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Japan's Problems Will Not Be Solved By More QE, RBS Warns
One thing that became abundantly clear about QE long ago even if it hasn’t yet dawned on Mario Draghi or Haruhiko Kuroda, is that the practice of monetizing anything and everything that isn’t tied down (or that you can’t pry from the cold dead hand of an institutional investor), is subject to the law of diminishing returns.
Put simply: eventually it just stops working in terms of stimulating aggregate demand and/or boosting growth and inflation expectations.
Unfortunately, the deleterious effects of QE are not subject to the same dynamic.
That is, when you print another say, €750 million to monetize everything from periphery EGBs to SSAs to munis, you invariably impair market liquidity on the way to creating the conditions for dangerous bouts of volatility (see the great bund VaR shock for instance).
Of course when you go full-Kuroda and simply corner the market for ETFs by stepping in to provide plunge protection at the first sign of Nikkei weakness, there’s no telling what kind of chaos you’ve set everyone up for once you step out of the market. Meanwhile, the mad dash to inflate the value of stocks and bonds has served to create enormous bubbles not only in those assets, but also in the things people who hold those assets are likely to buy when they get bored - like real estate and high end art.
In short, the drug addiction analogy (as cliche as it now is) still holds up remarkably well. For a drug addict, the benefits (i.e. the high) diminishes the more the addiction grows, but the harmful effects on the body do not. It’s the same thing with QE. The initial “high” wears off, but the asset bubbles only grow.
Nowhere is this more apparent than in Japan where just last night, we witnessed the unprecedented "quintuple recession":
As if that wasn't bad enough, Japanese business spending dropped 1.3% QoQ - its worst drop since Q2 2014.
Of course the Nikkei is doing just fine, surging right alongside the BoJ's balance sheet.
In honor of Kuroda and his special brand of Peter Pan-inspired, neo-Keynesian madness, we present a bit of color from RBS' Alberto Gallo on Japan and QQE.:
QE infinity? Japan re-enters into recession; the Economy Minister suggests that labour unions are still stuck in a deflationary mind-set. The Japanese economy suffered a technical recession again in Q3, contracting -0.8% QoQ on an annualised basis, following a -0.7% drop in Q2.
Inflation has also fallen back again, reaching 0% in September (below). One major reason for this is weak wage growth.
Why has QQE failed to boost growth and inflation for Japan? Cyclical tools are insufficient to tackle the country’s structural issues. Japan’s problem started in the 1980s, when firms increased debt by 14% of GDP per year to reach 130% of GDP by 1995 (BoJ). This was followed by two decades of slow corporate deleveraging, deflation/weak inflation, near-zero interest rates and compressed bond yields, albeit with few bond defaults. Under PM Abe, the Bank of Japan has stepped up monetary easing by initiating the Quantitative and Qualitative Easing (QQE) programme in April 2013 and expanding it in October 2014.
However, the issues faced by Japan are more structural, including an ageing population, low investment appetite for corporates and a widespread deflationary mindset as suggested by Amari.
Japan’s experience suggests that QE has its limits, and could bring a range of side effects, in our view. These include years of tepid growth (see below), the reduction in secondary trading liquidity, an increase in asset ownership by central banks (the BoJ now owns half of the national ETF market), potential formation of asset bubbles and social problems like inequality.
Ok, so in other words: Kuroda isn't going to be able cure the country's structural problems which include the well worn issue of Japanese demographics as well the much maligned "deflationary mindset" which seems largely immune to the hum of the BoJ's prinitng press. Nevertheless, Japan is all-in and is apparently prepared to keep the pedal to the floor until 2018 when, as we've documented extensively, the game will officially be up (see here for instance).
In the meantime, as Gallo rightly points out, you can expect an impaired secondary market for JGBs, asset bubbles, and rising inequality (all outcomes we've discussed at great length) as Kuroda triples, quadruples, and quintuples down on policies that now seem to be producing around one recession per QE iteration.
Summed up...
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Japan may be the economic catalyst.
Bullshit.
If some is good and more is better, then way the fuck too much is just about right.
So that means RBS has priced the Feds December-DUD even lower. Now that parabolic equity meltup is really making sense.
This G-20 shit is just co-ordinated CB handshaking.
Eh, some tribesmen have made a killing off linking JPY to the S&P, so what if the dying country of Japan adds more poison to the drip.
The only way to contain that balance sheet is to build a giant ice wall around it.
LOL...good one!
all Japan needs to do is 'aplogize' to China over wwii.
its that simple?
the ussa can't cover their backs forever as a colonial fortress for a 'foreign-policy' blunder regarding an assinine 'Asian-Pivot'!
go Hitlary
The picture of Japan's future is both cloudy and complicated by the combination of its massive still growing national debt, an aging population, and their heavy reliance on exports. A recent article in Reuters outlined how Japan is painting itself into a corner when it pointed out the latest fiscal strategy draft being issued by Premier Shinzo Abe lacks the mandatory spending cap. It should be noted the draft is also based on some rather optimistic economic estimates of future events.
This is in many ways about "confidence", the moment it is lost the consequences will be huge. With the government financing almost 40 percent of its annual budget through debt it becomes easy to draw comparisons between Greece and Japan. The obvious difference being Japan is not at the mercy of others and is able to print currency at will.
The bottom-line is the BOJ is in the hot seat and any effort to taper its purchases could cause chaos. Unless the government restores fiscal discipline bond prices will plunge and yields soar on any attempt by the BOJ to cut its bond buying. If it doesn't, fears that the country will monetize its debt will drive funds out of Japan and send the yen into free-fall.
http://brucewilds.blogspot.com/2015/07/japan-and-its-shrinking-number-of.html
That Touchdown photo is priceless Tyler. Well done.
I saved it as an png.{ easy to change format} and named it the, "Abe Kuroda recession of 2015".
There are costs to be paid
(for being ally to United States)
This headline is as meaningful as the statement "Catastrophic brian injury will not be solved by further nail-gun blasts to the temple."
Catastropic BRIAN injury?
Feeling lonely and bold much?
Go seek out your long lost love, Jessica.
discussing unicorn makes me feel rainbow
lets fly to a seveneleven
inequality is a goal, not a problem.
Inequality is irrelevant, in a world full of endlesscentral bank printing.
Every Day is like Sunday gap up or down.
Why are central bankers now saying: getting out of debt by getting more into debt to get out of debt is not a great idea. And you can't print your troubles away.
So what are the Central Bankers going to do, almost zero interest rates and secretly exchange belly button lint for instant cash from Wallet Wizzard.
QE leads to complete facism, that's the end game.
I have been driving Japanese cars for the last 15 years. Now, I have just bought my first Korean car, very impressed. The only things left in my house that are Japanese brand are TV and gaming console. Won't be long...