Thoughts on the never seen before actions of the Bank of Japan

The actions of the Bank of Japan, besides being completely wasteful and destructive, just confirm some of the many facts that we already knew:

• Complete lack of independence from the political power
• Complete lack of understanding of economics
• Complete of integrity

On the myth of independence:

(Bloomberg, 5th of October) Increasing risks to Japan’s recovery prompted what may become the biggest threat yet to the Bank of Japan’s independence as politicians seek to redress its failure to end the deflation entrenched in the economy since 1998.
Your Party, an opposition group, plans to submit a bill in the Diet session running through December that would give the government a greater role in BOJ policymaking. Ichiro Ozawa, a former challenger to Prime Minister Naoto Kan whose calls for currency intervention and enlarged fiscal stimulus have been adopted by Kan, made a similar proposal last month.

The debate comes after BOJ Governor Masaaki Shirakawa refused to expand monthly purchases of government bonds this year even as deflation persisted. The bank today instead created a 5 trillion yen ($60 billion) fund to buy bonds and other assets, and pledged to keep its benchmark interest rate at “virtually zero” until the end of deflation is in sight.
[...]
Shirakawa, 61, has repeatedly signaled concern that purchases of government debt at some point will be viewed by investors as a central bank effort to finance deficit spending. Japan has the world’s largest public debt, approaching 200 percent of its gross domestic product.

“If government bond purchases by a central bank are regarded as a tool to pay for fiscal expenditure, or an act of debt monetization, that would spur inflation expectations and increase government bond yields,” Shirakawa said at a forum in Kobe, western Japan, on Sept. 26.

Shirakawa’s intransigence has incurred the ire of politicians pressing the bank to boost efforts to end deflation, which erodes corporate profits, makes debt harder to pay back, and enhances the yen’s lure by lifting its purchasing power. The GDP deflator, a gauge of prices across the economy, has fallen 14 percent since 1997, according to data compiled by Bloomberg.

First of all, Japan is in deflation since 1997 according to the government and the central bank. It's amazing to see that after the failure of almost 20 years of ZIRP, all the stimulus/deficit spending, and all the currency interventions and asset purchases done by the government and their central bank, they are still believing that the bank needs to do something against deflation.

I think it's obvious that they tried everything they could and failed.

Please also note that while the Yen was falling against all the other currencies, deflation was still the name of the game in Japan. So the Yen raising is definitely not the reason of Japan's issues. But when you can't expect politicians nor economists to have any sense of what causality is.

I also would like to add that deflation DOES NOT erode corporate profits, if measured in something else than the yen (the USD or gold for example). Deflation DOES NOT make debt harder to pay in the sense that the interest rates fall during a deflationary period (how else could Japan bear the burden of a 200% GDP worth of debt?). Finally, how can one complain that they are getting richer by just doing nothing? How can any Japanese complain that lifting the purchasing power of the Yen is a bad thing?

(Bloomberg, 5th of October — later that same day) -- The Bank of Japan pledged to keep its benchmark interest rate at “virtually zero” until deflation has ended after unexpectedly reducing borrowing costs for the first time since 2008 and expanding its balance sheet.

Remember "Shirakawa’s intransigence"?
Deflation has never ended in Japan, and yet, somehow, they believe that by trying one more time the same thing, they will succeed. Specially since Japan has been in ZIRP forever now.

The bank cut the overnight call rate target to a range of 0 percent to 0.1 percent, the lowest level since 2006, from 0.1 percent, it said in a statement in Tokyo. Policy makers will set up a 5 trillion yen ($60 billion) fund to buy government bonds and other assets, expanding the balance sheet at a time when U.S. and U.K. central bankers are contemplating similar moves.

 What a bold move: moving from 0.1% to 0.0%. This is a not a move in my definition, it's standstill, in ZIRP zone. Flushing $60 billion into the toilet won't do any good and will add later on to the pain.

[...] Today’s move, labeled “comprehensive monetary easing” by Governor Masaaki Shirakawa and his colleagues, still falls short of a wider expansion of debt purchases sought by some politicians.

Remember "Central Banks independence myth"? Politicians are making the monetary policy in Japan. The same holds true for the UK, the US, Europe and every other country with an "independent" central bank.

[...]
The bank also kept the target for monthly purchases of government bonds at 1.8 trillion yen. The statement said the debt bought through the new facility won’t be considered as applying to the BOJ’s rule for keeping its holdings at less than the value of banknotes outstanding.
[...]
The measures widen the Bank of Japan’s arsenal of tools beyond the 30 trillion yen credit program, which extends funds to banks at the 0.1 percent benchmark rate. That facility had failed to halt a contraction in credit, and only about 20.8 trillion of the resource has been used so far, according to money-market brokerage Tokyo Tanshi Co.

It has failed for 20 years. It will fail still.

Japan introduced the zero rate policy for the first time in 1999 and again in 2001, when it also adopted so-called quantitative easing, or targeted injections of funds into the economy.
[...]

Moving the interest rate from 0.1% to 0.0% is not a move. It's the same. Specially when it's not 0.0% but (quote) a range of 0 percent to 0.1 percent.

