#BoJ

The one fatal flaw experts forget when seeking to mimic #Abenomics style endurance

Pain

Over three decades ago, the Japanese introduced a TV programme titled, ‘Za Gaman‘ which stood for ‘endurance‘. It gathered a whole bunch of male university students who were challenged with barbaric events which tested their ability to endure pain because the producer thought these kids were too soft and self-entitled. Games included being chained to a truck and dragged along a gravel road with only one’s bare buttocks. Another was to be suspended upside down in an Egyptian desert where men with magnifying glasses trained the sun’s beam on their nipples while burning hot sand was tossed on them. The winner was the one who could last the longest.

Since the Japanese bubble collapsed in the early 1990s, a plethora of think tanks and central banks have run scenario analyses on how to avoid the pitfalls of a protracted period of deflation and low growth that plagued Japan’s lost decades. They think they could do far better. We disagree.

There is one absolutely fatal flaw with all arguments made by the West. The Japanese are conditioned in shared suffering. Of course, it comes with a large slice of reluctance but when presented with the alternatives the government knew ‘gaman’ would be accepted by the nation. It was right.

We like to think of Japan, not as capitalism with warts but socialism with beauty spots. Having lived there for twenty years we have to commend such commitment to social adhesion. It is a large part of the fabric of Japanese culture which is steeped in mutual respect. If the West had one lesson to learn from Japan it would be this. Unfortunately, greed, individualism and self-entitlement will be our Achilles’ heels.

It is worth noting that even Japan has its limits. At a grassroots level, we are witnessing the accelerated fraying of that social kimono. Here are 10 facts taken from our ‘Crime in Japan‘ series – ‘Geriatric Jailbirds‘, ‘Breakup of the Nuclear Family‘ and the ‘Fraud, Drugs, Murders, Yakuza and the Police‘ which point to that old adage that ‘all is not what it seems!

  1. Those aged over 65yo comprise 40% of all shoplifting in Japan and represent the highest cohort in Japanese prisons.
  2. 40% of the elderly in prison have committed the same crime 6x or more. They are breaking into prison to get adequate shelter, food and healthcare.
  3. Such has been the influx in elderly felons that the Ministry of Justice has expanded prison capacity 50% and directed more healthcare resources to cope with the surge in ageing inmates.
  4. To make way for more elderly inmates more yakuza gangsters have been released early.
  5. 25% of all weddings in Japan are shotgun.
  6. Child abuse cases in Japan have skyrocketed 25x in the last 20 years.
  7. Single-parent households comprise 25% of the total up from 15% in 1990.
  8. Domestic violence claims have quadrupled since 2005. The police have had to introduce a new category of DV that is for divorced couples living under the same roof (due to economic circumstances).
  9. The tenet of lifetime employment is breaking down leading to a trebling of labour disputes being recorded as bullying or harassment.
  10. In 2007, the government changed the law entitling wives to up to half of their husband’s pension leading to a surge in divorces.

These pressures were occurring well before the introduction of Abenomics – the three arrow strategy of PM Shinzo Abe – 1) aggressive monetary policy, 2) fiscal consolidation and 3) structural reform.

Since 2013, Abenomics seemed to be working. Economic growth picked up nicely and even inflation seemed like it might hit a sustainable trajectory. Luckily, Japan had the benefit of a debt-fueled global economy to tow it along. This is something the West and Japan will not have the luxury of when the coronavirus economic shutdown ends.

However, Japan’s ageing society is having an impact on the social contract, especially in the regional areas. We wrote a piece in February 2017, titled ‘Make Japan Great Again‘ where we analysed the mass exodus from the regions to the big cities in order to escape the rapidly deteriorating economic prospects in the countryside.

Almost 25 years ago, the Japanese government embarked on a program known as
‘shichosongappei’ (市町村合併)which loosely translates as mergers of cities and towns. The total number of towns halved in that period so local governments could consolidate services, schools and local hospitals. Not dissimilar to a business downsizing during a recession.

