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Home > Blogs > Shaun Richards > Is this a new beginning for Quantitative Easing in Japan or perhaps an endgame?

Is this a new beginning for Quantitative Easing in Japan or perhaps an endgame?

Is this a new beginning for Quantitative Easing in Japan or perhaps an endgame? Shaun Richards

The spring and summer of 2013 has seen quite a few changes in the perception of Quantitative Easing as an economic policy. On April 4th the Bank of Japan announced that it would expand its operations in this area as its part of what has become called Abenomics. For more details on what Abenomics means please see my blog post earlier this spring.

However I have always had many more doubts about QE than supporters such as Paul Krugman (New York Times) as after all Japan has been down this road before, more than once in fact. It appears that the Japanese Government Bond (JGB) market is also beginning to have some doubts as after an initial surge where prices rose and the benchmark ten-year yield fell to 0.45% the market has retreated and the yields have risen to more than double that at one point on its way to the current 0.85%. This has happened in spite of the fact that the Bank of Japan has increased its purchases of JGBs, which you might think would raise prices and reduce yields. Interestingly it has been accompanied by rises in bond yields around the world including the US Treasury and UK Gilt markets. For the first time in the best part of two years it is possible to get an expected positive real return from US inflation linked Treasuries or TIPS.

So are central bankers and their bond buying QE programmes losing control of bond yields and longer-term interest -rates?

What next?

Tuesday’s meeting of the Bank of Japan came to this conclusion

"The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. "

Actually they are being somewhat disingenuous here as Japan has had stable prices for some time and what they actually intend is for a stable inflation rate of 2% per annum. Also if we read their statement the Bank of Japan admits that there is a long way to go.

"On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been negative,"

So the fall in the value of the Japanese Yen has yet to impact materially on the inflation rate in Japan. This may be something of a surprise if you note that in Japanese Yen terms the price of commodity imports has risen by 14.2% over the past year. A factor in this is that in Japan prices are as quick to fall as rise. So for example the price of petrol at the pump did rise by 7% up to March this year it has lost half of that rise since. This has offset to some extent more publicised price rises such as the 19% rise in the price of one of Apple's I-Pads. Therefore we end up concluding that the 2% per annum inflation target remains a challenging one for Japan. Although we are beginning to see one or two hints of a possible change. For example the Corporate Price Index numbers from this morning show that prices were 0.6% higher in May than a year before. Not much you might think but a last July it was falling at an annual rate of 2.3%.

Perhaps it speaks for itself that an annual rate of inflation of 0.6% can be considered progress!

The Japanese Yen

Until now this has been the easiest part of economics as the promises and then the beginnings of the reality of monetary expansion saw the exchange rate of the Yen head downhill and fast. Against the US Dollar we saw it fall such that the 80 Yen required to buy one US Dollar in November 2012 rose to 103 in late May 2013. However the picture has got much more confused and volatile recently and the Yen has strengthened overall to 94 versus the US Dollar. So like the other measures we see that matters are not only unclear but in this instance also volatile.


The latest developments pose quite a few questions for the monetary expansionism of Quantitative Easing. Yes Japan can increase its monetary base at an annual rate of 31% as it did in May and it can initially at least make itself more internationally competitive by encouraging the Yen to fall. But a new expansion to QE is also coinciding with rising rather than falling bond yields. So far this is of relatively minor concern but with a national debt rising towards 250% of economic output a continuation of this trend would be a concern. Also it can do nothing to help the problem of Japan's demographics which give her both an aging and a shrinking population. Or the fact that the Japanese consumer is unlikely to welcome a rise in inflation.

So in conclusion I feel that Johnny Nash was correct to point out many years ago that

“There are more questions than answers”

And wonder if he was also right later in the same song

“Yeah, the more I find out the less I know”

Tags: Economy , Japan , Japanese economy , Japanese equities , Japanese Government Bonds , Japanese stocks , QE , quantitative easing , yen
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