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Japan's Game Plan Is Doing More Harm Than Good

Japan's Game Plan Is Doing More Harm Than Good

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Wednesday, 21 September 2016 07:22 AM Current | Bio | Archive


The Bank of Japan (BOJ) has spoken. 

There was an easing of policy, but no increase in, what we could call the "tax" that negative interest rates represent. In this context it was interesting to note the Governor of the Bank of Japan Haruhiko Kuroda being mindful of how negative rates can affect banks’ profitability. 

It seems as if central banks are starting to come to terms with the idea that taxing savers and banks via negative rates may do more harm than good. 

Nevertheless, the Bank of Japan did declare that they could tax savers and banks more aggressively in the future with more negative rates if they felt like it.

The easing came in the quantitative policy. There has been a declaration that the margin base will be expanded until inflation exceeds the 2 percent target: “…inflation expectations would be raised through the Bank's large-scale monetary easing under its strong and clear commitment to achieving the price stability target of 2 percent. At the same time, downward pressure would be put on nominal interest rates across the entire yield curve through the Bank's purchases of JGBs.” 

Yes, the BOJ expects, once again, to reach its 2 percent inflation target, but now in 2017. 

As a long-term investor, it could be wise not to read too much in it as already in March 2014 Mr. Kuroda stated: “The inflation rate is expected to gradually return to an increasing trend, and is likely to reach around the price stability target of 2 percent toward the end of fiscal 2014 through fiscal 2015.”

It is also interesting to note that the Bank of Japan did not mention anything about the Japanese consumers' inflation expectations, perhaps because their inflation expectations are considerably higher than 2 percent. 

The natural rate of interest in Japan was declared to be zero percentage point and there will be no maturity target for the Bank of Japan’s holdings of Japanese government bonds (JGB). The aim is to keep the 10-year Japanese government bond trading around its current yield level. The bond has a 0.10 percent coupon and yields at present around minus 0.04 percent. 

This last point is vaguely reminiscent of the United States Federal Reserve’s operations during the 1940s and 1950s. 

Will it work? It seems to have held some equity prices in a knee-jerk reaction. 

However, it is hard to imagine ordinary Japanese sitting at home eagerly awaiting the decision before declaring the Bank of Japan will scrap their maturity target on its Japanese Government Bond (JGB) holdings, and finally we can buy the car that we have been wanting.

Maybe domestic demand will revive on all this, but, at least in my opinion, it does seem a little unlikely.

The policy action is more reminiscent of a gesture rather than something that is going to revive real income expectations and will support growth.

Never forget, the Bank of Japan is, and for good reason, generally regarded as an example of the Japanese concepts of “Tatemae” and “Honne,” or that which appears on the surface is not the same as that which exists in reality.

So much for the Bank of Japan. 

From a global perspective, this all is lot less interesting than the forthcoming decision of the FOMC meeting. 

I’m not expecting a rate hike this time, but we could say the way to a rate hike in December is being prepared. 

Why a Fed rate hike in December? Because inflation in the States is normal; because the labor market in the States is tight and because wage pressures in the States are building.

In fact, this all rather argues that the Fed is behind the curve and it should have been raising rates earlier this year. 

In the Fed’s defense, the incoming data has been so unreliable with so many revisions that the Fed may have found it hard to know what to do in real time.

So, why not raise rates right now? Because the Fed is driven by intellectual disagreements; because there are people at the FOMC who, mistakenly, think that what markets are expecting is in some way relevant and because the political uncertainty surrounding the

Presidential and other elections in November may be an issue. 

Please keep in mind that in addition of the Presidential Election, elections will be held for all 435 voting-member seats in the United States House of Representatives (as well as all 6 non-voting delegate seats) and 34 of the 100 seats in the United States Senate. Twelve state governorships, two territorial governorships, and numerous other state and local elections will also be contested.

It also a fact that the Fed is still tightening quantitative policy right now. This is sometimes overlooked in spite of the focus on quantitative policy elsewhere. The tightening is not dramatic, but the Fed’s balance sheet is falling as a "share" of the U.S. economy (or GDP), signaling, and this is important for investors, less liquidity is available for every dollar of economic activity.

Of course, today, we are also going to get the Fed’s economic forecast including the infamous dot-plot chart of future expectations of the FOMC members today. 

This will, as usual, excite investors although the whole dot-plot chart has become the curse of the FOMC itself as it overly simplifies complex and nuanced decisions. 

This does appear to be one of those things that once started it is difficult to stop.

So, let’s wait and see what we will learn, or not learn, from the Fed this afternoon.  

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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HansParisis
So, let’s wait and see what we will learn, or not learn, from the Fed this afternoon.
fed, economy, rate, japan
951
2016-22-21
Wednesday, 21 September 2016 07:22 AM
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