Beleaguered BoJ Throws Desperate Punches
In a surprise move, the BoJ cut its target rate from 10bp to a range of zero to 10bps, announced a JPY35tn ($418bn) monetary easing program, and launched a JPY5tn asset purchase program. The WSJ reports that the bank acted due to pressure from the government to promote growth, staunch deflation, and blunt the rise of the JPY. These acts seem to us the last wild punches thrown by a boxer soon headed to the mat.
There’s only so much that a central bank can do to overcome fatal societal mores and government policies. We have often noted that Japan has proven unable to procreate and refuses to allow immigration, surely a noxious mixture for any civilization.
Additionally, the government has wasted precious decades fooling around with Keynesian “bridges to nowhere,” and seems unable to offer up any concrete solutions. We are watching the death throes of a civilization. Japan is a "dead man walking."
But dying animals rarely go peacefully. The BoJ has run out room to cut interest rates and while asset purchases can pin down long-term borrowing costs, such action assumes “animal spirits” willing to partake of the low rates.
Unfortunately, Japan will be pressed further into the mire of deflation and yet another “lost decade” as other developed country central banks cut rates and competitively devalue their currencies relative to the JPY. As Robert Zoellick of the World Bank stated yesterday, while currency wars are not likely on the horizon, there will likely be growing tensions over FX policy.
Bernanke's "Ghost of Christmas Future"?
Perhaps Bernanke discerned a “Ghost of Christmas Future” in the BoJ’s desperate attempts to slip the grasp of deflation and stagnation when he spoke last night. Bernanke’s address last night was titled, “Fiscal Sustainability and Fiscal Rule,” and it didn’t include much on monetary policy – his professional expertise.
Bernanke spoke of our fiscal challenges being the “product of powerful underlying trends,” including the aging of the US population and rising healthcare costs. I’d suggest that the real challenge in the case of the aging of the US population is not the aging, but the utter, nonsensical inability to plan for an eventuality that was foreseen decades ago.
As to the rising healthcare costs, that is partly a function of the “should have been foreseen” population aging, and partly a function of some US politicians’ fascination with the European social welfare state, which is failing so spectacularly right now.
In any event, some critics castigated Bernanke for not stating what the central bank would do to offset these policy issues. I think I know why Bernanke was so silent. Perhaps it was because Bernanke was looking at the BoJ and realizing that the problem was with the elected officials and the populace that put them in office, and that the only thing the central bank could do was provide a morphine drip of quantitative easing to mute the pain. And how does the head of the Fed say that publicly?
Disclosure: No positions