Notes From Underground: The Significance of Japan’s Monetary Action

A Reuters story today (“Kuroda Sprang Easing Surprise to Head Off Damaging Inflation Forecast”) suggested that the move by the BOJ was a rapid and expedient effort by Governor Kuroda to prevent the markets from believing that the previous Japanese actions to “ignite” inflation had been a failure. The BOJ had been trying to target 2 percent inflation but the recent fall in oil and energy prices was placing downward pressures on inflation, calling into question previous attempts by the Japanese authorities to raise inflation expectations.

I have watched the price of crude oil in terms of YEN to keep readers abreast of the impact of a weaker currency on Japan’s attempt to jumpstart its economy. Abenomics and its “three arrows” has not had great success as of yet as structural reform of the labor market has been slow in lifting wages. Also, the weakened YEN has not been able to generate increased exports as global growth is weak and Japanese corporations off-shored production during the period of the ultra-strong yen.

The post-tsunami nuclear power plant shutdown compounded Japan’s foreign trade problem for the BOJ. High oil imports prevented Japan from generating trade surpluses as the weak yen created a massive outflow of currency to global oil producers. As the OIL/YEN chart reflects (dating back to October 2012), Japan’s oil costs declined 30% and provided Governor Kuroda with the opportunity to push the YEN lower through greater liquidity additions. What this proves to the markets is that Kuroda is ALL IN on igniting inflation and whatever the cost will be dealt with in the future. OIL/YEN is trading around 9000 yen to a barrel of crude post-BOJ meeting, well off its recent highs of more than 10,000 yen per barrel. This is an important indicator for Kuroda so we will also watch if as an indicator of when to expect possible action from the BOJ.


Crude Oil in Yen

Also, the fact that the BOJ vote was a politically tight–5-4, with the Governor’s vote as the tie-breaker–is indicative of the discourse taking place around this very experimental policy. There is a rumor floating around that Prime Minister Abe may dissolve Parliament and call a snap election in order to get public support for his economic policies and maybe even some support for turning on some nuclear power plants. The biggest issue is the next installment of the sales tax increase, which may be another reason that Governor Kuroda moved to increase the BOJ‘s stimulus program. Many in Japan believe a further rise in the sales tax will be a drag on the economy while fiscal conservatives are afraid that failure to curb some of the budget deficit will put pressure on Japanese bonds.

The JGBs are a broken market for the BOJ buys the majority of the securities, which results in a monetization of government borrowing. Kuroda’s response is to go all in on inflation and worry about the effects later. This is the asymmetrical nature of all central bank monetary policy: Stop deflation and worry about the inflationary impact in the future. The Volcker Fed showed the economists it is must easier to stop inflation than to prevent deflation. The Kuroda-led BOJ is conducting a real-time experiment in the theoretics of monetary policy.

The problem for other countries is the pressure it puts on their policy decisions. GREAT PRESSURE IS NOW ON MARIO DRAGHI AND THE ECB. European policy is fractured, unlike the consensus based entity that is Japan. As Kuroda’s efforts reflect, it was still a difficult task to undertake efforts to prevent deflation from taking hold. Equity markets continue to remain the recipients of central bank liquidity but  it is still as theoretical policy fraught with uncertain outcomes. What did Mario Draghi learn from Haruhiko Kuroda. Maybe the next ECB meeting should be held in Tokyo rather than Frankfurt?

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7 Responses to “Notes From Underground: The Significance of Japan’s Monetary Action”

  1. Blacklisted Says:

    If wages can stay ahead of the cost of living, why should CB’s be afraid of deflation? The idea that people will wait to make needed purchases is more absurd than the SNB printing Swiss francs to buy euros.

  2. Blacklisted Says:

    If net income stays ahead of living costs, why are CB’s afraid of deflation? The belief that people will put off needed purchases is more absurd than the SNB printing Swiss francs to buy euros. Since inflation policies have not and cannot work in world where govt’s will never stop confiscating other peoples money, one would think the 99% would be better off with deflation. Oh yah, the establishment could give two sh*ts about anyone that doesn’t help them maintain their jobs, perks, and power.

  3. asherz Says:

    “The Volcker Fed showed the economists it is much easier to stop inflation than to prevent deflation.”
    Volcker broke the back of the runaway inflation by dramtically raising interest rates. Fed Funds reached 20% in 1981.
    Central bankers are between a rock and a hard place today. Through QE and ABS programs they are trying to prevent deflation, (partially caused by too much debt,) and are adding more debt to their own balance sheets. If they then are successful in increasing inflation which will result in higher long rates, how will they service their debt? With the US national debt now at $18 trillion, and Japan having its debt at 240% of GDP, raising rates no longer is a viable option. How do they get around this conundrum? You are right that preventing deflation is difficult, as the string can’t be pushed.
    But everyone keeps dancing.

  4. Yra Says:

    Asherz–this is the Charles prince conundrum of keeping dancing which I know you are referring to but the economists pushing for inflation now–the new button in not Gerald Ford’s WIN–whip Inflation Now –but Bernanke’s SIN–Start Inflation Now—-yes inflation may be a problem later but the present “secular stagnation”,the new mantra of the modeling class takes precedent because with lagging growth rates as far as the eye can see there is no worry about normalizing interest rates and thus the burden of interest costs driving out other public sector expenses—just think of the social programs being minimized once interest rates climb to 3%–

  5. ShockedTo Find Gambling Says:

    Yra and Asherz,

    You hit it on the head. You can’t fight deflation as debt loads continue to increase dramatically.

    It’s like continuously adding 2 gallons of water (debt) into a dinghy and bailing out 1 gallon (QE and ZIRP), and expecting the boat not to eventually sink.

    • Blacklisted Says:

      …and you haven’t even included the ever increasing taxes on the folks (including the lottery scam), the govt’s unstoppable search and confiscation of assets that’s driving capital underground and under mattresses (i.e. FATCA, NSA, civil asset forfeitures, etc.), and the coming replacement of service jobs with robots (accelerated by ZIRP) –

      It’s more like adding 4 gallons of water (govt desperation to hold on to their jobs, perks, and power), and pulling out a gun and shooting themselves in the foot and putting holes in the boat at the same time.

      All of this is highly deflationary, and the FED or anyone else who mistakenly assigns underserved power to the FED has no understanding of global capital flows and the power of the invisible hand. The masses may wake up too late, but they will wake up, and I wouldn’t want to be a FED Gov, a big bank exec, or a figure head at the NSA, DOJ, CONgress, or a major media outlet that has been carrying the water for the establishment.

  6. Blacklisted Says:

    As Denninger notes in this piece ( and in his book (Leverage), those with first access to cheap money and the establishment that suckles at their tit don’t want deflation, and will continue their propaganda – like Lagarde calling deflation an “ogre” that could “prove disastrous for the recovery.” This type of blathering from the “most dangerous woman in the world” (now that Blythe has stepped aside), should hardly be unexpected –

    While Cochrane intentionally refuses to connect the dots that would educate the masses, the simple fact is that even if we did have “one dollar of capital” as Denninger promotes –, nothing will fundamentally change until govt is reformed – which starts with short term-limits (STEP 1 –

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