While the population growth of some Western economies might look promising versus Japan, we are kidding ourselves to think we can copy and paste what Nippon accomplished when we have relatively little social cohesion. What worked for them won’t necessarily apply with our more mercenary approach to economic systems, financial risk and social values.

Sure, we can embark on a path that racks up huge debts. We can buy up distressed debt and repackage it as investment grade but there is a terminal velocity with this approach.

The Bank of Japan is a canary in the coalmine. It has bought 58% of all ETFs outstanding which makes up 25% of the market. This is unsustainable. The BoJ is now a top 10 shareholder of over half of all listed stocks on the index. At what point will investors be able to adequately price risk when the BoJ sits like a lead balloon on the shareholder registry of Mitsui Bussan or Panasonic?

Will Boeing investors start to question their investment when the US Fed (we think it eventually gets approval to buy stocks) becomes the largest shareholder via the back door? Is the cradle of capitalism prepared to accept quasi state-owned enterprises? Are we to blindly sit back and just accept this fate despite this reduction in liquidity?

This is what 7 years of Abenomics has brought us. The BoJ already has in excess of 100% of GDP in assets on its balance sheet, up from c.20% when the first arrow was fired. We shouldn’t forget that there have been discussions to buy all ¥1,000 trillion of outstanding Japanese Government Bonds (JGBs) and convert them into zero-coupon perpetual bonds with a mild administration fee to legitimise the asset. Will global markets take nicely to erasing 2 years worth of GDP with a printing press?

Who will determine the value of those assets when the BoJ or any other central bank for that matter is both the buyer and seller. If the private sector was caught in this scale of market manipulation they’d be fined billions and the perpetrators would end up serving long jail sentences.

Can we honestly accept continual debt financing of our own budget deficit? Japan has a ¥100 trillion national budget. ¥60 trillion is funded by taxes. The remainder of ¥40 trillion (US$400 billion) is debt-financed every single year. Can we accept the RBA printing off whatever we need every year to close the deficit for decade upon decade?

In a nutshell, we can be assured that central banks and treasuries around the world will be dusting off the old reports of how to escape the malaise we are in. Our view is that they will fail.

What will start off as a promising execution of Modern Monetary Theory (MMT), rational economics will dictate that the gap between the haves and the have nots will grow even wider. Someone will miss out. Governments will act like novice plate spinners with all of the expected consequences.

In our opinion, the world will change in ways most are not prepared for. We think the power of populism has only started. National interests will be all that matters. Political correctness will cease. Identity politics will die. All the average punter will care about is whether they can feed their family. Nothing else will matter. Climate change will be a footnote in history as evidenced by the apparition that was Greta Thunberg who had to tell the world she caught COVID19 even though she was never tested.

Moving forward, our political class will no longer be able to duck and weave. Only those that are prepared to tell it like it is will survive going forward. The constituents won’t settle for anything else. Treat them as mugs and face the consequences, just like we saw with Boris Johnson’s landslide to push through Brexit.

The upcoming 2020 presidential election will shake America to its foundations. Do voters want to go back to the safety of a known quantity that didn’t deliver for decades under previous administrations and elect Biden or still chance Project Molotov Cocktail with Trump?

What we know for sure is that Trump would never have seen the light of day had decades of previous administrations competently managed the economy. COVID19 may ultimately work in Trump’s favour because his record, as we fact-checked at the time of SOTU, was making a considerable difference.

Whatever the result, prepare to gaman!

 

Who the hell is Leeroy Jenkins?

One of the more uniques ways of describing the behaviour of the US Fed. Zerohedge noted that the Fed has gone full Leeroy Jenkins. Who the hell is Leeroy Jenkins?

As you will see in the video clip, the team gamers are discussing a coordinated strategy to defeat the monsters waiting in the next stage of the game. Unfortunately one of the gamers, Leeroy Johnson takes matters into his own hands.

Since 2001, we have continuously said that easy credit would become so addictive. The resulting complacency would turn destructive.

