QE, Japan Style
NEW YORK ( TheStreet) -- Monday morning (Tokyo time), Bank of Japan announced the universally expected Japanese version of QE-ternity. They would buy JPY13 trillion worth of sovereign debt (mostly short-dated bonds) per month. Using the approximate exchange rate of 90, that's $140 billion a month, compared to the $85 billion a month in the U.S. version. That's a darn impressive number, more so when considered relative to GDP.
But there's a big caveat. The beginning date for this all-out, nothing-held-back, do-or-die Kamikaze is January 2014. Huh? If the situation is so dire as to warrant such a dramatic action, why wait for a year?
The fact is Bank of Japan has been one of the only two major central banks (the other being Deutsche Bundesbank) that have been very prudent in monetary policy and are humble and realistic enough to recognize that monetary policy can achieve little in the face of inevitable, long-lasting structural changes such as aging baby boomers. While the effectiveness of the Fed's bold experiments into the uncharted territories is at best debatable, such actions in Japan would be suicidal for the following reasons:
1. While lower yen is good for export, it also directly drives inflation since Japan heavily depends on import in almost all resources, unlike the U.S., which is a net exporter in most resources. Therefore, cheap yen first and foremost drives inflation in essential goods. The poor and the struggling middle class would take a disproportionally large hit.2. Japan is a saver's society. This is the single most critical pillar supporting the huge government debt. While inflation helps a borrower's society with soft, gradual default, it hurts a saver's society. There is already anecdotal evidence of Japanese lining up to buy gold (as evidence by the SPDR Gold Trust ETF (GLD)). If and when Mrs. Watanabe is stung by inflation, the Japanese sovereign debt bubble will burst. 3. If and when inflation picks up as Prime Minister Shinzo Abe demands, the sovereign debt yield will go up by at least as much unless domestic investors are willing to sacrifice themselves for the government -- much more likely in Japan than in the west but still difficult to grapple with. But then the credit risk premium would also rise since it'd be more difficult for the government to roll old debt and serve new debt. Thus, the familiar vicious cycle.
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