The vast and uninhibited use of quantitative easing (WE) measures in Japan to reflate the economy hasn’t worked thus far, judging by the results. Inflation remains nonexistent—deflation is the real problem, as is the case in the Europe—and the Japanese economy continues to move along at an uneven pace.
In response, the Bank of Japan (BoJ) has gotten increasingly desperate. The central bank recent decided to cut the interest rate it offers to hold excess funds for depositor banks to -0.1%.
This negative rate means that depositors are paying for the privilege of putting their money in the BoJ, a move intended to encourage spending and discourage saving. Japan joins several of its counterparts in Europe who have made the same move, including Denmark, Sweden, Switzerland, and the European Central Bank (ECB).
Believe it or not, the “free banking” we enjoy in the West where banks hold your money without charging you (or even offering you interest) is a bit less common in other parts of the world than one might expect. Nonetheless, this radical move toward negative interest rates is a sign that the BoJ’s governor, Haruhiko Kuroda, is doubling down on the ambitious stimulus plan known as “Abenomics,” named after the country’s popular current prime minister, Shinzo Abe.
Relying On Magic Tricks
The current crop of central bankers serving around the world have earned a reputation for bending the rules of the financial system in order to accomplish goals that defy reality. These would-be magicians treat their respective economies, and by extension the global economy, like the circus that it really is.
In Japan, as has been the case in the fracturing European Union, the aggressive rigging of monetary policy has not been coupled with complementary fiscal policy. In the EU, there is no central fiscal authority, so the individual governments chart their own paths in regard to spending, different as they may be. For Japan, the legislature has resisted falling in line with the obscene spending goals laid out by the Abe administration. This has rendered Governor Kuroda’s attempts at QE even more impotent, denying Abe one of his “three arrows” proposed as a weapon to a defeat the country’s economic woes.
Reaching the country’s inflation target of 2% is appearing more and more unlikely. Meanwhile, the country’s wages are stagnant and its population continues to age and become top-heavy. Looking at the chart below, the BoJ has aggressively expanded its balance sheet to a far greater extent than even the ECB, Federal Reserve, and Bank of England. Over this time period, Japan’s benchmark Nikkei 225 stock index first lost more than 55% of its value (between 2007-2009), then traded sideways for the next four years, only to rally better than 150% between 2013-2015. Now, the Nikkei is mired in its worst start to the year since 1997.
When conventional measures simply won’t do, the BoJ has ventured into fantasy land for its policy prescriptions. Take, for instance, Kuroda’s comments at a conference hosted by the central bank last year:
“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.'”
Citing Peter Pan is entirely appropriate, and Kuroda acknowledged this in a tongue-in-cheek manner. He literally asked everyone to trust that the impossible is possible—like Wile E. Coyote running off of a cliff and not falling until he looks down.
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