We said that the then-Fed Chairman Alan Greenspan would go down as the most hated central banker in history. Despite being heckled, laughed at and mocked, we never waivered from the key tenet that his actions and those of the subsequent Fed chairs would ultimately end up in tears.

We should have had that cathartic moment to reset back in 2008/09 (and 2000 for that matter). Instead, we merely doubled down on the very same mistakes that got us into trouble in the first place.

If the Fed moves to support the junk bond market, undeserving companies run by irresponsible boards will be kept on life support instead of the free market being able to set clearing prices and potentially terminate them. Why not let market forces determine whether anything of value remains inside their entrails?

The Fed doesn’t have the power to buy equities yet but surely that is a coming attraction. We have seen how dismally it has worked in Japan.

The Head of Japan’s stock exchange admitted that  Japan’s central bank now owns around 60% of all Japanese Exchange Traded Funds (ETF) which is almost a quarter of the broader market. By stealth, the Bank of Japan has become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door. At what point does it stop? When is enough?

We must accept a new reality where bankruptcy is openly accepted as a cure to weeding out excesses in the economy. Should there be demand, more efficient players can pick up the spoils.

We need this to make people realise that moral hazard isn’t going to be tolerated and personal responsibility is the order of the day. Anyone who is more than happy to have a winner-take-all mentality on the upside must be prepared to accept that the loser has to take all as well. Why should Main St bailout people who poorly assessed personal risk because our authorities provided a platform that encouraged the behaviour?

Let us not kid ourselves. There are no excuses in the game of greed. Lessons need to be taught to avoid such calamities in the future.

Sadly, our authorities will reject that advice and continue to fool around using the same reckless tools tried making us pay an ultimately higher price.

Buy Gold.

Who left the currency printer on?

CBs

This chart shows how fast he printing presses have been flying to boost the “asset” line of the Bank of Japan (blue), the US Federal Reserve (red) and the ECB (green).

The BoJ has grown its “assets” from ¥100 trillion in 2008 to ¥585 trillion today. Yes, that is right the Japanese central bank has printed so much money that the assets on the book are the equivalent of 100% of GDP, 5x that of 12 years ago.

Does MMT predicate that it is ok to print another 100%? After all the existing Japanese national debt pile is ¥1000 trillion. So who is counting?

We note that the shares in Japan’s biggest currency printing press maker Komori (6349) quadrupled during the boom and only tapered off as the BoJ slowed the rate in early 2018. Maybe coronavirus will get the BoJ back to its wicked ways as it buys up even more of the stock market??? It already owns 58% of outstanding ETFs and by stealth has become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door.

The US Fed has grown “assets” from just shy of US$1 trillion at the time of GFC when the economy was worth US$15.7 trillion or around 6%. There was a nice breathing period between 2014 and 2018 before tapering started.

However, in October 2019 we noted that the Fed was getting a LOT more active in the repo market. Now with coronavirus upon us and the volatility in capital markets at the start of 2020 we can see that another $1.6 trillion has been added to the asset line to a record $5.8 trillion or around 30% of current GDP.

The European Central Bank (ECB) has powered up its balance sheet too from around Eur 1.4 trillion to Eur 4.7 trillion. or 40% of Europe 19’s Eur 10.7 trillion GDP. At the time of the GFC, Europe 19’s combined GDP was Eur 9.3 trillion meaning ECB assets were only 15% of the total. Note the ECB has discontinued reporting its assets.

The point is with the world economy about to hit a brick wall, will markets just face more central bank distortion? Surely no one honestly believes that central banks have got this under control with such an appalling record.

To be honest, if modern monetary theory (MMT) was truly working to date, there should be no unemployment, no poverty, no taxes and we could have easily funded all that renewable energy without even having a debate. Just print and spend.

Therein lies its fatal flaw of MMT. Eventually, conjuring money out of thin air hits terminal velocity. Truth be told the tales above show that each asset that the central banks have bought has created less and less impact in the real economy. Velocity has been sliding for decades.

