22nd January 2013 by Shaun Richards
This morning has seen something which I have been waiting for with anticipation. I have written both here and on Q Finance about the threats that the new Japanese Prime Minister has been making to his country’s central bank the Bank of Japan. His economics plan or Abenomics needs support from monetary policy andso he has threatened to rewrite the Bank of Japan Act and demanded that a 2% inflation target replace the current 1% one. His pressure is reinforced by the fact that the term of the current Governor Shirakawa ends in April so that he will be able to appoint a new one. Oh how he must regret that the pliable Governor of the Bank of England Mervyn King is not available until June! After all it is the current fashion to transfer or poach central bank governors is it not? We are after all in the English transfer window.
Something you may not be expecting
The reputation of the Bank of Japan internationally is often one of a central bank which lacks independence. Actually in the credit crunch era it has been one of the more independent central banks as it has often resisted the pressure applied on it by the Japanese government. A feature of Japanese economic life has been the squabbling between the two. A precis of it is that the Japanese government -of whatever ilk- blames the Bank of Japan for its economic ills and it hints at it being the government’s fault. So far as Kipling put it.
And Ne’er the twain shall meet
So what happened today?
We had the announcement of three actions by the Bank of Japan.
Specifically, the Bank decided to (1) introduce the “price stability target,” and (2) introduce the “open-ended asset purchasing method” (i.e., to purchase assets without setting any termination date) under the Asset Purchase Program. Furthermore, the Bank decided to release the joint statement with the Government.
So we immediately wonder if the joint statement is the equivalent of the apochryphal civil servant Sir Humphrey Appleby’s “strongly worded letter”? In general it is although if the bit below actually happens it will be a clear change as explained above and the emphasis is mine.
the Government and the Bank of Japan will strengthen their policy coordination and work together as follows
The Price Stability Target
It looks at first as though Abenomics has a clear victory here.
Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI).
However you may note that the “price stability target” is anything but! It can go straight into my financial lexicon as whatever the faults of the Japanese economy a lack of price stability is not one of them. The Consumer Price Index rebased at 100 in 2010 is at 99.2 which in fact is one of the most stable inflation measures you will find. Perhaps they meant to add the letters i and n to the word stability!
Indeed if you note the sentence which preceded this there is another problem.
The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan’s economy make progress
Yes raising prices will apparently be part of “strengthening competitiveness!”. At this rate my financial lexicon is filling up rather fast.
How will this be achieved?
Open ended asset purchases
We quickly note that here the plans for Abenomics have had something of a reversal.
The Bank will pursue aggressive monetary easing, aiming to achieve the above-mentioned price stability target
You see we were being told that policy was “aggressive” anyway! So where’s the change?
from January 2014, the Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date.
Oh so not now then? And as Prime Minister Abe scowls at the delay we see that the Bank of Japan has provided itself with a ready made excuse.
Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy…..
So any effect will not be felt until 2015 at the earliest and maybe 2016 which starts to feel like the can is being kicked down the road.
And whilst the mainstream media is talking of the Bank of Japan doing its version of “Pump up the volume” by mentioning 13 trillion Yen a month there is a catch.
As a result of these measures, the total size of the Asset Purchase Program will be increased by about 10 trillion yen in 2014
Is 10 trillion the new 156 trillion then?
What we are seeing is the difference between gross purchases (156 trillion Yen) and the net purchases of 10 trillion Yen. Or to put it another way the new application of stimulus is relatively limited. Did anybody actually think that in 2014 the existing stimulus stock would have been allowed to mature and expire?
Looked at like that the QE to infinity statement below just looks like a continuation of the current policy which lest we forget has failed to even hit the 1% inflation target.
is expected to be maintained thereafter.
The Bank of Japan strikes back
At the bottom of the statement we see this.
The Bank expects that the Government will surely implement measures, specified in the “Joint Statement,” such as carrying out bold regulatory and institutional reforms, and furthermore, steadily promote measures aimed at establishing a sustainable fiscal structure.
As Prime Minister Abe is moving in the opposite direction to “a sustainable fiscal structure” with his expansionary plans he will not welcome this. Also his first period as Prime Minister gave Japan pork barrel politics rather than reform!
Is the Bank of Japan trying to endgame the government?
If you look at the inflation forecast for 2014 then Prime Minister Abe’s eyes will light up. The Bank of Japan forecast is for its favourite inflation measure in Japan to be between 2.4% and 3%. However there is a catch-22 type situation here.
The scheduled consumption tax hikes for 2014 and 2015 — of 8 percent and 10 percent, respectively — are incorporated in the forecasts.
Abenomics is not likely to be very keen on tax rises and accordingly its proponent has deferred any decision on this or kicked the can to August. But for a man who wants a 2% inflation target look at the carrot held out.
The domestic CGPI will be pushed up by 2.9 percentage points and the CPI by 2.0 percentage points. (assuming it is fully passed on).
Just to ram the point home the Bank of Japan forecast for inflation in 2014 without the tax rise is centred on 1.1% or below the 2% target.
So as you can see from the above it looks as though the Bank of Japan continues to resist the Japanese government. It can offer a 2% inflation target because it feels that fiscal sustainability requires the sales tax increases recommended by the International Monetary Fund and they are likely to hit the target for it on their own. Also even inspite of this elephant trap there were dissenters.
Mr. T. Sato and Mr. T. Kiuchi dissented from setting the price stability target at 2 percent in terms of the year-on-year rate of change in the CPI.
Also Mr.Miyao proposed an alternative motion so there are three possible dissenters which in Japanese culture is not far off a revolution.
Also as a final thought I leave you with this triumph of mathematics and statistics from the Bank of Japan.
the inflation rate consistent with price stability on a sustainable basis will rise
Perhaps that is why the explanatory note keeps repeating itself (hoping by repetition it will be believed) and takes 3 pages to explain what is actually a simple concept. Or perhaps they all retired to the next room for a good laugh!