Kuroda boost fails to lift spirits outside of Japan

 
Ben Southwood
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WORLD markets showed little change yesterday, despite new Bank of Japan (BoJ) governor Haruhiko Kuroda’s avalanche of monetary stimulus, while analysts squabbled over whether the easing would boost the real economy.

Taking his debut shot at boosting the Asian economy, Kuroda scrapped the focus on the interest rate target and promised inflation of two per cent within two years by almost doubling the monetary base (upon which the money supply is balanced) to ¥ 270 trillion (£1.87 trillion).

But the Dow Jones rose just 0.38 per cent, the S&P 500 only 0.4 per cent, while Euro Stoxx was down 0.67 per cent and the FTSE 100 fell 1.19 per cent. By contrast Japan’s Nikkei surged 2.2 per cent, the yen fell three per cent against the dollar, and 10-year Japanese government bond yields slid to an all-time low of 0.45 per cent, after Kuroda’s stimulus package promises.

Professor Scott Sumner, known as the blogger who saved the US economy, said: “The stock market actually rose over four per cent on the news, as it was down sharply right before the announcement.”

“And the market response merely reflects the extent to which the bond purchase was larger than expected – it makes more sense to look at the stock market reaction since prime minister Shinzo Abe first stunned the markets with a two per cent inflation target proposal,” he said.

“The Japanese stock market is up 45 per cent since that announcement. The yen is down roughly 20 per cent.” He said this proved that central banks still had more ammunition when the policy interest rate was at or close to zero, and that fiscal stimulus was unnecessary. But Hiroaki Muto, economist at Sumitomo Mitsui Asset Management said the policy stunk of past failures: “It’s as if we’ve gone back to the quantitative easing of the 2000s. Targeting the monetary base will lead to a huge increase in current account balances that banks keep at the BoJ, but I’m not sure if this money will move through the economy.”

And Charles Dumas at Lombard Street Research said Shinzo Abe had completely ignored the supply-side of the economy. Dumas said that without reform to the country’s “feather-bedded” large firms, any recovery would be short-lived.

KURODA’S STIMULUS

  • In order to bring inflation up to the Bank of Japan’s (BoJ) two per cent target as soon as possible, new governor Haruhiko Kuroda promised to keep injecting new money into the Japanese economy until the monetary base reaches ¥ 270 trillion (£1.87 trillion), almost double where it is now.
  • Other things being equal, this will require the world’s biggest ever monetary stimulus, worth about ¥ 130 trillion – or £900bn – more than double all the quantitative easing (QE) the Bank of England has done so far.
  • Kuroda managed to secure a unanimous vote on the measures at the BoJ’s rate-setting committee, and moreover switched the Bank’s focus from interest rates to the monetary base.
  • This marks a drastic break with the previous governor, Masaaki Shirakawa, who allowed mild deflation during most of his time in the job.
  • This came after the so-called lost decade of the 1990s, when Japan first slipped into deflation, and found itself unable – despite massive public spending programmes and quantitative easing – to fight its way out.
  • Whereas in the UK prices were – according to the consumer prices index (CPI) – 37.1 per cent higher in 2012 than in 1997, in Japan, last year’s average prices were about 3.3 per cent lower than 1997’s.
  • In the same period the Japanese economy grew a total of only 9.4 per cent, while the UK economy, even counting the slump, grew 34.3 per cent.
  • Economists believe deflation holds back economies partly by increasing the real value of debt. Deflation also means people hold back from investment and consumption they would otherwise have undertaken, reducing output.

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