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BOJ says it is winning deflation battle

14 Comments

The Bank of Japan (BOJ) on Wednesday held off announcing any fresh measures to stimulate the economy, saying its monetary easing blitz was winning the war on deflation.

The unanimous decision was widely expected, with analysts predicting the BOJ would launch an expansion of its asset-buying plan later this year to counter the effects of an April sales tax hike.

While the increase is seen as crucial to chopping Japan's eye-watering national debt -- proportionately the worst among rich nations -- there are fears it will derail its economic recovery.

The BOJ kept its forecast for the long-sluggish economy to expand about 2.7% in the year to March, saying it "continued to recover moderately", while it also stuck with its 2% inflation target.

The BOJ's monetary policy "will support the positive movements in economic activity and financial markets, contribute to a rise in inflation expectations, and lead Japan's economy to overcome the deflation that has lasted for nearly 15 years," it said in a statement.

BOJ Governor Haruhiko Kuroda is to hold a regular press briefing Wednesday afternoon.

Kuroda unveiled the BOJ's vast asset-buying scheme in April as part of a broader plan by Prime Minister Shinzo Abe to reinvigorate the economy and eradicate years of deflation with a policy blitz, dubbed Abenomics.

Reversing years of falling prices is a key goal of the BOJ's plan, although some analysts are growing increasingly skeptical of its ambitious timeline.

© (c) 2014 AFP

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14 Comments
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Surprise!!! Print enough money and you will get inflation. just hope they as good at stopping it as they have been at starting it.

4 ( +4 / -0 )

Surprise!!! Print enough money and you will get inflation. just hope they as good at stopping it as they have been at starting it.

Here's why stopping it is literally IMPOSSIBLE.

Japan currently spend 25% of it's budget just on INTEREST on it's debt. The more money they print, the more the debt will increase.

Even with the current debt, if the interest rates go as high as 6% (definitely NOT out of the question) Japan will be spending 100% of it's budget JUST on interest. No construction, no social programs, no education, NOTHING.

And guess what the ONLY way to stop inflation is? RAISE INTEREST RATES.

Japan is PURPOSELY creating inflation when they KNOW they simply CANNOT stop it when it starts.

It's like they're trying to start a fire, and all they've got is dry wood and gasoline. NO WATER.

This is NOT going to end well, no matter WHAT happens.

1 ( +3 / -2 )

Surely a good dose of runaway inflation and yen depreciation will monetise the existing debt mountain. seems the only way they will ever afford to get it down to realistic levels.

-1 ( +1 / -2 )

@Wakarimasen: At the expense of the life savings of millions of hard-working people, who will see the fruits of their labor turned to toilet paper. Following this will be a generation who see saving as being for suckers, and who will recklessly spend all that they earn and more. Is that the kind of Japan you want to live in?

0 ( +1 / -1 )

Good stuff gaijinfo. Your analysis is even more PERSUASIVE than Bloomberg. I can feel it from your TYPING.

So powerful.

It's like they're trying to start a fire, and all they've got is dry wood and gasoline. NO WATER.

This is NOT going to end well, no matter WHAT happens.

Oh by the way, NO WATER NO PROBLEM, SOMEONE HAS A LIGHTER! OH YAH~YAKINIKUUUU

0 ( +1 / -1 )

"Japan currently spend 25% of it's budget just on INTEREST on it's debt."

Who or what is receiving that interest income? (One hint: the BOJ buys 70% of the bonds.)

0 ( +0 / -0 )

I do fear that interest rates are going up up up once the BOJ decides it's time to stop creating money out of thin air to buy the debt the government is issuing in order to pay for stuff that it can not afford.

And I do fear that the assets on the BOJ's balance sheet are going to look like sheet when that happens!

Take out insurance by moving some savings away from this place, if you have the means... this is the only way to live a happy and assured life in Japan, I think.

1 ( +1 / -0 )

"...once the BOJ decides it's time to stop creating money out of thin air "

How else can central banks in the 21st century create money?

"And I do fear that the assets on the BOJ's balance sheet are going to look like sheet when that happens!"

Yet another prediction about a JGB crisis. These are getting really, really old. The latest bond auction was oversubscribed by a factor of 3.7 even after the pension fund said it would buy less bonds.

