Photo:Alamy
Stephen:
In Europe, they have austerity and Bail-ins (where you take from your citizens
to give back to the banks). In the US, you’ve had the Fed capable of brazenly
printing notes – only to have them go into yet another pool for the banks and
not the people.
Now
, in what could be another tipping point in the shift from West to East, the
new Bank of Japan Governor, Haruhiko Kuroda, is doing something completely
different. In a massive initiative to cut the economy’s interest rate and
dramatically expand the nation’s money supply, he’s creating a ‘money blast’ – a
stimulus to flood the markets, which could well benefit the entire
world.
Haruhida Kuroda
Japanese Bank Governor Makes History with Monetary Blitz
By
Ambrose Evans-Pritchard, The Telegraph, UK, – April 4, 2013
http://www.telegraph.co.uk/finance/economics/9972754/Japanese-bank-governor-Haruhiko-Kuroda-makes-history-with-monetary-blitz.html
The
Bank of Japan has launched the most daring monetary experiment of modern times,
aiming to double the money base within two years to overpower deflation and
catapult the economy out of slump.
The
blast of money is expected to reignite the yen “carry trade” and flood global
markets with up to $2 trillion (£1.3 trillion) of pent-up savings, giving the
entire world a shot in the arm.
The
BoJ’s new team under governor Haruhiko Kuroda voted 8:1 for a double dose of
“quantitative and qualitative monetary easing”, vowing to inject stimulus for
“as long as it takes” to break the deflation psychology.
“This
will be recorded in economic history books as a watershed in central bank
action. Investors should be shocked and awed,” said Stephen Jen from SLJ Macro
Partners.
The
monetary base will rocket from 29pc to 56pc of GDP by 2014. The pace of bond
purchases will rise to 7.5 trillion yen (£53bn) a month, almost three times the
US Federal Reserve’s stimulus as a share of the economy. The maturities will
stretch to 40 years, ending the three-year cap that has hobbled policy for a
decade.
“This
is a huge sum. It could set off a rip-roaring economic boom if they buy the
bonds from insurance companies and boost broad money by 10pc over the next
year,” said Tim Congdon from International Monetary Research.
Mr
Kuroda said the bank had taken “all available steps” to meet its new target of
2pc inflation within two years. “This is an unprecedented degree of monetary
easing,” he said.
The
scale of action caught markets off guard, sending 10-year bond yields tumbling
to an all-time low of 0.44pc. The yen weakened three “big numbers” to 96 yen
against the dollar, in the biggest one-day move for more than a year. The Nikkei
index of stocks jumped 2.2pc, crowning a 50pc rise since October.
Hans
Redeker, from Morgan Stanley, said the package was dramatic enough to break
“Endaka” – strong yen – once and for all. “The carry trade is going into full
swing. Japan’s institutional funds are going to wind down their currency hedges
from 70pc to a normal hedge ratio nearer 35pc, and that will free up $1 trillion
of overseas lending,” he said.
“This
is a gigantic fixed-income machine. They don’t buy equities and real estate.
They buy bonds, and we think they’ll look at peripheral eurozone markets like
Italy and Spain.”
Japan’s
legendary housewives and grannies – so-called “Mrs Watanabe” – lead a phalanx of
retail investors with another trillion dollars waiting to venture abroad once
again in search of yield. In the 2003-08 cycle, the money leaked into everything
from Australian “Uridashi” bonds and Icelandic debt, to London property.
Simon
Derrick, from BNY Mellon, said Japan’s battle-weary investors may be more
cautious this time, chilled by North Korean jitters and tensions with China. “We
don’t think the climate is yet right for the carry trade,” he said.
Hiroaki
Muto, from Sumitomo Mitsui, said the Kuroda experiment could go badly wrong if
markets started to think the BoJ was printing money to cover Japan’s fiscal
deficits. “At some point, yields could spike”, he said.
Japan
is the only major country yet to start retrenchment. Premier Shinzo Abe is
boosting spending by an extra 2pc of GDP to kickstart recovery, though the
budget deficit is already 9pc.
Japan
has had no trouble raising funds from its captive debt markets so far, but
ageing costs are rising and public debt will reach 245pc of GDP this year.
The
International Monetary Fund says Japan may hit the buffers unless it changes
course soon, warning that confidence can evaporate fast. A 200 basis point rise
in borrowing costs would play havoc with public finances.
Mr
Kuroda played down the concerns, insisting there was no risk of a “sudden” jump
in long-term rates or a fresh asset price bubble.
Japanese
officials say monetary stimulus should protect against a debt compound trap by
cutting “real” rates. While Japan’s borrowing costs look low, they are higher
than in the US, Britain or Germany if adjusted for deflation.
The
Kuroda policy is radically different from past episodes of BoJ stimulus, mostly
half-hearted tinkering to fend off political pressure. It brings the BoJ into
line with the US, UK and Swiss central banks.
The
European Central Bank looks increasingly isolated after it sat on its hands on
Thursday, offering little to soften the credit crunch in Italy and Spain. The
hawkish stance is leading to an over-valued euro. “We’re afraid that the euro
could rise further. That is the last thing that Europe needs,” said Mr
Redeker.
The
euro has risen 32pc against the yen since July, giving Japanese exporters an
edge over European rivals. A Ford executive warned last month that Japanese car
makers are poised to sweep the EU market.
An
army of doubters question whether Mr Kuroda’s shock therapy will feed through to
the real economy. Daragh Maher, from HSBC, fears a “damp squib” outcome that
exposes the limits of central banking, or a “UK replay” where inflation rises
but wages lag, causing a squeeze in real incomes. “Neither would point to a new
era for Japan’s economy.”
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