torsdag 29 november 2012

BOJ to implement QE without limits?

In the land where it's central bank some decades ago actually invented the QE approach things seems to be adding up. Now whats then the solution? Apparently not only more QE but in fact unlimited QE. 

Japan was reported its first ever current account deficit, or certainly, its first for many decades. They have a very overvalued exchange rate, a collapsing export sector, an unreformed domestic economy, a debt challenge that makes Greece’s seem easy to solve, a central bank that doesn’t try too hard – currently – to reach its inflation target and, once again, a very weak economy. 

And that is without even getting into the complex issues of its relationship with China and other Asian countries, that in principle should be as good for them as those countries are for the rest of us. 

Anyhow, we may soon see a general election and a return of the LPD, whose probable 

Prime Minister has told us now 3 times in the last fortnight that he would force the BOJ, if necessary, to pursue a 3% inflation target

This is the sort of thing that many were advising Japan from overseas in the mid to late 90’s when so many people mistakenly lost of lot of money betting against the Yen. Go get all those guys out of retirement as the time has probably come. 

The outlook for the Yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there.  I have been getting more and more negative about the Yen for the past couple of years, and I have, so far, been wrong, but it seems more and more obvious to me, that the moment is here.

Read more:

The history of QE and how it came about:

The original Japanese expression for quantitative easing (量的金融緩和, ryōteki kin'yū kanwa), was used for the first time by a Central Bank in the Bank of Japan's publications. The Bank of Japan has claimed that the central bank adopted a policy with this name on 19 March 2001.[25] However, the Bank of Japan's official monetary policy announcement of this date does not make any use of this expression (or any phrase using "quantitative") in either the Japanese original statement or its English translation.[26] Indeed, the Bank of Japan had for years, including as late as February 2001, claimed that "quantitative easing … is not effective" and rejected its use for monetary policy.[27] Speeches by the Bank of Japan leadership in 2001 gradually, and ex post, hardened the subsequent official Bank of Japan stance that the policy adopted by the Bank of Japan on 19 March 2001 was in fact quantitative easing. This became the established official view, especially after Toshihiko Fukui was appointed governor in February 2003. The use by the Bank of Japan is not the origin of the term quantitative easing or its Japanese original (ryoteki kinyu kanwa). This expression had been used since the mid-1990s by critics of the Bank of Japan and its monetary policy.[28]
Quantitative easing was used unsuccessfully by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s.[12][29][30][31] The Bank of Japan has maintained short-term interest rates at close to zero since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage.[32] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities and equities, and extended the terms of its commercial paper purchasing operation.[33]
So given the indded very, very poor track record related to how improvements in the economy correlates to QE stimuli, and then also considering it has now been going on in Japan for well over a decade one would imagine it's time to trye some new approach rather than to contimue with the QE program? Not so it seems the real viable option to the japanese is not only to continue the QE programs but in addition significantely ramp up the scale and scoope.
Insanety - a definition

Time to replace the QE name with a new one. As QE in reality has nothing to do with trying to improve the overall real economy but in fact is all about tryung to save already insolvent banks it should be named something along these lines - "make taxpayers pay in order to try to delay the imminent and very necessary downzising of the fianancial sector to an acceptable level program".

Then when the Yen is down the drain next to the slaughter is the dollar as the US in a very predictable pattern has followed the Japanese example and QE approach. Only differencve is that the US as it started to enroll on this scheme approximately half a decade later than the Japanese, still has some time to catch up.

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