While Richard Koo is an employee of Nomura, or a bank which is among those who stand to benefit the most from the BOJ's doomed Banzainomics experiment, he has less than kind words to say about this latest and greatest demonstration of sheer desperation by Japan's Prime Minister, whose tenure may not be all that long - something which perhaps he is not very much against, as Abe is hardly looking forward to being named in the history books as the person who dealt Japan's economic death blow.
To wit:
When evidence meets faith, it doesn’t stand a chance
When a year and a half of aggressive quantitative easing failed to produce a recovery in private demand for funds, the government should have realized that the answer to the economy’s problems was not in monetary policy and shifted its focus to the second and third arrows of Abenomics.
But the reflationists in academia and bureaucracy who are unable to accept that monetary policy is powerless in a balance sheet recession have basically said that if one pill doesn’t cure the patient, try two, and if two don’t work try four, 16, 256....
Most patients would start to question the doctor’s diagnosis before they agreed to swallow 256 pills. But such voices have been erased from Japan’s policy debate.
ECB President Mario Draghi quipped in a press conference on 6 November that “when evidence meets faith, it doesn’t stand a chance.” For those who believe monetary policy is always effective, no amount of evidence that there are times when monetary policy does not work will convince them otherwise.
Ironically, instead of boosting the economy, Abe's latest lunacy will merely lead to even greater Japanese economic devastation and the inevitable quadruple dip. That, or an outright economic depression, one from which the country will not emerge.
Fanning inflation expectations and devaluing the yen will depress domestic demand
Reflationists like Mr. Kuroda argue that people will start borrowing again if they anticipate higher inflation. If inflation is being driven by an excess of demand over supply, the private sector will naturally borrow money to invest in facilities aimed at rectifying the supply shortfall.
But if real demand is not growing—if real consumption is actually declining and the money circulating in the real economy is increasing at a negligible pace, as is the case today—there is no reason why Mr. Kuroda’s promises should convince anyone that inflation is on the horizon.
In fact, most of the price increases reported in Japan recently have been imported inflation fueled by the weak yen. The resulting decline in the nation’s terms of trade implies an outflow of income, which naturally depresses domestic final demand.
So if Japan's QE12 (it may be QE13, we lost count after QE10) won't do much for the economy, what will it do? Well, what else: blow bubbles.
Central bank-supplied liquidity has nowhere to go without real economy borrowing
As I have repeatedly pointed out, the central bank can supply as much base money (liquidity) as it wants simply by purchasing assets held by private-sector banks.
But a private-sector bank cannot give away that liquidity, it must lend it to someone in the real economy for that liquidity to leave the banking sector.
For the past 20 years, Japan’s private sector has not only stopped borrowing money but has actually been paying down existing debt and increasing its savings in spite of zero interest rates.
Traditional economics never envisioned this kind of behavior, but the collapse of debt-financed bubbles in Japan in 1990 and the West in 2008 left many businesses and households owing as much or more than they owned, prompting them to focus on repairing their damaged balance sheets.
QE without private demand for funds only generates mini-bubbles
While Japan’s private sector finally cleaned up its balance sheet around 2005–06, the debt trauma lingered on. That, together with the collapse of Lehman Brothers in 2008, led to a situation in which Japan’s private sector is still saving 5.7% of GDP in spite of zero interest rates and aggressive quantitative easing.
Unless the government borrows and spends this 5.7%, the funds supplied by the BOJ under quantitative easing would never leave the banking system and neither the money supply nor private credit would have increased—in fact, they might actually have decreased.
No matter how much the BOJ eases policy during this kind of balance sheet recession, the liquidity it supplies will not enter the real economy as long as there are no private-sector borrowers. The only result is likely to be the creation of mini-bubbles in the financial markets.
While funds supplied under quantitative easing may provide a temporary boost to the prices of stocks and other assets, at some point those prices will correct unless they are justified by corporate earnings growth and other appropriate measures, and that will be the end of the mini-bubble.
Unless, of course the QE baton has passed to the ECB by then and/or the Fed's QE4. In which case Japan's "mini bubble" will merely merge into the maxiest bubble ever blown by the central banks.
Finally, we are happy to see that Mr. Koo reads Zero Hedge and the Banzainomics [18]term that was conceived on these pages.
Overseas views on QQE2 are divided
Overseas views on the BOJ’s surprise easing announcement can be broken down into two camps: the reflationists, who commend the BOJ for its bold actions, and those critical of the policy, who say it is a symptom of the final stages of Japan’s economic decline.
The critics can further be divided into two groups: those who believe that continuing the current policy of “Banzainomics” will lead to a collapse of the Japanese economy and government finance triggered by a crash in the JGB market, and those who worry that the ongoing devaluation of the yen under this policy will hurt their own countries’ industries.
Of those in the second group, I think the voices from the US and the UK can be safely ignored. After all, what Japan is doing now is exactly what those two countries did six years ago with their reckless quantitative easing and currency devaluation
But the first group’s scenario, in which the BOJ’s reckless attempts to achieve a 2% inflation target trigger a bond market crash and an eventual collapse of the Japanese economy, is of greater concern. After all, it is the same scenario the world’s QE pioneers—the US and the UK—are desperately trying to avert at this very moment.
Collapse it is then. The only question is when.