0 ( +1 / -1 )

Buy a commodity....gold,silver,wine,whisky or anything that will keep pace with inflation.

My current return on my latest whisky investment was 1000% - choose wisely and avoid the traps.....

0 ( +0 / -0 )

"gold,silver,wine,whisky or anything that will keep pace with inflation."

Adjusted for inflation, gold was worth $2,100 an ounce in 1980. Now it's worth $1,200

1 ( +1 / -0 )

JeffLee,

Is not the scale of what the BOJ is doing on a completely different level to recent standard central banking practice?

I don't like that the government spends twice as much as it takes in in tax revenues, and has been doing so for years now with no sign of stopping, and that the BOJ is (currently) buying up 70% of that with newly imagined money. I don't like the idea of what happens to the government's ability to repay that debt when interest rates go up in future.

Under a deflation scenario, holding yen and JGBs made pretty good sense.

But now Abenomics would have it that inflation should be 2%. If interest rates are to be kept low, the value of holding yen and JGBs is greatly diminished as real value is lost through reduced purchasing power. Once the BOJ finishes it's current splurge and those trillions of bond sales are out there to be sucked up by something else, I would think interest rates will have to go up to attract buyers. As you say, the BOJ owns 70% of this new debt essentially, they are a gorilla. So if interest rates go up, how much extra tax is the government going to need to take in to pay back it's debts? Or is it finally going to chop some spending (which won't do much about existing debts)? What would both these actions do to the Japanese economy?

Look, I'm just a normal guy, I have no degree in economics or finance. I'm serious, if I am missing something here and it's all going to be hunky dory, fantastic! But If I were to buy an expensive house when floating rates were low, without thinking about what would happen should interest rates rise, I'd likely end up bankrupting myself eventually. As I say I'm not an expert, but to me what is going on doesn't make a lot of sense. It seems like a last roll of the dice. I hope it works, but personally I'm not taking chances.

The latest bond auction was oversubscribed by a factor of 3.7 even after the pension fund said it would buy less bonds.

I personally wonder what on earth the rationale behind buying bonds is. It seems just like the music hasn't stopped playing yet, is all...

1 ( +1 / -0 )

"Is not the scale of what the BOJ is doing on a completely different level to recent standard central banking practice?"

Yes it is. But QE isn't really "printing money." It's swapping assets around, from one balance sheet to another, in the form of numbers and electronic blips. Some of the numbers may get converted into "money" depending on the investment climate. The "debt" exists on paper. Japan could chose to eliminate this debt in an instant, but the BOJ doesn't view this as advantageous.

"Look, I'm just a normal guy, I have no degree in economics or finance."

The best thing I can say is that fiscal debts are vastly different from private debts, especially in a country like Japan. The money remains and circulates within the system, it doesn't get drained out.

"I personally wonder what on earth the rationale behind buying bonds is."

These bonds, like US Treasuries, are backed by the reputation of the gov't's that issue them. Investors see Japan as highly secure, safe and reliable. That's why they stick their money there, despite getting the world's lowest yield. If your concerns were justified, this wouldn't be the case. The proof is in the pudding.

0 ( +0 / -0 )

It's swapping assets around

Indeed. But I see it having a negative / unintended consequence of removing an incentive for the government to get it's fiscal house in order. I do believe a degree of fiscal discipline is a good thing for the long term sustainability of a government's finances. I see Japan has been pushing the envelope for a goodly while now.

The best thing I can say is that fiscal debts are vastly different from private debts, especially in a country like Japan. The money remains and circulates within the system, it doesn't get drained out.

This supposed difference loses me. Japan's system is not closed off from the outside world, far from it. Capital is allowed to flow relatively freely (at the moment). In that respect it doesn't seem disimilar to me and my own spending & borrowing decisions.

These bonds, like US Treasuries, are backed by the reputation of the gov't's that issue them. Investors see Japan as highly secure, safe and reliable. That's why they stick their money there, despite getting the world's lowest yield. If your concerns were justified, this wouldn't be the case. The proof is in the pudding.

I worry that that is true, until it isn't. The only thing I see Japan has going for it is that it has a load of foreign assets, a current account surplus, but this seems to be getting eroded away pretty quickly. Having a reputation doesn't guarantee it forever.

0 ( +0 / -0 )

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