The WSJ's Modest Proposal: The Bank Of Japan Should Buy Oil

We have joked about it in the past: with equities around the globe all correlating tick for tick with the price of oil (supposedly "lower oil is good for the economy", just don't tell that to the stock market), instead of doing piecemeal interventions and monetizing stocks, something which as even Citigroup has noted no longer works, what central banks should do instead is monetize the source of all market problems: oil itself.

We first joked last January that the ECB should do it...

... that the Fed should do it...

... and that Canada, arguably the one developed nation most impacted by plunging oil, should certainly do it.

Key word, however, in all of the above is "joked." After all, by now most traders, and even the Davos billionaires, not only admit, but agree they have all had enough with central bank market rigging and manipulation.

Which is why we were almost surprised when none other than the WSJ proposed that, because "central banks have gone down the rabbit hole... starting with record low interest rates, then purchases of government bonds and mortgage bonds, ultra-accommodative policy progressed in Japan to buying real-estate investment trusts and equity funds" and because "in the looking-glass world of modern central banking, almost nothing is taboo, with even the abolition of cash discussed seriously by top monetary wonks" that it is time to make precisely this joke part of actual monetary policy.

The WSJ's modest proposal: "the Bank of Japan should print money to buy oil. It sounds beyond nonsense. But with central bankers believing six impossible things before breakfast, it no longer seems inconceivable, which is informative in itself."

The WSJ "explains":

Consider the BOJ’s problem. The central bank is creating ¥80 trillion ($700 billion) a year to buy mainly government bonds, one of the biggest programs of money printing in history. It already owns almost a third of the bond market, nearly 2% of equities and about half of exchange-traded funds by value.

 

Nonetheless, Japanese inflation remains quiescent. The yen has been strengthening despite the negative rates introduced last month, making it even harder to push prices up toward the BOJ’s 2% target.

The logic behind the proposal is... fragile.

Because the BOJ keeps digging itself into an ever deeper hole, and because "negative rates have unpleasant side-effects, hurting banks, while bond supply may be limited" and because Japan's QE is running out of bonds to monetize (something we have warned about since 2013), "over the next three years only ¥236 trillion of bonds could be available to buy because banks and insurance companies are reluctant to sell many of their holdings—making it hard to ramp up purchases further... HSBC says that in a worst-case scenario the BOJ would have trouble filling its monthly purchases later on this year", it is time to throw something, anything at the wall, and pray it sticks.

To be sure, the WSJ admits there are even more idiotic ideas are available "such as direct financing of government spending, or abolishing bank notes so interest rates can go deeply negative. None is politically palatable."

But, it adds, "compared with these, creating money to buy oil has several big advantages."

First, it allows the BOJ directly to weaken the currency without dangerous diplomatic repercussions. Oil is denominated in dollars, so yen have to be sold to finance the purchase. But the U.S. could hardly object to Japan importing more oil.

 

Second, purchases by the BOJ would push up the price of crude. Japanese consumers may not see that as a good thing, but investors are fixated on the oil price as a measure of whether to take risk or not. Crude has this year become central to everything from equities to government bonds and currencies, as traders take their cue from the oil price—with the safe-haven yen tending to strengthen when oil falls, as it did again on Tuesday. This market effect gives oil purchases additional power in weakening the yen, compared with buying bonds, and could be particularly powerful.

 

Third, Japan imports almost all its oil and has fewer days’ reserves than the average importer. Building new oil storage would support investment, too.

 

Fourth, it is easy to argue that now is a good time to buy oil, with the price down to a quarter of its 2008 peak. (Although Brent crude at $33 a barrel on Tuesday was not far below the 30-year median of $38 a barrel, adjusted for inflation.)

To be sure the proposal is idiotic on more than one level: as the WSJ admits, "there just isn’t enough oil in the world to help the BOJ print money on the scale it wants for very long. Oil is a big market; the extra supply expected from Iran is worth about $8 billion a year. But $1 billion is no longer the unit of account for central banking. While the total oil market is worth roughly $1.2 trillion a year, Japan can buy only a fraction of that—though of course the higher it pushes the oil price, the more it can spend."

Picture that: a world which is running out of assets for central banks to buy with money they create out of thin air.

Still, we are glad that the WSJ closes on a somewhat so(m)ber tone:

HSBC Chief Economist Stephen King says, the BOJ might eventually move from debating what else it can buy to asking whether these unconventional policies work at all.

And while we can't help but laugh at all of the above, simply because it confirms the epic failure of central planning intervention, something we have railed against since March 2009, we agree with the following: "We have come to the point in Japanese monetary policy—and soon perhaps in the West—where it is hard to tell sense from nonsense."

Indeed we have.