A subscriber observes; Was Japan’s experiences since 1990 a beta test for the United States?

Central bank policy makes sense when we know the Conspiracy

Question: Since most economists view BOJ policy as a failure, why were the other major central banks so eager to engage in the same after 2008?

Answer: To those in control of the financial system, the BOJ’s ZIRP and QE programmes have been successful. These elites have been able to keep the nation-states on an indefinite financial IV-drip, while consolidating global wealth at a breathtaking pace. Essentially, the overbearing weight of debt service precludes sustained inflationary pressure.

If need be, the central banks can work with their member banks to effectively sterilize money stock. Shocks to the system like the coronavirus crisis can also be beneficial and can help to lower bond yields. Indeed, Japan’s economy has recently taken another downturn, which only bolsters the staying power of its QE and ZIRP programmes.

Looking at the chart below, we can see that inflation data in Japan have actually ticked up since the latest large scale round of QE, but the rate of growth has been minimal.

Japan’s CPI since 1998 has barely budged. Of course, Japan’s long-term QE & ZIRP experiment was helped along as Japan has been experiencing population declines. The latest population data (2019 not shown) shows even more declines. This keeps a lid on price inflation.

Chris
As I look at the situation in the U.S. I can’t help but see similarities to the experience of Japan since 1990.

I have to wonder if they (Japan) were a beta test for the U.S.?

Regards
D

Japan’s CPI has been so anemic that nominal GDP is lower than real GDP growth since 1994

The short answer to D’s question is “yes.” I recall reading the transcripts of meetings from 2002 on the U.S. Treasury’s website, between US Fed and US Treasury officials. They are no longer available, but there were discussions regarding how to deal with a sudden drop in demand for US Treasuries at prevailing rates. The Fed and Treasury observed the types of policies that the BOJ were employing and were tentatively encouraged by their results.

The Fed and Treasury also contemplated asset purchases, but did not call it QE at the time. In addition, both parties discussed ways in how they could engage with the large commercials to underwrite and sell cheap UST put options to investors and institutions. This would allow these large holders to cheaply insure their UST holdings against sudden yield spikes. There was also an implied promise that these put options would either expire worthless or that the commercials would be made whole. Indeed, this system is much more managed than most wish to believe.

We can observe how Japan has fared in the face of its longer-dated ZIRP and QE programmes.

For those with assets, this chart is encouraging.  The BOJs total assets as a percent of Japan’s GDP has eclipsed 100%, and yet, Japan’s system is intact, while inflation and GDP growth remain muted.
What does this mean for the United States going forward?

Objective: The owners of the Fed hope to carry out QE and ZIRP without spiking CPI data, which would mean lower bond yields over time. While the BOJs balance sheet has exploded over time, their system remains intact. This is encouraging to the Fed as it may be able to  continue carrying out QE in a similar magnitude if conditions warrant.

The problem with the United States is that its demographics trends are much more favorable than Japan’s (The U.S. added as many people to its population since 2008 than Australia’s total population), but the U.S. dollar is the global reserve currency. Thus, domestic inflationary pressures can be more effectively offshored than with Japan.

The circumstances between Japan and the U.S. may differ, but the objectives are the same; Carry out QE and ZIRP without stoking higher than normal inflationary growth.
Based on the action in the longer-end of the yield curve, QE has worked as intended
The BOJ buys equities; will the Fed do the same?

In the seven years since the BoJ embarked upon its latest QE programme, its equity holdings have now reached phenomenal levels. According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.

Perhaps, the Fed may have to modify its current charter to accommodate equity purchases. If the markets swoon enough, never underestimate the Fed’s ability to conjure up more programs. The more assets on the balance sheet of the central banks, the more power the elites hold over the nations states.

Here is my one warning to my readers. If the Fed cannot control the longer-term inflationary trend, and by extension, bond yields, it’s game over. If this were the case, we would need to sell everything, including gold. My concern is that we could see a replay of 2007-2008 unfold. But, I doubt we would get to that point without the Fed attempting to buy every UST outstanding.

Related Posts