The Bank of Japan is embarking on a final effort to stoke its economy by turning up the Yen printing press to 11. After all, Japan must keep up the race to debase with its trading partners.
Virtually all the world’s central banks are Keynesian, which is more akin to religious rather than economic doctrine. Religion is based on faith. If one follows the religion and does not receive the desired effect, the problem cannot possibly be the divine doctrine meaning it is not being followed in the proper fashion. If praying is not working, then it is because one is not praying enough.
So it is with the Keynesian cult. Money printing is always the answer. If this is not working, it is because money is not being printed on a grand enough scale.
As such, the Bank of Japan is taking the following steps to promote a 2% inflation rate in its economy:
- Switching the target from the overnight call rate to the monetary base
- Doubling bond purchases from ¥3.8tr to ¥7.5tr
- Purchasing all durations of debt rather than just the shorter-dated issues
- Increasing ETF purchases by ¥1tr per year and REITs by ¥30bn
- Removing the limit on debt holdings to outstanding currency
This is not a new plan, merely a souped-up version of previous episodes of money printing. The new head of the BoJ, Haruhiko Kuroda, believes that this round of money printing will finally be the one to revive Japan’s moribund economy after nearly two decades of stagnation. The goal of the plan is to create a wealth effect for Japanese consumers that will induce them to increase their spending.
If the Bank of Japan succeeds, it will initiate the Japanese debt crisis. The benchmark JGB pays less than a half a point a year in interest. With a deflation rate of 2%, this is a good return. Under a 2% inflation rate, JGB yields will have to rise to compensate the lender for use of his capital accordingly. Japan cannot afford to pay a higher interest rate on its debt.
This is the problem. An interest rate of 2% on JGBs effectively doubles the interest costs for the government, and it cannot afford this. Japan will become insolvent, and it will happen quickly.
Japan is too big to fail. As such, there will be a coordinated central bank rescue that may succeed in kicking the can down the road a little further. Remember this when placing those bets against the ¥, the Nikkei 225 and JGBs.