As I’ve outlined in recent missives, Japan is at the forefront for Keynesian driven Central Bank monetary policy. Japan was not only the first Central Bank to start ZIRP and QE, it has also launched the single largest QE program in history (a single QE program equal to over 25% of Japan’s GDP).
However, in the last few months, the Head of the Bank of Japan, Haruhiko Kuroda has lost credibility for the markets. Specifically:
1) The markets only rallied for a day after he announced NIRP.
2) His claim that there are “no limits” to the monetary policy the Bank of Japan might employ failed to generate a market rally.
3) Japanese lawmakers have begun to openly criticize him.
Regarding #3, consider the following article published in Bloomberg.
The Bank of Japan took a wrong turn by adopting negative interest rates this year, says Takeshi Fujimaki, the Japanese banker turned opposition lawmaker who first called for sub-zero yields two decades ago.
Governor Haruhiko Kuroda’s decision to charge for some deposits parked at the central bank is punishing those who hold the cash he just spent 2 1/2 years pumping into the economy. And the BOJ is boxing itself into a corner because it won’t be able to stop its asset purchases once inflation takes hold, raising the specter of fiscal collapse as yields soar, the 65-year-old lawmaker said.
"The BOJ is trapped,” Fujimaki, who has been predicting an eventual default in Japan over the past 20 years, said in a Feb. 16 interview at his office in Tokyo. “Minus rates weaken the yen and push up inflation, but the BOJ doesn’t have the courage to expand negative rates because that will expedite a fiscal collapse."
Source Bloomberg
Compare this to another Bloomberg article written immediately after Kuroda launched NIRP and before it was obvious that the market had turned against him
BOJ Market Magician Kuroda Pulls Another Rabbit From His Hat
…In the case of Japan, the bold move by Bank of Japan Governor Haruhiko Kuroda shows the lengths that the BOJ is willing to go to end a decades-long economic malaise. Since taking over in 2013, Kuroda has already pushed monetary policy to the limits with an aggressive quantitative easing program of bond and other asset purchases that has blown out the central bank’s balance sheet to about three-quarters the size of the economy. Along the way, the yen has tumbled more than 20 percent versus the dollar.
Source Bloomberg
Kuroda has gone from a magician to being “trapped.” Small wonder as his goal of forcing the Yen lower (the black line below) and pushing the Nikkei higher (the blue line below) has completely reversed.
Now even former IMF economists are admitting Japan has entered the “End Game”
Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned.
Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory.
Source: Telegraph
The situation here is more significant than many realize. Japan first launched ZIRP in 1999. QE was launched there in 2000. So the Bank of Japan has roughly 15 years of experience with the monetary policies that all Central Banks have begun to adopt post 2008.
So if the Bank of Japan loses control of its financial system, it’s only a matter of time before other Central Banks do the same. At that point it’s systemic collapse.
Buckle up… it’s coming. Sooner than most expect too.
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