The Bank of Japan (BoJ) has “completed” the formulation of its monetary policy expansion, which began in August when it first expanded the credit availability programme at fixed rates. It pledged to make available additional 10 trillion yen on top of the 20 trillion yen it was providing for three months.
Then, in October, it announced its intention to launch an asset purchase programme, buying various assets from Japanese government bonds to J-Reits to exchange-traded funds (ETF) on the Nikkei 225 and Topix index. It provided more details on 28 October. Five trillion yen worth of new assets would be purchased, of which 500 billion yen would be on ETFs and J-Reits. In its November monetary policy meeting, brought forward to 4-5 November from 15-16 November, BoJ formulated and announced operational guidelines for the asset purchase programme.
Let us not be put off or intimidated by the terminology here. In plain English, BoJ is going to print yen and buy assets with those yen. It is pure and simple inflation of asset prices. It is about putting more money in the hands of investors by announcing the availability of a seller with deep pockets. Pockets with unlimited depth. They can print as much as they want to.
The question is whether this would trickle down to the man or woman on the street in Japan. Workers might benefit if their pension savings are invested in these assets, provided these assets go up in value, at the arrival of the new buyer—BoJ. Otherwise, they have to wait for a “trickle-down” effect. That would happen, provided these are bought from domestic buyers rather than from foreign buyers. Otherwise, gains could and would be repatriated, resulting in zero or limited impact on the Japanese economy.
Then, there is the basic question of whether the size is big enough to make an impact. Five trillion yen is around $60-65 billion. The Japanese economy is around 35% of the size of the US economy. The US has recently announced a $600 billion asset purchase programme (it has not included stocks yet) spread over eight months. Japan’s new programme is only about one-tenth of the size of the US programme. Would it make a dent in the USD-JPY exchange rate? What do you think? I do not think it would, because the US is printing faster and more than Japan does.
Is Japan less justified or more justified than the US in doing these unconventional things? Japan is more than amply justified than the US. It has deflation and a persistent one at that. Its domestic asset prices—land, real estate and stocks—are depressed. There is no risk of creating a bubble in Japan with these modest purchases.
But the question is whether it will work. Demographics are not in Japan’s favour. Old people living on savings do not like inflation. The ecosystem is inherently deflationary. In any case, Japan is not new to quantitative easing or asset purchase programmes. As David Rosenberg wrote in his daily breakfast serving on 5 November, they launched a big one in 2001. If it had worked, they would not be at it all over again.
Perhaps, Japan has only made a modest beginning. More firecrackers could be on the way. If they crank up their programme in the coming months, they would risk a clash with the US, which, too, wants to pursue similar ends with similar means. The world would be awash with liquidity as it was in the five-year period up to 2007.
No wonder, prices of commodities are on a tear. Gold is flirting with $1,400 per ounce. Brent crude oil price is up 25% from recent lows of around $70 per barrel. It is up 10% in the last two weeks alone. Similar is the story with agricultural commodities. The S&P Goldman Total Return Index of agricultural commodities is up 66% since early June, and 10% in the last two weeks alone. Recent rebound in economic data in the US and in Europe—even if they eventually prove to be transient—together with easy availability of liquidity, is a very combustible mix for commodities.
How do growing Asian nations tackle inflation coming from these commodity prices, and other service prices that are going up in any case? Further, there is generalized inflation in Asia due to vigorous economic activity. If Asian central banks raise interest rates, more money would come in. They have to raise it a lot more to put a brake on asset price bubbles forming. That would be unpopular and hence, they are not prepared to do it. Hence, they are creating all-round inflation in cost of living and in their domestic assets.
Would this end well? Juergen Stark, a member of the European Central Bank’s monetary policy council, told the Financial Times in an interview last year that we were clinging to the economic models that had failed us in the last 15 years. QED.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at email@example.com
To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk