Kuroda’s Monetary Policy Bazookas and the Failure of Abenomics

ADB's Kuroda Says Additional BOJ Easing Can Be Justified for '13
Haruhiko Kuroda, Governor of the Bank of Japan, speaks during an interview in Tokyo, Japan, on 11 February 2016. His stimulus programmes as BoJ head have sparked international controversy and discourse but have unfortunately ended in a resounding failure.

Since Haruhiko Kuroda became Governor of the Bank of Japan in 2013, he has implemented a labyrinth of monetary expansion initiatives, including the famous quantitative easing programme of ¥‎80 trillion per year and the negative interest rate policy. As a major tenet of the Abenomics reform package, this was intended to stimulate Japan’s ailing economy.

The most pressing issue for both Kuroda and Prime Minister Shinzo Abe is that these reforms did not—even remotely—achieve their desired goals. Inflation is nowhere near the 2% annual target and GDP growth is lacklustre. Since the dawn of the 2008 financial crisis, the Japanese economy has endured five recessions and GDP growth that is stagnant at best.

Abe’s reform package relies heavily on a weaker Yen to increase exports, raise corporate profits, and fight deflation, but this is not materialising either. Since January 2016, the Bank of Japan has improvised a -0.1% interest rate on many reserves and yet the currency has still increased 18% vis-á-vis the US dollar since the new target rate. The asset purchasing programme, which has now been implemented at the ECB as well, has resulted in the Bank of Japan holding 38% of Japanese government bonds. This astonishing figure is more than double the 14% of US government bonds held by the Federal Reserve after its quantitative easing scheme under Bernanke and Yellen.

In a desperate attempt to finally revitalise Japan’s economy, many observers are pointing to helicopter money as a means to increase aggregate demand and hopefully economic output. While this has not been implemented at the central bank level, Abe’s cabinet did approve a 13.5 trillion stimulus programme in August that focuses on public works spending. The recent appointment of Toshihiro Nikai, a long advocate of this variety of spending, as Secretary-General of the Liberal Democratic Party signifies Abe’s commitment to this new plan.

There is one significant problem with this new plan—it isn’t new at all. Following the burst of the Japanese property bubble in the early 1990s, several administrations, notably that of SPJ PM Tomiichi Murayama, initiated massive stimulus programmes in civil projects to jumpstart the economy. In fact, the massive demise of this policy was even used in the United States to argue against the Obama administration’s American Reinvestment and Recovery Act. Like many Western nations, the plight of the Japanese economy is the result of structural forces that are regulatory, tax-related, and demographic.

In their reckless aim to artificially boost the economy, Abe and Kuroda both fail to realise this. While the BoJ Governor said in late 2015 that negative rates were not an option, he proceeded to implement them in January the following year. Any denial of prospective helicopter money directly from the BoJ should likewise be viewed as a tentative hope for the future, not as an actual policy position. After the pledge of a “comprehensive review”, the BoJ has now decided to begin a new yield-curve monitoring programme during the late September meeting.

A glimmer of hope once existed for the Japanese economy: the Trans-Pacific Partnership. Unfortunately, due to populist forces fuelled by demagogues such as Bernie Sanders in the Western world and the Renho-led Democratic Party’s opposition to the deal, this lifeline is unlikely to come to fruition.

As Japan’s international competitiveness continues to decline, leaders in both the BoJ and National Diet will attempt to employ any method possible to save future generations from malaise…

…except the ones that actually work.

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Overinflated and Bursting: Growth Prospects of the US, China, and Global Trade

The port of Singapore is the world's largest transshipment port. Global trade growth is projected to clock in at 3.2% in 2015, the worst performance since the Great Recession.
The port of Singapore, depicted, is the world’s largest transshipment port. Global trade growth is projected to clock in at 3.2% in 2015, the worst performance since the Great Recession.

The International Monetary Fund has again cut its forecast for global GDP growth in its World Economic Outlook, which is now only 3.1%, a decrease of 30 bps from 2014. This is during a time in which the vast majority of the world’s central banks have lowered their discount rate, with some even adopting NIRP. To complicate matters even more, the European Central Bank is in the process of massive quantitative easing program, while the Bank of Japan is anticipated to resume theirs towards the end of October.

This week global growth is based almost solely on asset bubbles created by the economic distortions of central banks. The Federal Reserve in the United States is perhaps the most infamous example, when it purchased $3.7 trillion in securities through open market operations in three rounds of QE from 2009 to 2014. Equity markets in the US are still in this bubble, albeit without quantitative easing, the bull market is beginning to reflect signs of subsiding.

The fundamentals of the US economy are disturbingly weak during this expansion, leaving many to wonder if the Federal Reserve will raise the federal funds rate in the next FOMC meeting. PCE is currently at 0.3% on an annualised basis, far below the level the Fed would consider optimal for raising rates. The latest BLS report was an abject disappointment with only 142,000 jobs added in September and labour force participation diving to a 38-year low of 62.4%. Considering these reports, it is unlikely that a rate hike will occur, however if it does, it will most likely be a small 25 bps, which could place this current bubble in jeopardy.

Projections from the IMF report peg US GDP growth at 2.6% in 2014. This will be strenuously difficult to achieve, as the latest data from the Federal Reserve Bank of Atlanta’s GDPNow index nowcast third quarter growth at 0.9% annualised, combined with 0.6% in Q1 and 3.9% in Q2.

A large feature of the WEO focuses on the state of the Chinese economy. The nation recently underwent the correction of a bubble in the equity market, which quickly prompted liquidity support and trading restrictions from the People’s Bank of China and China Securities Regulatory Commission, respectively. Despite these measures, the Shanghai Composite rests at just over 3,000 at 6 October market closing, equal to the trough evident in late August. Li Keqiang stated on 10 September that the PBOC will not begin a quantitative easing program, which signifies that the Communist Party has finally obtained an elementary level of competence. Due to this burst and subsequent slowdown, the report projects Chinese GDP to grow at under 7% in 2015, the rate long regarded as a technical support.

The highlight of the WEO also the most depressing inclusion. Global trade, which is less affected by myopic actions of central banks, is predicted to grow at only 3.4% in 2015. This level is the lowest seen since the end of the financial crisis of 2008-09 and is unconventionally low during an economic expansion. Global trade has grown significantly faster than other components of the world economy due to increasing levels of globalisation. Growth rates this low reflect that GDP growth is propped up only by central banks.

Despite the plead of many economists, global central banks have continued easing their monetary policy, the only exception being the Reserve Bank of India, and have produced asset bubbles combined with economic stagnation as a result. Many problems facing the world economy, ranging from overregulation to high welfare spending to a lack of property rights, will not be rectified, as the motives for reform are greatly inhibited by the constant cycles promulgated by central banks. While another financial crisis is not the most desirable outcome, it is the only way to restore the proper function of price discovery and create a pathway for policy reform, both from central bank and government.