches.  Hug your children.

Mine Is Bigger's picture

If you want to lose fat, you could do so by completely stop eating.  But can you stop eating and survive?

Jena's picture

For a little while.  It's that long term thing.

ISEEIT's picture

"The Fed will likely exit QE by the end of this year."

You just haven't been paying attention huh?

Turn OFF the fucking TV idiot.

noless's picture

you are actually saying and believing this shit after boston?

noless's picture

if the BOJ actually overshoots the fed then game over.

Element's picture

 

 

Nah, it's already over, this is window-dressing. From the above:

" ... Growth in private credit has been severely depressed. Even in the US, where conditions are said to be relatively healthy, private credit has yet to recover to pre-Lehman levels. ..."

Given GDP is a function of private credit growth (or else in bizarro-world, Govt spending), all else being equal, and US nominal inflation is unofficially ~9% (according to SGS), does not "severely depressed", growth in private credit implicitly equate to at least a sustained mild but undeclared economic depression hidden by food stamps, unsustainable Govt spending and massive insolvent pseudo-market and pseudo-banking fraud growth instead?

So in REAL terms there's been no net economic growth since Lehman's, just the reverse. All that's happening is the massive financial engineeering dam-wall propping-job that occurred after Lehman's, remains in place, for now. i.e. it's already over, the dam is breached, it just hasn't taken down the whole wall yet. Too big to fail is just a form of backhanded escapism to distract from the fact they already did.

So let's turn on the glitter-ball and half-price drinks all around, on you and me, as the Japs do know how to throw a great depression.

nodhannum's picture

The Fed can't stop at this point.  Can you imagine interest rates going up while we borrow close to ten percent of GDP just to paper over this depression.  Yeah, raise rates in a depression.  Get real.

andrewp111's picture

Who says stopping QE will make rates go up in a Depression? There is no evidence for this whatsoever.

Glitterbug's picture

"The underlying cause of a balance sheet recession is a decline in - and ultimate disappearance of - private demand for funds due to a critical shortage of borrowers."

I don't agree with this statement; the banks are unable to lend (at least, they can't increase their loan portfolio balance).  As I understand it, they can only lend against collateral - if you put 100k in the bank they will lend you 100k. Sounds stupid, but it is so.

We have an ongoing project and we have had to borrow €500,000.  The existing business and premises has been valued at €1.5M.  Surely it would be easy to get a 30% mortgage you say! No chance.

We have to put up cash in advance as collateral, as well as the property!  If you know anyone out there who will lend at the moment, please point them in my direct.  We have €2Million of EU money already, but we are under pressure because of the bank's demands.  So please don't tell me that there is a shortage of borrowers, it's nonsense.

See www.retirodosbispos.com which illustrate the hotel we are constructing, and if you have some excess cash, put it here where it will be safe (in a EU project).  Or take your chance and leave it in the banks - and let them steal it from you.

rebasse @ aol . com

blindman's picture

coordinated central bank strategy to destroy the physical metal market
and wipe out every dealer in the usa, etc...
.
in the form of a question.

kaiserhoff's picture

Funny you should mention that.

No one wants to talk about it, but I know a couple of small scale guys who have their balls in a vice.

Everyone is pullling back because of Obummercare.  This will not end well.

blindman's picture

the central bankers don't want anyone to know what
anything is valued in in their respective currencies.
there is a fundamental reason for that (they want
stuff for nothing).
they are psychotic and I fear there is no cure.
at some point the volatility will ignite into
something at least regionally exothermic. ?

tango's picture

I don't think they're psychotic - simply serial reactionists who keep trying the same old thing in the hope that one time it might work.  But you are SO right about value and this is the hallmark of any central planning system, particularly socialism.  It's been suggested that the reason the USSR collapsed was the inability to determine the price of anything. Determining value is the ultimate goal of any economic system and when you purposely attempt to force value or make it unknowable, it's a form of suicide.  

Without value, every business up and down the ladder is thrown off kilter.  I'd go as far as to say that "economics" for many of these "experts" consists of finding more profitable ways to slodge debt from one computer to another.

holdbuysell's picture

And when it's a 'coordinated devaluation', it's thus not a 'competitive devaluation' as the G-20 has already stated they won't do.

The words are always chosen very carefully.