Oct. 6 (Bloomberg) -- The Bank of Japan may have acted first in a new round of central bank action to prop up the global economy as recoveries in industrial nations falter.

The unexpected decision by the Japanese central bank yesterday to drop its interest rate to “virtually zero” and expand its balance sheet follows the U.S. Federal Reserve’s move toward more unconventional easing. Bank of England officials will consider further stimulus tomorrow, while the central banks of Australia, Canada and New Zealand are among those now holding fire on further interest-rate increases.

The renewed push for easier monetary policy comes as the International Monetary Fund warns growth in advanced economies is falling short of its forecasts ahead of its annual meetings in Washington this week. The dilemma for policy makers is that their actions may do little to revive growth and end up roiling currency markets.

Indeed. Printing money will not create wealth, it will not create economic progress.

We have to realize that credit is not growing mainly because all the credit that could have been taken on, has already been taken.

Finally, for the past 30 to 40 years, GDP growth was due to credit growth and was confused with economic growth, lower interest rates used to work. This was mainly due to a generational addiction to credit that last for about 30 years. Now, there's a secular shift and from addiction to credit we're moving toward rejection of credit.

[...]
The Bank of Japan cut its overnight call rate target from 0.1 percent and established a 5 trillion yen ($60 billion) fund to buy government bonds and other assets.
[...]
Bank of Japan Governor Masaaki Shirakawa may not be alone for long in taking action and Daiwa Institute of Research argues he’s now engaged in a “vicious spiral” of monetary easing with the Fed as both compete to bolster their economies.
[...]
“The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world,” Joseph Stiglitz, a Nobel Prize- winning professor at New York’s Columbia University, said today in New York.
[...]

Joseph Stiglitz is right. He might be Keynesian bouffon, he still can see the reality even if the cures he often suggests are poisonous.

Here are some quotes a column from Bloomberg columnist William Pesek, who's done a good job at summarizing the past 13 years of the central banking experience in Japan and of reflecting on the myth of the independence of central banks.

Oct. 7 (Bloomberg) -- It has been 13 years since the Bank of Japan was freed from the clutches of politicians. What has it done since? Cut interest rates to zero and left them there.

If that’s your definition of “independence” then it’s different from mine. Sure, the BOJ managed to boost rates here and there -- even getting them as high as 0.5 percent. It has since relented. This week, it bowed anew to politicians’ demands to lower its 0.1 percent benchmark toward zero.

Even the BoE, one of the worst central banks on the planet, has 0.5% interest rate as the historical low rate. For the BoJ, it's the highest rate of the past 13 years!

Japan doesn’t cut rates. It shaves them. [...]

Six months ago, it was possible to say we’re in crisis, extreme measures are needed and central banks are doing their part. Now, we must accept that ultra-low borrowing costs will be with us for a while because governments will make sure of it.

Take the world’s other main monetary authorities. In Washington, Ben Bernanke would be called to Capitol Hill the moment the Federal Reserve even hinted at reining in liquidity. Calls for his resignation would pave the way for legislative efforts to install a more agreeable Fed chairman.
[...]
The BOJ may be the vanguard of a fresh round of central- bank action to prop up the global economy as recoveries falter. It’s a reminder that the lines between central bankers and politicians have rarely, if ever, been fuzzier. They are about to get even blurrier as the effects of massive fiscal stimulus fall short and politicians get desperate.

Yet with all the calls for a return of free-market fundamentalism and budget cuts in the U.S., the Fed won’t have much latitude to move away from near-zero rates.

Our romantic notions about autonomous central bankers have long been a bit much. Take the Fed under Alan Greenspan. In December 1996, Greenspan spooked investors with questions about “irrational exuberance” in stocks. Politicians like then- Senate Majority Leader Trent Lott went absolutely ballistic.

Greenspan left asset prices alone after that -- to disastrous effect. If only he displayed a bit more independence, the bubbles that inflated and burst in the early and late 2000s might not have been created.

Central-bank freedom is steadily being curtailed. Concerns that the global economy will follow the BOJ’s trajectory are pointless. The world’s main monetary powers already are like Japan. Just imagine the outcry Bank of England Governor Mervyn King would face if he raised interest rates. It would be politically impossible as lawmakers try to cut spending.

And like Japan, free money isn’t getting much traction. Japan’s rates have been near zero for 15 years and the country is still fighting deflation. The Fed is toying with another round of quantitative easing as hundreds of billions of dollars of public spending fail to lower the U.S. jobless rate.

Notice that there’s less and less talk of exit strategies in markets. [...] 

In Japan, a great premium is placed on fiscal and monetary authorities working hand-in-glove. The lines get mighty blurry when central banks start gobbling up private-sector assets such as corporate debt, commercial paper, exchange-traded funds and real-estate investment trusts.
[...]
Even more so than a year ago, central bankers are acting like reckless bartenders enabling markets. Doling out more and more booze gets politicians off your back, yet the hangover will be nasty. The drinks are free, but the fallout won’t be.