The Ultimate Q

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Includes: DBJP, DEWJ, DXJ, EWJ, EWV, EZJ, FJP, FXJP, GSJY, HEWJ, HFXJ, HGJP, HJPX, JEQ, JPN, JPNH, JPNL, JPXN
by: Alhambra Investment Partners

By Jeffrey P. Snider

I for one can't wait for a quadrillion. Nothing could so far both implicate Economists as well as demonstrate the folly of following them like the potential for the Bank of Japan's balance sheet to hit that mark. In the coming months, BoJ will be at the halfway point, though I doubt there will be any celebrations. The central bank has promised to keep on going, stating in its last policy missive, "It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner."

Thus, with no reasonable basis to expect that to ever happen, given no correlation whatsoever between the so-called monetary base and the CPI, we could somewhat realistically expect to witness a single balance sheet into sixteen digits.

It's an astounding thing to write, just as it is to try and comprehend. It wasn't all that long ago that billions meant something, even in yen. Now they are as whatever is less than a rounding error. It is the ultimate debasement of our time, though not in the form it was always understood.

In many ways, the resulting global economy is the perfect opposite of all that, debasement the wrong way. If in 2007, or 1997 in the case of Japan, you were told that the Bank of Japan was to print half a quadrillion on its way to a full one, you likely would have envisioned something like the catastrophic end of Weimar Germany.

That much was expected in some quarters when the Federal Reserve started QE in 2009 with a paltry sum by contrast of less than a single trillion. Thus, we have arrived at the world of upside down, where the more "money printing" that is done, the less likely anything once expected of it will occur. The economy doesn't heat up in the burning of inflationary circumstances, but instead, grows colder still further into the hell of inactivity.

A quadrillion will prove, as if half of one wasn't enough, in nice round number fashion that they are and have been all wrong for a very long time. By "they" I mean, of course, Economists and their lack of depth of knowledge about anything apart from mathematics.

In the late 1990s, Paul Krugman (and others) asserted that what was missing from Japan, the very key to snapping that economy out of its "deflationary mindset," was a credible promise to be irresponsible; the mother of all money printing operations, so to speak. The Japanese economy in the face of such stated fury would have no choice but to snap out of the doldrums and embrace inflation and therefore recovery at long last.

For policymakers, that was the lesson of the 1990s around the rest of the world. If a central bank claimed a target, the market would immediately entertain that target without the central bank having to do anything. You don't ever fight the Fed. What Krugman argued was that a similar ethos was needed in Japan, meaning that the Bank of Japan should prove beyond all doubt that its targets were the only thing that mattered; so much yen there was no other choice.

What quadrillion will do is to inarguably fulfill that mandate. Who could argue that a single quadrillion is not irresponsible? It would actually be irresponsible to try to make the claim that it isn't (though some are already trying at the level near half of one). The matter could be settled, and the ledger finally cleared of all this money printing nonsense.

At half a trillion yen, markets no more believe in the 2% inflation target now than they did when BoJ's balance sheet was less than €175 trillion at the start of QQE. Convention states that JGB yields are low because the BoJ is buying JGBs, and thus "stimulating" the Japanese economy. There is no evidence that anything is being stimulated, and so in truth, bond yields go lower to reflect that reality. The word "accommodation" has especially lost all meaning except in official statements and the media's uncritical treatment of them:

Looking at the financial conditions assumed in the above outlook, short- and long-term real interest rates are expected to be in negative territory through the projection period as the Bank pursues "QQE with Yield Curve Control." Financial institutions' proactive lending attitudes as well as favorable conditions for corporate bonds and CP issuance are both likely to be maintained and support firms' and households' activities from the financial side. Thus, financial conditions are likely to remain highly accommodative.

This is demonstrably false, as Japanese households in particular have been devastated under QQE; having first attained no better placement beneath any of its prior nine instances (or 20, depending on your definitions). Yet, all these words are continually used as if they still hold their meaning in this context.

JGB yields are a reflection of the state of Japan's households rather than the idea of "accommodation." If that was the correct word to have used, bond yields would be rising and rising rapidly in surrender to that 2% inflation that is still being targeted. Even the bond selloff of last summer was but a minor difference in the overall picture, nothing like what the BoJ still talks about on the path toward a quadrillion.

Furthermore, the recent direction in both JPY as well as JGBs is once more in the "wrong" direction. The less inflation accelerates as planned, the more likely the BoJ gets to ¥1 quadrillion and so the lower bond yields will go not because of the buying but because of the failure of that buying.

Monetary policy has been reduced, no matter how irresponsible, to nothing more than signaling economic distress. This is why the world is upside down, why so much "money printing" can leave no trace as to its existence. There is neither a "Q" nor an "E" in quantitative easing, and there never has been. Up to now, Economists simply believed the deficiency a matter of "Q." Quadrillion is the ultimate "Q," and nobody outside the media believes such an unthinkably large number will actually amount to much. Even monetary officials on this side of the Pacific have begun purging QE from reference, and at a threshold an order of magnitude less.