It is a bit like taking morphine to kill the pain. Take too much and the side effects are:

  1. nausea and vomiting
  2. constipation
  3. itching
  4. loss of appetite
  5. lower body temperature
  6. difficulty urinating
  7. slow breathing
  8. sleepiness
  9. changes in heart rate
  10. weakness
  11. dizziness upon standing up
  12. confusion
  13. nervousness
  14. erectile dysfunction
  15. osteoporosis and risk of fractures

Not unlike the symptoms being shown by the global economy today.

Unlimited QE and a reminder of discontinued series

Just when you thought it couldn’t get crazier, the Fed has announced that it will buy unlimited sizes of treasuries, mortgage-backed securities and corporate bonds. Recall our comments in 2018 when the Fed discontinued its reporting of assets. We noted that the Fed discontinued M3 money stock in 2006, two years before the GFC. Coincidence?

We were always struck by former Fed Chair Janet Yellen’s comments in 2016:

Monetary and fiscal policy is far better prepared for large positive shocks than negative ones

and 2017:

Don’t expect another financial crisis in our lifetime

The only thing left is to buy equities outright which would require an act of Congress. Such moves once again only highlight just how bad the situation has become. The Bank of Japan can hardly be credited with success over its ETF based equity purchases. It has now lost $30bn in this recent market rout. We should mention that the BoJ is a top 10 shareholder in almost 50% of listed stocks, creating an overhang of epic proportions should it ever announce it wants to reduce holdings. It now owns $300bn and due to be $400bn by year-end.

Central banks use coronavirus as a convenient cover-up

Image result for death by 1000 cuts

Where would we be without central banks? The Reserve Bank of Australia (RBA) has trimmed another 25bps of the cash rate to 0.5%, an all-time low and the fourth cut in 9 months.  It is amazing how central banks can shape-shift from climate scientists to doctors.

Given the recent three rate cuts were unrelated to coronavirus and have failed to stimulate the economy as hoped, the pandemic has allowed the RBA to continue its limited ammunition under the context of rescuing us.

We aren’t supporters of ever more rate cuts, truth be told. Yet if central banks want to keep the disco ball spinning, why bother with a sissy 0.25%? If the RBA wants to jolt the economy back to life it would have been better to go straight to zero. Show the markets they are serious rather than drip-feed to the inevitable.

No doubt we will get the usual song and dance from politicians goading banks into passing on the full rate cut to customers. This time banks will probably fold on the back of the Hayne Royal Commission even though the truth is their funding costs won’t fall by the full amount meaning profit will be forgone for the sake of keeping up appearances.

Think through the logic. Last month, China PMI plunged to 35.7 from 50 in January, the lowest reading since January 2005  38.8 during the 2008 Global Financial Crisis.

Australia’s next economic print will be awful. Pushing through a miserly 0.25% won’t put a spring in people’s step unless they see a cycle. Personal credit growth is negative and at levels not seen since the GFC. Housing and business credit growth are at 6-yr lows. Money velocity is slowing. Business investment is at 1994 lows. Nothing to see here.

The economy needs proper industrial, structural and tax reform. After 28 years of untrammelled growth, Australia needs to realise that the complacency bred over that period will come back to haunt if we don’t wake up from the sleep walk.

As Jonathan Rochford of Narrowroad Capital said,

“When it comes to central banks, I would prefer to believe it is a combination of groupthink, an unwillingness to take career risk by speaking the truth and a willingness to either ignore or disregard counter-evidence that has resulted in the detrimental decisions since the financial crisis. However, the increasing amount of evidence, often produced by central banks themselves, points to central banks being more culpable than gullible.”

Don’t believe the hype. Coronavirus has given another excuse to cover up failed central bank policy alongside climate change green swans.

Return of the State-Owned Enterprise

Image result for state owned enterprises

A new investor to Japan once asked CM how to categorise corporate behaviour in the land of the rising sun. CM replied, “Japan is not capitalism with warts, but socialism with beauty spots.

