After nearly three decades of stagnation, Japan in 2013 went all-in, ordering
its central bank, the Bank of Japan, to buy pretty much every bond on the market
with newly-created yen. The BoJ's balance sheet -- a rough proxy for the amount
of money it has created and dumped into the economy -- soared at a rate that
dwarfs, in relation to GDP, the US Fed's QE programs.
But it's not working:
(Bloomberg) - Consumer price gains in Japan remained little more than zero
in June while household spending dropped, challenging the central bank's effort
to spur inflation.
Consumer prices excluding fresh food rose 0.1 percent from a year earlier,
fractionally better than economists estimated. The same measure for Tokyo
showed a 0.1 percent decline.
JPMorgan Chase & Co. and Barclays Plc are among economists estimating
a second-quarter contraction that could sap momentum in inflation that BOJ
chairman Kuroda predicts will pick up later this year.
"I can't see when the BOJ will be able reach the 2 percent inflation target
at all," Yasunari Ueno, chief market economist at Mizuho Securities Co.,
said before today's data. "It appears to be a matter of time before the BOJ
adds monetary stimulus."
Oil has tumbled more than 50 percent from last year's high, squelching early
progress that the BOJ made with unprecedented monetary stimulus in reflating
the economy. Consumer prices excluding food and energy increased just 0.6
percent in June from a year earlier.
Household spending, which dropped in 14 of the past 15 months, fell 2 percent
in June from a year earlier. Retail sales data released earlier in the week
showed a 0.8 percent drop from May while industrial production provided a
bright spot, rebounding more than expected.
There isn't enough momentum in Japan's economy to drive up inflation, said
Yoshiki Shinke, an economist at Dai-ichi Life Research. He sees a contraction
as deep as 2.5 percent last quarter, driven by weaker exports and consumer
spending.
Most economists see the BOJ failing to reach its goal in its timeframe,
with 22 of 35 in a Bloomberg survey this month forecasting that the bank
will eventually bolster stimulus.
Japan is bit of a special case because its population is aging faster than
any other. The country's stores now sell more adult diapers than baby diapers
while its seniors commit more crimes (mostly shoplifting for necessities) than
its teenagers. In that kind of environment it's not clear that any amount of
money creation will produce healthy growth.
But giving up isn't an option because debt continues to soar. The following
chart is a slow-motion train wreck:
So, as the above article notes, "It appears to be a matter of time before
the BOJ adds monetary stimulus."
Which means that Japan will be the first nation to test the modern limits
of debt monetization. Specifically, what does a central bank do when it has
bought all the bonds in its economy and the politicians demand even more? Does
it become the country's largest landlord by buying up office buildings and
apartment complexes? Or the largest hedge fund by vacuuming up blue chip equities
or small caps or derivatives?
Whatever the specifics, at a certain point (arguably already achieved by most
of today's major central banks) it damages the price signaling mechanism that
defines free markets beyond repair.
