For almost a year and a half the Bank of Japan has been purchasing assets at around 7 trillion Yen (roughly $64 billion) a month, mostly in the form of Japanese government bonds, in an attempt to boost inflation and the economy.
The Bank of Japan now respectively owns assets equivalent to over 77 percent of Japan’s nominal GDP, without, and this is important, having the intended impact on the economy. What’s more, questions over an effective move into negative interest rate territory and recent back-to-back monster earthquakes in Southern Japan may prompt the Bank of Japan to take measures to further boost domestic spending even further.
For the past several years the government of Japan, alongside the independent Bank of Japan, has been reattempting to jump-start Japan’s economy. First it implemented the massive asset purchases now totaling 405 trillion Yen (roughly $3.7 trillion), in the form of exchange-traded funds and Japanese government securities.
Then in January, the Bank of Japan declared a negative interest rate policy for a number, but not all, of the Bank’s current accounts being held on behalf of other financial institutions. This means banks would begin making money on their future deposits held at the Bank of Japan.
The Bank of Japan has been on a mission to get inflation, or the consumer price index, to 2 percent—which they determined the Goldilocks percent for price stability and path out of deflation. Stymied by an ever-changing global economy, and commodities prices such as oil decreasing, Japan has had trouble reaching 2 percent. As the Bank of Japan has committed to use every tool available to reach 2 percent, a number of experts and advisors hinted towards the Bank of Japan adding extra stimulus sometime this year.
On April 14th and 16th, the southern prefecture of Kumamoto was hit by the largest earthquakes to rock mainland Japan since the March 11th Tohoku disaster. While the assessment to the damage will likely be on-going for a while, large companies in the region have already determined to temporarily suspend operations. Companies include Toyota, Honda, and Sony to name a few.
Central banks have a history of increasing asset purchases following a catastrophe, whether it’s a natural disaster or financial crisis, seeking to deter negative economic growth. Within a week of the March 11th earthquake and tsunami, theBank of Japan determined to increase an already 35 trillion Yen asset purchase program by another 5 trillion Yen.
It’s not determined whether the Bank of Japan will take action at this time, in the near-future, or whether action will be taken through an increase of asset purchases or dipping further into negative interest rates. There still remain questions as to whether the Bank of Japan will ever achieve their dream of 2 percent inflation and what the future impact of these massive asset purchases and negative interest rates will have on Japan and regional economies. However it is more likely the Bank of Japan will announce an increase in asset purchases at their April 27th meeting.
The bottom line is that this extraordinary intervention into financial markets is fundamentally flawed. It’s been underway for two and a half years. So although one could understand the Bank of Japan’s interest in easing the recovery from the recent earthquakes, its approach actually predates them and points to systemic problem with its monetary policy. Continuing on this path is not the answer.
Economics aside—our thoughts and well-wishes go out to those in Kumamot—especially as this author is concerned having my first extended homestay with a lovely family near Tamana-shi, Kumamoto.