 

blindman's picture

I think the strategy is to , not devalue the physical but,
redistribute it without having to pay the price that
the little people have to pay to own it. they would like
the value to be high but in the same hands that control the
debt levers and credit creation process as the real goal
is to make people debt serfs, constantly paying interest
on borrowed money. they have realized that there is a class
of people who will honor their debts and a class that won't.
they want that first group loaded down heavy with debt and
they don't want them protecting themselves from the inflation
used to perpetuate their debt status by owning gold or silver
or any investment that might keep them from loans and those
payments to the banks.
the central bankers need people to borrow moar, moar moar
or the system dies.
so they will destroy the prospect of individual pm ownership
and have it all in the central and bullion banks with the exception
of the elites/owners who can do whatever they want. the local coin shops and
dealers are in the bankers cross-hairs as are their customers. imo
am I paranoid?

StychoKiller's picture

Nope, yer NOT paranoid ENOUGH!

Joey Big Balls's picture

In related news, Zerohedge actually did a piece about marijuana on 420, for spliff's sake! 

Skin666's picture

A bug looking for a windshield...

Mentaliusanything's picture

The people just wont drink the Koolaid! Maybe they underststand that it is poisoned.

TheSilverJournal's picture

Japan still has one move left...stop buying US Treasuries.

bank guy in Brussels's picture

Actually, in his essay above, Koo makes clear that Japan has LOTS of positive things to do yet

Kudos to Tyler and ZeroHedge for bringing this piece by Richard Koo of Nomura

He is superb, one of the great economists of the world ... tho I realise he does not fit in to the dominant ZH themes.

But Koo and his ideas ... including making sure that common working people are the ones benefited, with jobs and incomes ... are a good part of why Japan has never had a 'depression' since its giant market crash 23 years ago, and why Japan has remained an okay place economically.

What is missing from Tyler's above summary, is Koo's optimistic presentation of the other parts of the new Japanese government's programme, which Koo thinks could well succeed, and help to avoid the problems mentioned in Tyler's article, if they are implemented promptly.

Koo writes in his Nomura research piece given above:

« One concern is the fact that while the first pillar of Abenomics—monetary accommodation—is already being implemented, the second and third have been slow in coming. I think the base money supplied by the BOJ would come to life if the government announced an accelerated depreciation scheme for capital investment or a bold plan for deregulation of the energy sector.

The Abe administration therefore needs to present concrete proposals for the second and third pillars of its economic strategyas soon as possible.

Other options for the “second pillar” that are being discussed include policies to encourage business investment, such asinvestment tax breaks or accelerated depreciation schemes. If such measures succeeded in ending the private sector’saversion to debt, I think everything would start moving in the right direction at a time when interest rates were low and banks willing to lend.

The third pillar of Abenomics—structural reforms and deregulation—needs to provide the kinds of attractive investmentopportunities that tend to be in short supply in a mature economy like Japan’s.Oft-mentioned candidates for reform and deregulation include energy, environmental businesses, and agriculture. I think policies aimed at achieving more effective use of urban land, enabling residents to live in larger homes for less money, would create significant new domestic investment opportunities.There are few city dwellers in Japan who do not want to live in larger homes. »

smlbizman's picture

this has not changed yet and until it does all the magic in the world aint gonna fix it.......u cannot create a sustainable false demand...i am the dumbest motherfucker in the shed and i know the password is......demand

Offthebeach's picture

Well, Hitler and banker Shecht proved otherwise. That is until their John Law like schemes couldn't make interest only margin calls in non German paper. Of course the lesson was to thus get everyone on paper.
Musing about the central planning ability to continue at the costs to the bottom 2/3rds of intellect pool, 100 years of Marxism, Hitler, Pol-Pot , Greek trannie Michael Dukakis, Low Fat Chocolate milk, low carb supposedly beer and other horrors, we have decades of new new programs, plans, laws, agreements to go. At. A. Minimum.
The sheeple will take it, swallow it, exist it, just like the serfs, peasants, dumb fuk fatties that the are.

suteibu's picture

We are actually discussing government forcing people to move their money here and there like a board game.  In fact, that's the fucking problem. 

As smibizman said, it's all about demand, something the government can not create no matter what it does.  In that regard, and as we have already seen, the more the government tries to create demand, the more people save.