Latest reports confirm the Bank of Japan (BoJ) has now become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door. The BoJ now owns $250bn of listed Japanese equities. It is the top shareholder in household Japanese brands such as Omron, Nidec and Fanuc. At current investment rates, the BoJ is set to own $400bn worth of the market by 2020-end.

The original reason for this move was to boost the ETF market and hope that Mrs Watanabe would pocket her winnings and splurge them at Mitsukoshi Department Store to increase consumption. Sadly all she has done is stuff it under the futon.

Although the government has been very public about the drive for good corporate governance, a stewardship code that drives to unwind cross-shareholdings, improve liquidity and lift returns, sadly the BoJ essentially reverses free-float and confounds the ability of companies to be attractive investments. What will happen if one day the BoJ announces it needs to pare its balance sheet back or that its holdings become too noticeable? These stocks will crater and Mrs Watanabe will become even more gun shy.

We shouldn’t forget that behind the walls of the BoJ, there is discussion to buy all $10 trillion of outstanding Japanese Government Bonds (JGBs) and convert them into zero-coupon perpetual bonds with a mild administration fee to legitimise the asset. Global markets won’t take nicely to wiping out 2 years worth of GDP with a printing press. Such a reckless experiment has yet to hit the Japanese Diet for discussion because such a move will require legislation to approve it. If it happens, the inflation the BoJ has now given up on will turn into a tsunami.

Gov Kuroda how do you intend to control the yield curve?

Image result for kuroda

The BoJ intends to keep much of the same game in play with the addition of ‘yield curve control’ QE measures which almost sounds like an automotive active safety system. One of my astute former colleagues correctly pointed out that “if we have surrendered the yield curve to the complete control of the BoJ and the BoJ wants to steepen the curve, how can they do this without tightening money supply, given liquidity at the short end of the curve? How is this good for a weak yen? Who is the willing counter party to a manipulator now looking top SELL not BUY to manipulate prices downward? Does this mean the end of fixed income departments?

Once again, market manipulation as being conducted on the scale done by the BoJ would result in the multi-decade sentencing of anyone in the private sector. Although perhaps given Japan’s woeful prosecution of market manipulators (i.e. fines of $500 (yes five hundred dollars only) for insider trading) then perhaps the BoJ does not see its actions as anti-capitalist. My bigger concern remains yet again the refusal to allow the market to function properly. Ploughing more into equity ETFs might seem a helping hand to Mrs Watanabe but she is not out there spending any gains she might get. At the rates the BoJ is buying if this strategy doesn’t work the BoJ will end up part-nationalising listed companies which in turn will fly in the face of PM Abe trying to attract foreign capital to invest in Japan when liquidity is being sucked out of the market.

I did find the comment in the opening remarks of Kuroda’s assessment somewhat overly optimistic for the real economic impacts to reflect it – “More than three years have passed since the Bank introduced QQE in April 2013. In this period, Japan’s economic activity and prices have improved significantly, and Japan’s economy is no longer in deflation.

He goes further to highlight the ‘vision’ which for the most part is theoretical gibber.

“The main transmission channel of QQE would be the reduction in real interest rates. Namely, (1) people’s deflationary mindset would be dispelled and inflation expectations would be raised [this is not happening!] through the Bank’s large-scale monetary easing under its strong and clear commitment to achieving the price stability target of 2 percent. At the same time, (2)downward pressure would be put on nominal interest rates across the entire yield curve through the Bank’s purchases of JGBs. (3) Together, these developments would reduce real interest rates. (4) The decline in real interest rates would lead to an improvement in the output gap. (5) The improvement in the output gap, together with rising inflation expectations, would push up the observed inflation rate. (6) Once people experienced an actual rise in the inflation rate [Japan has coped with near as makes no difference zero inflation for 20 years], they would adapt their inflation expectations, resulting in higher inflation expectations and further reinforcing this process…In addition, it was envisaged that as a result of the Bank’s monetary easing, (7) asset prices such as stock prices [fuelled by artificial ETF buying] as well as the foreign exchange rate [FX is back to the same levels of April 2013 and since NIRP has strengthened 10%] would reflect actual or anticipated improvements in economic activity and prices, thereby improving financial conditions and having a positive impact on economic activity and prices. Finally, it was envisaged that (8) it would work through the portfolio re-balancing effect by increasing investors’ appetite for risky assets [Japanese are traditionally very conservative investors and this is pushing them out of their comfort zone, so much so they’re buying home safes], thereby exerting a positive effect on prices of risky assets and leading to an increase in lending [Japanese banks are hesitant to lend – lending sideways since April 2013].

