With the yen precipitating levels not seen since the very week Lehman collapsed and finally confirmed just how global the crisis was (and would remain), “markets” in Japan and everywhere have begun to “anticipate” (beg?) even more. The yen briefly touched (devalued) 107 to the US$, a remarkable run that threatens to even further upend the now-very weakened state inside the Japanese system. There is nothing so dangerous to a currency regime as widespread economic contraction set against the “printing press.”
It does not matter that the Bank of Japan neither possesses nor intends to enforce a “printing press” measure, as QQE is as its related cousins being used elsewhere. The BoJ may have blown past its own “banknote principle” but that does not mean a technical monetization of debt or anything else is at work. That is being left to China and Europe where central banks also on the precipice of something worse are now actively engaging in asset allocation, though not direct in nature (just yet). Until a central bank actively lends directly to an economic agent (or government) monetization is not occurring.
But that really doesn’t matter, as what really matters is perception. That lends so much credence to why monetary policy no longer contains money and is instead aimed squarely at “hearts and minds” rather than a pile of cash in a vault. Governor Kuroda is stuck – he has to say that the economy is performing and that he is “comfortable” with the yen since he cannot admit what “markets” are already moving toward. That would be too dangerous as a predicate condition for the worst of the worst.
Go back almost eighteen months, to early April 2013 when QQE was debated in the BoJ policy meeting. What was said then was as conclusive as a central banker(s) will ever get:
Members concurred that the Bank should shift away from its gradualistic approach and stop adopting easing measures in an incremental manner. In relation to this point, some members expressed the view that it was important for the Bank to introduce a policy that would have an impact in terms of scale, so that the markets would perceive that it had decided to take all necessary measures to achieve the price stability target of 2 percent.
In more raw terms, they opted for the Krugman approach of monetary “shock and awe”:
They agreed that, to this end, it was necessary to boost demand by exerting influence on long-term interest rates and asset prices, and to drastically change the existing deflationary expectations of markets and economic entities. They continued that the size of increases should be significantly large and unprecedented in scale. [emphasis added]
Again, this is not about money supply, money size or money at all – it is entirely left to perceptions and an attempt to manage and influence expectations. That is it.
In many respects that policy of “boom” has worked, including the abject incidence of positive inflation. What is often forgotten is that this wa not the first “boom” in BoJ monetary history. In fact, you only need not go back very far to see others.
The “shock and awe” part of QE from October 2010 was in the vast expansion of the assets that would come under “eligibility” running alongside its rinban program. They started an execution of purchase targets for everything from discount t-bills, commercial paper, ABCP and corporate bonds, but extending into Japan-style REIT’s and even ETF’s. Clearly, the intent was to create perceptions that the Bank would “do whatever it takes” in order to “force” a recovery, expanding operations into areas once thought totally, completely and utterly off-limits.
And while the overall amount of the operations was modest by current standards, that was the first indication of the BoJ’s willingness to set aside (if not banish) the banknote principle (where the amount of assets, usually long-term gov’t bonds but in Japan’s case there resides so much more, is never to exceed the amount of banknotes in circulation). All in all it was intended, and let’s not forget fully expected, that such a debasement of operations would “work” since they were going where no one ever thought a central bank would go. By stretching the bounds of monetary discourse into reality, it was fully believed that such “unprecedented” debasement would be enough to change expectations and perceptions.
Of course it failed, though the earthquake and tsunami that followed shortly thereafter often garner the most blame for that. But that program continued, and then in 2012 the BoJ unleashed still another “boom” by scrapping its 0.1% rate floor. They became the world’s first central bank to actually embrace ZIRP as all other central banks (until the ECB this year) were only near-ZIRP (the actual federal funds target since in the US version enacted in December 2008 has been a range of 0% to 0.25%). By taking that measure in 2012 it paved the way for what the BoJ did just this week – buy bills at negative rates.
The longer-term perspective of all this incremental ratcheting is a cycle of breaking through psychology with hope blasted “forward” by increasing regimes of lunacy and the depths to which the central bank will sink beyond anything once thought not long ago to be downright dangerous – with each and every single one of these increasing intrusions failing to do what was both intended and believed a foregone conclusion when they initiated.
There is a significant problem, again moving away from the short and narrow focus on details and only recency bias, when your track of “stimulus” involves raising the level of “dangerous” continuously. Not only might that suggest a reason for the lack of success itself (as investors and financial agents respond not with “helpful” action but rather more appeals to liquidity and relative safety, as we see so clearly in Europe with negative “private” rates proliferating just recently) it proves that the theory of monetary psychology is totally inappropriate as a means to the intended end of actual and sustainable recovery.
The fact that the global economy has yet to see such a thing at the very same time the level of monetary danger ratchets still further is quite revealing. And this is not limited to just Japan or Europe. Each and every instance of “going further” into the dark side may create temporary instances of positive numbers, but those only mask the deeper rifts that are wedged still-further apart in the course of undertaking these “stimulative” pressures. As I have said before, you can’t force an economy to recover and grow healthy by accumulating and enlarging nothing but negative factors.
We should take absolutely no comfort that the Federal Reserve has not gone that far, and is seemingly now headed for an exit. All that means is that the next one will “have” to be further up the scale in order to achieve the same psychological effect (or what the FOMC believes of it). We already know that the Fed has evaluated QE along those lines, seeing very closely the diminished impact that QE3&4 actually had. And, like Kuroda, they are left with the same problem of having to take public acceptance of current economic conditions as more than acceptable as there is no alternative aside from taking QE to the next level (or actually stopping these intrusions altogether, but there is never an option for this ideology and faith).
What is left now is to see just how far these central banks will go, and the dangers they will invite in even thinking about it. Japan is on an edge now, as the “market” is “pricing” yet another failure and deeper(er) counter-response.
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