Kuroda’s triple whammy

The new governor of the Bank of Japan, Harohiko Kuroda, along with the relatively new right-wing government of Shinzo Abe, has launched a triple whammy on the Japanese economy.  The government is already running a substantial budget deficit, implying fiscal stimulus, and it has been trying to talk down the value of the yen with the aim of improving the ‘competitiveness’ of Japanese exports.  And now it has announced the most expansive injection of money supply into a major economy ever, in an attempt to raise ‘expectations’, or what Keynes called ‘animal spirits’, among businesses and consumers to spend more.

Japan’s economy has been stagnating and there is deflation in the prices of transactions in the ‘real economy’.  Now the aim is to raise real growth by causing inflation in the economy – a target of a 2% rate within two years, something not experienced since the 1980s.  So we have the most extreme experiment so far in mainstream economic policies of Keynesian fiscal stimulus and devaluation along with a ‘monetarist’ boost  – a triple whammy.  We shall now see if these can revive a stagnant economy or not.

To gauge the size of the monetary injection, consider that if the US Fed maintains its current planned ‘quantitative easing’ programme of buying government and corporate bonds by printing money up to mid-2014,the Fed’s balance sheet will rise to about 25% of GDP. Under Kuroda’s programme, the BoJ’s balance sheet will reach 40% of GDP by the end of 2014.  Indeed, nearly all the new issuance of government debt over the next two years will picked up by the BoJ.

Here is the weird thing.  You’d think that a government would aim to boost investment and spending to get the economy going.  Instead, the aim is to raise inflation!   That’s because if you don’t want to ‘interfere’ in the capitalist sector or replace it with direct investment by government, you have to find ways of ‘stimulating’ the capitalist economy.  The inflation idea is based on the theory that more money in an economy raises inflation ‘expectations’ and that will inspire more spending, not saving.

Fed chair Ben Bernanke approves of Kuroda’s actions – it’s right in line with his view that central bank policy works if tried hard enough.  He recently argued that if all central banks expanded the money supply together it would ‘enrich-thy-neighbour’ by stimulating the world economy.  But Kuroda’s  deliberate aim of trying to force down the value of yen big time won’t be popular with Eurozone and American exporters if they lose market share as a result.  Is it not just the old-style ‘beggar-thy-neighbour’ policy adopted by national governments in the past?

In a previous post (https://thenextrecession.wordpress.com/2013/02/06/japan-and-the-race-to-the-bottom/) I showed that Keynesian fiscal stimulus policy applied by successive Japanese governments since the end of the credit bubble in 1989 has not kickstarted the economy.  So now we have this uber-Keynesian approach.  Indeed, it is adopting the policy prescription of Robert Farmer, the Californian Keynesian
(see my post https://thenextrecession.wordpress.com/2010/06/02/the-keynesian-answer-support-the-speculators/) that the answer is not to stimulate the economy through more government spending or lowering interest rates, it is to buy stocks and shares.  Stimulate the speculators and this will raise ‘animal spirits’ and thus boost spending in the real economy.

Well, the ‘shock and awe’ effect on the stock market of Kuroda’s announcement has certainly kickstarted the Japanese stock market, which is up 55% since the talk of these measures seeped through, although the Japanese index is still way below the bubble peak of the late 1980s.

N225-bubble-since-1984

So we shall see.  Kuroda is set to buy trillions of yen in Japanese government bonds from the banks and insurance companies.  But what will the banks do with the cash?  Will they hoard it within the financial system, buying stocks and bond at home and abroad?  If so, the cash will not get through to the real economy.  Is Robert Farmer right that a rising stock market will create the environment for investment and growth in the real economy?   Will a falling yen lead to export-led growth (remember 40% of Japanese exports are priced in yen and so do not gain from devaluation)?  Or will we find in two years time, that the Japanese economy is still stagnant?  I’m taking bets.

7 Responses to “Kuroda’s triple whammy”

  1. duvinrouge Says:

    If the crisis is a crisis of overproduction caused by excessive debt, then more debt isn’t going to resolve the problem.

    This is not to ignore the role of the rate of profit. It may well be that the increase in debt is a reaction to a falling rate of profit. The debt enables production to continue ahead of what can be realised in the long-run, but eventually, as we saw in 2008, debt saturation causes a financial panic.

    Markets have been calmed since then by governments & central banks taking some of the debts onto their books. So now we have the solvency of governments & central banks called in question. They can of course just print money. It looks like inflation will take off!

  2. paulc156 Says:

    “Will a falling yen lead to export-led growth (remember 40% of Japanese exports are priced in yen and so do not gain from devaluation)?”

    I don’t get this. If a hundred yen is worth one dollar and the yen halves in value to 200 yen to the dollar an item priced in yen to the tune of 1000 yen can now be bought for $5 dollars compared to $10 on the higher [yen] exchange rate. The importer still has to convert dollars to yen to purchase the item. So they either sell more goods or raise yen prices and earn more profit. Or are you referring to Japanese firms or subsidiaries abroad trading between themselves without any conversion factors involved?

    • michael roberts Says:

      Well, a Japanese exporter that has priced a contract in yen gets no gain from the devaluation of the yen. The buyer from America will now pay less in dollars for the contract, however. So the buyer may buy more in future as a result. But the yen price stays the same. The exporter could raise the yen price and the buyer would then pay the same in dollars as before devaluation. Then yen profits would rise. So yes you are right that yen contract exporters could gain, eventually, through repricing or more sales. But as you say, if the deal is intra-firm there is no gain for either side.

  3. sartesian Says:

    “To gauge the size of the monetary injection, consider that if the US Fed maintains its current planned ‘quantitative easing’ programme of buying government and corporate bonds ”

    Technically, the Fed’s QE program does not include the purchase of corporate debt– unless you want to classify thesecurities of the GSE’s FNMA and FMAC as corporate debt.

    The Fed’s balance sheet of assets for ALL its crisis-response programs does not show the outright purchase of corporate debt:– Maiden Lanes 1,2,3 where special purpose vehicles that provided funded secured by specific types of collateral; TALF, and all the other acronyms to prop up the commercial paper markets etc. did not execute purchases of corporate debt.

    Maybe the Fed has a program somewhere to buy corporate debt, but damned if I can find it on its balance sheet.

    • michael roberts Says:

      Sartesian, Yes I meant asset backed securities like RMBS. What is interesting is that the BoJ will buy equities too – the Farmer proposal.

      • sartesian Says:

        Didn’t Bank of England do, or attempt, something similar awhile back, with Mervyn God Save the King rolling out a program to directly purchase the corporate debt of “small” and “medium” enterprises?

        Wonder how that has worked out.

  4. Mike Ballard Says:

    What will this quantitative gush do to the savings of Japanese workers? Cut them in half, like those of U.S. savers have been cut in half by the devaluation of the USD?

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