Toward the end the BoJ acknowledges:

“Given that the decline in deposit rates has been smaller than the decline in lending rates, the decline in lending rates, however, has come at the expense of financial institutions’ lending margins. Therefore, the extent to which a further decline in interest rates translates into a reduction in lending rates will also depend on financial institutions’ lending stance going forward.”

Although I interpret the “Moreover, reflecting financial institutions’ search for positive yield, new developments have been observed in the field of corporate finance such as an increase in the issuance of super-long-term corporate bonds and in funding through long-term subordinated loans” comment to suggest that gullible investors that get sucked into buying super LT corp bonds to get a morsel of yield may get completely thumped if weakening credit conditions for such enterprises (e.g. a Sharp or Toshiba) down the line crater their asset worth given the extended duration.

“In addition, it should be noted that financial institutions can boost their profits by selling assets they hold to realize valuation gains, which tend to increase when interest rates fall and the yield curve flattens.”  I’m sorry but the BoJ promoting this activity as a virtuous circle just shows how Mickey Mouse the amateur levels of desperation at the BoJ are. This is kindergarten level commentary although at least their translators haven’t mastered the Fed’s use of comical language.

Finally

“Another issue is that an excessive decline in interest rates — especially at the long and super-long end — lowers the rates of return on insurance and pension products, and increases firms’ pension benefit obligations. The direct impact of this on economic activity as a whole is unlikely to be substantial. However, attention needs to be paid to the possibility that it can cause uncertainty regarding the sustainability of financial functioning in a broader sense, with a negative impact on economic activity through a deterioration in people’s sentiment.”

Perhaps I should ask why the Japanese government will explicitly withdraw ‘public pension’ money from individual bank accounts of those who earn Y3mn from Y3.5mn but are not contributing, largely because they have no faith in the pension system. Some 270,000 people are supposedly guilty of this crime but Although the return profile of Japanese pensions is far more realistic than US public pension funds, the unfunded risks going forward remain.

So what looked promising on the announcement is now being seen for what it is. Poorly thought out strategy. Trying to manipulate a curve where the BoJ might be both seller and buyer…hmmmm

蜘蛛の糸 The Spider’s Thread – when helicopters can’t save central banks from hell

kumo.png

Almost 100 years ago a children’s tale known as “The Spider’s Thread” (Kumo no ito) described Buddha’s compassion for a criminal named Kandata. It sums up the problems facing the Bank of Japan and how it intends to climb out of fiscal hell.

Buddha is meandering around Paradise one morning, when he stops at a lotus-filled pond. Between the lilies, he can see, through the crystal-clear waters, the depths of Hell. He notices one sinner in particular – Kandata. Kandata was a cold-hearted criminal, but had one good deed to his name: while walking through the forest one day, he decided not to kill a spider he was about to crush with his foot. Moved by this single act of compassion, the Buddha takes the silvery thread of a spider in Paradise and lowers it down into Hell.

