Japan’s Desperate Lunacy

Japan hit the markets last week with a zany announcement. It said it was going to double its base money supply!

Reuters – The Bank of Japan unleashed the world’s most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.
New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.
The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the U.S. Federal Reserve’s own quantitative easing program.

Will it work? Will it put some life into the Japanese economy?

Richard Koo says no. He maintains that this kind of monetary stimulus won’t do the trick. Because businesses and households are still rebuilding their balance sheets, paying down debt. The Japanese feds may make more money and credit available, he says, but the real economy won’t take it. Instead, the money just goes into the (speculative) stock market.

Yen fell on the news. The US stock market was unimpressed. The Dow fell 40 points on Friday.

What to make of it? The world’s third-largest economy. A jolt of money-printing unprecedented in world history. And the Fed, Bank of England and the European Central Bank all following along.

The BOJ says it just wants to get inflation to 2%. It says it will buy assets with money that didn’t exist previously…and keep buying…until inflation reaches 2%.

Then what? Well, we guess it will stop. And then what? Then, it will have an economy that has come to expect ¥70bn in new money every month. And an economy with a monetary base of BOJ assets maybe twice what it is today.

We don’t know what that will mean. Will the economy collapse when the money-printing stops? Or will the economy pick up…and the banks begin to lend…and the people go on a spending binge?

Or will investors all over the world dump their yen back onto the home islands… eager to get out of the Japanese paper money before inflation levels get out of control?

We don’t know. But neither do the Japanese feds. As Reuters describes it above, it is a ‘radical gamble’.

People make radical gambles now and then. Businessmen might take a chance now and then. Gamblers might go for long odds. Lovers might hope to get lucky.

Traditionally, central banks do not make ‘radical gambles’. They tend to eschew gambles of any kind, even of the most respectable and bourgeois sort. Central banks are meant to be stolid and boring.

Spiders should be able to weave their webs in front of their vaults and remain unmolested. Central bankers are not supposed to call press conferences and not supposed to have anything to say anyway; and all requests — whether for bailouts, interviews, or lunch — should be answered with an unyielding ‘no’.

For a central bank to make a ‘radical gamble’ bespeaks desperation and lunacy.

How this gamble will pay off, we don’t know. But we note first that all major central bankers are putting their money on the same colour…and that as the wheel spins…we urge readers to get out of the casino.

Neither in yen, euros, pounds nor in dollars, should we be. For when the dust finally settles on this wild riot of radical gambles by central bankers, gold will be the ‘last man standing’.


Bill Bonner

for Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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