Leave It To The Bank Of Japan

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by: Alhambra Investment Partners

By Jeffrey P. Snider

Japan has seemed unusually put upon by Mother Nature over the past few years, for which we can only express our sincerest sympathy. However, Japan's most pressing problem is entirely man-made stemming from the fact that it was first among the world's "developed" nations to have its economy subsumed by central banking. More than a quarter of a century later, unsurprisingly, the Bank of Japan still is in the business of proving it has no idea what it is doing - and that the Japanese economy will continue to pay the bill for it.

The latest insanity was negative interest rates which only followed the previous insanity which has seen the Bank of Japan buy everything and anything at a pace for which used to trigger historical comparisons to the worst regimes of monetizing. Predictably, it hasn't gone well with the latest experimentation of NIRP blowing up almost immediately upon introduction. Now the BoJ has realized that it may have gone too far in the very place it is counting on to deliver anything positive - Japanese banks.

The rumors today were that the Japanese central bank may offer funding subsidy to banks that are now being penalized by NIRP. The Stimulating Bank Lending Facility, ironically named, currently offers Japanese banks collateral funding at 0.0%. If the whispers are true, BoJ policymakers are considering dropping that rate also negative, especially if the other whispers about deeper NIRP all prove founded. These people just will not stop.

Financial conditions in Japan had long ago left the boundaries of logic and reason, but now they are threatening to enter the realm of pure satire. The idea of QQE was to create reserves or, as it is thought in the mainstream, "money printing." Having made tens of trillions of yen in bank reserves the past three years (curious that there were no national celebrations of QQE's third anniversary this month), the BoJ decides that having "printed" all that "money" banks now need a penalty to actually be made to use them. Having then inaugurated the penalty to get banks to use the "printed money", the central bank is now considering further financial aid to Japanese banks so that their penalty for not using money isn't too severe because they have so much money.

In what can only be a testament to how screwed up the world has become, that isn't even the most absurd sentence I have written this week or even for a column today. Relatedly, in cataloging US policymakers' longstanding unfamiliarity with actual, modern money, I wrote of Ben Bernanke professing to bail out more than a Merrill Lynch or an AIG (NYSE:AIG), as in January 2009, he stated he would go so far to even the true behemoths of Bank of America (NYSE:BAC) or Citigroup (NYSE:C). The reason for his bailout/TBTF stance was similar in so many ways to why the Bank of Japan has wrapped itself in a cocoon or QQE/NIRP loop of irrationality.

The "flow" of "capital" was not capital in any such way, but rather was an enlarging "global dollar short" that was being pushed around the world by the very global, eurodollar banks (shadow banks) that he was prepared to bail out at any cost because he really didn't have any idea what they had done or why they had done it.

Nothing Bernanke and the Committee had done to that point worked and none of them could figure out why, which he explicitly admitted on an emergency FOMC conference call that turbulent January. Rather than give them pause, they decided to just push ahead and do anything for anybody anywhere no matter how far it all traversed from what used to be at least the resemblance of standard order and good conduct. The things that have been done by central banks over the past eight or nine years were at the start of that period believed impossible; it was entirely inconceivable that central banks all over the world would be constantly "printing money", buying any number of different assets, intervening beyond merely buying, and then still devising various schemes by which to make all that work. How much further until some central bank (BoJ, of course, the leading candidate) just buys up everything and simply declares the prices or quantities it wants? Are we all that far from it now?

Standing somewhat aloft, you can really appreciate this descent into madness because it is entirely too focused and centered on exactly the wrong things, where economists seem to believe they are the only things - first money and then money demand. There starts "stimulus" first through lowering interest rates; then QEs or "money printing" as to supplement interest rates that can go no less than zero; then penalties for not acting on the QEs as a further supplement beyond zero. Lower, always some kind of lower, stimulates demand for money. Or does it?

In Japan, where the sub-zero rate became effective in February, a survey of senior loan officers showed this week that banks' profit margins from lending to highly rated companies dropped to the lowest level in almost a decade. The BOJ's quarterly survey also showed that demand for credit from large, medium and small-sized firms all dropped.

It is the exact same "problem" that the Wall Street Journal was forced to recognize in describing the very same failure of the ECB's lower, lower, lower program to do anything about lending.

But borrowers will only demand more credit if they have optimistic expectations of future income-and banks will only supply it if they deem them creditworthy. Interest rates, which is [sic] all ECB policy can affect, are less important than economic expectations.

In reality, then, lower only stimulates various schemes for financially managing risk and liquidity, thwarting directly all intents and purposes of central bank central planning. But this isn't a neutral interference, however, as we see most clearly in Japan's real economy where the BoJ absurdities do seem to be having an effect just in the wrong direction.

The downturn of Japan's manufacturing sector gathered speed in April. The Nikkei Flash Japan Manufacturing PMI fell from 49.1 in March to 48.0, its lowest since January 2013 and the second successive month for which the index has signalled [sic] a deterioration in the sector's overall health.

The data were collected over a period when Japan was hit by a series of earthquakes of a magnitude not seen since 2011. It is likely, therefore, that some of the weakness in the latest survey numbers reflects disruptions to manufacturing and supply chains due to the quakes. However, anecdotal evidence from survey respondents also indicated that weak global demand and the appreciation of the yen (up 10% against the US dollar since earlier in the year) were also significant contributory factors behind the downturn in April.

The earthquake surely didn't help, just as the prior one hurt, but the disaster is really the accumulating absurdity of central planners who just won't stop no matter how much they further demonstrate just how little grasp they have on true economics. Ben Bernanke was only sure of one thing during the worst of the crisis; that he could act. Because he "could", he confused that with "should" and squandered any hope of actual reform and recovery. The logical course of any rational interpretation of an existential threat beyond the current grasp is to understand first, not just blindly flail about with your fingers crossed and merely hoping for the best. It is the same scene being replayed the deeper and deeper these central banking arrangements sink into the global muck of surrealist nightmare, dragging the whole global economy down with them.