Down in Hell, the myriad sinners are struggling in the Pool of Blood. Kandata, looking up by chance at the sky above the pool, sees the spider’s thread descending towards him and grabs hold with all the might of a seasoned criminal. The climb from Hell to Paradise is not a short one, however, and Kandata quickly tires. Dangling from the middle of the rope, he glances downward, and sees how far he has come. Realizing that he may actually escape from Hell, he is overcome by joy and laughs giddily. His elation is short-lived, however, as he realizes that others have started climbing the thread behind him, stretching down into the murky depths below. Fearing that the thread will break from the weight of the others, he shouts that the spider’s thread is his and his alone. It is at this moment that the thread breaks, and he and all the other sinners are cast back down into the Pool of Blood. In the end, Kandata condemned himself by being concerned only with his own salvation and not that of others.

Bernanke was in Japan warning advisors to PM Abe that Japan risked slipping back into deflation (err it is already in deflation). He noted that helicopter money — in which the government  issues non-marketable perpetual bonds that are linked to O/N rates plus a premium with no maturity date and the Bank of Japan (BoJ) directly buys them — could work as the strongest tool to overcome deflation.  The government would hold the right to redeem the perpetual bonds at their face value. It would only logically choose to redeem if inflation came back in the mix.

In essence the BoJ has bought 40% of outstanding JGBs ($4 trillion) and the balance is held mostly by domestic financial institutions. If they end up swallowing all the $10 trillion of outstanding JGBs the idea is that they are packaged as a swap into perpetuals. The Diet would have to ratify this transaction and the complexity of it would likely bamboozle most Japanese politicians. I’m not quite sure if that makes it an easier or harder sell. The BoJ’s balance sheet is as big as the US Fed

None-the-less, if you park a majority of the $10 trillion dollars (Y1,000 trillion) or 2x GDP then it doesn’t overcome the need for the government to raise Y40-50 trillion (or raise a Switzerland) annually to cover the shortfall in the budget deficit given the dwindling tax base. This gap is ongoing.

While $10 trillion dollars can be put inside a velvet bag and packaged in a way that disguises the contents then it come down to how willing financial institutions will step up to buy new JGB issuance. The risk is that if the BoJ is the only willing buyer them the psychological impacts on the lack of confidence of buying JGBs any collapse in the currency will potentially create inflation that will be far harder to control. Japan imports 60% of its food and most of its raw materials and energy. To all of a sudden be faced with dollar denominated contracts to mitigate risk for suppliers Japan’s inflation could soar way beyond desirable levels. Would a yen fall to Y300 or Y400/$ from almost parity today? Then we are staring down the barrel of double digit rate inflation.

Let’s consider the collapse of the Argentinian Peso in early 2000s. It exploded from 1/US$ to 4/US$ and today trades closer to 14.5/$. At the time inflation surged to 25% and has remained between 5% and 20% since. 

As soon as markets have seen the MoF & BoJ in cahoots on monetising the debt, the risk is that they can always do it again. No-one ever suspected they would do it in the first place but once it is done it can be done again and Japan is 10x the size of Argentina so the knock on effects are far greater. 

Imagine even 10% rates of inflation in Japan. Banks that have loan books that are 30 years fixed at 3% and below with 90%+ of financing coming from deposits. If the currency was collapsing, Mrs Watanabe would be flocking to safe havens – gold, US$ etc. If there was a run on the banks, deposit rates would have to go high enough to offset the flight. At the same time, the net margins would be crucially negative causing the likelihood of nationalisation with yet more printed money…exacerbating the problem.

Which takes us back to Kandata. The financial gods may lower a spider’s thread but if central banks become too greedy in implementing helicopter strategies, it will snap as they climb from the infernal hell they’ve traded themselves into. Then it really will be a pool of blood.

I also think listening to Bernanke is not necessarily wise as he merely continued in the footsteps of Greenspan to lead us into the GFC. Should we credit those who got us into this mess with pretending they’ve got us out of it? To me, the failing experimentation in financial markets is disproving a lot of theories of monetary policy (especially NIRP) and the declining confidence in central banks expressed by rising poverty is being shown in the shake up of incumbent political classes. It feels that the big RESET button will have to be pushed.