The War For The BOJ's Balance Sheet Gets Real

Over the past month, the world has finally awakened to the reality that when it comes to easing, there is more than just one central bank (i.e., the Fed). in fact, as we have been showing since early this year, the bulk of the easing over the past 5 months has happened elsewhere, primarily in Europe with LTRO 1+2, and subsequently at the BOE, and more recently at India and Brazil. Yet some holdouts still remain. One of these naturally is China, which everyone would love to see cut RRR or even the benchmark rate, yet which as recent CPI data has shown still has lingering packets of inflation precisely where it hurts: food (and of course recall China's Schrodinger economy). Which leaves Japan, which already eased more a few months back when it expanded its LSAP program... but it is never enough. Needless to say strategists, in their quest to shake any and every central banker here or there for some free money, have been seeing imminent BOJ easing in the form of yet another Y5 trillion LSAP any second now. Yet it is one thing for bankers to do what they are programmed to do, which is demand more free money, it is something very different when politicians step in and defuse the myth that any central bank is even remotely independent, especially when reelection is at stake. As Bloomberg points out this morning, the fight for the BOJ's "independent" balance sheet is starting to get lethal.

The Bank of Japan sees protecting its own balance sheet as more important than ending deflation and spurring the world’s third-largest economy, according to the former minister who led a clean-up of the nation’s banks.


“This isn’t difficult — it’s Economics 101,” said Heizo Takenaka, 61. “They think the balance sheet is more important than Japan’s economy. That’s why they are ok with leaving deflation,” said Takenaka, who served in former Prime Minister Junichiro Koizumi’s cabinet. 


Political pressure for expanding easing was highlighted by lawmakers this month rejecting a government nominee for the BOJ’s board who some saw as lacking enthusiasm for bolder measures. Governor Masaaki Shirakawa and his officials should loosen monetary policy further at a meeting on April 27 after pledging “powerful” easing to achieve an inflation goal of 1 percent, said Takenaka, a professor of policy management at Keio University in Tokyo.

Yet at the end of the day, just how much capacity for expansion at the BOJ is there. Below we show the balance sheet of the Japanese central bank as a percentage of total GDP. At 30% of GDP it is 50% greater than the Fed's. Which means two things: 1) all those years of modest monetization have done absolutely nothing to stem the deflationary tide, and the result is that if politicians win the war for the BOJ, the next easing episode will not be a gradual one, but will be full on Fed-like "sturm und drang" which will result in some major shifts in the precarious balance within the Japanese economy, as Andy Xie explained a month ago; and 2) judging by the relative size of the Japanese and US central balance sheets, who do you think will ease first?