The Bank of Japan and the Abyss

With bazookas of quantitative easing being fired off around the globe by central banks, my attention turns to the ones who fired first.

According to the Bank of Japan, the central bank adopted quantitative easing on March 19 2001. Under which, the BOJ flooded commercial banks with excess liquidity to promote private lending, in a battle against domestic deflation in the early 2000s. The BOJ increased the commercial bank current account balance from ¥5 trillion to ¥35 trillion (approximately US$300 billion) over a four-year period starting in March 2001. The BOJ also tripled the quantity of long-term Japan government bonds it could purchase on a monthly basis.

In October of 2010, the Bank of Japan made another purchase of ¥5 trillion (US$60 billion) in assets in an attempt to devalue the yen against the US dollar in order to stimulate the Japanese economy by making exports cheaper, however, this failed dismally.

On the 4th of August 2011 the BoJ announced a move to increase the commercial bank current account balance from ¥40 trillion (US$504 billion) to a total of ¥50 trillion (US$630 billion), and in October 2011 the bank increased its asset purchase program by ¥5 trillion ($66bn) to a total of ¥55 trillion.


Fast forward to 2016. The Bank of Japan has set a staggering target of ¥80 trillion ($733 billion) in government bond purchases per year in it’s still raging, colossal battle against the domestic deflation. Japan also has the highest sovereign debt in the world and they seem to be sinking deeper and deeper into the depths of the quantitative easing abyss.

The idea of “helicopter money”, although declined on many occasions by the BoJ, seems highly plausible in the coming months with the Bank planning to purchase the entire new issue of Japanese 40 year bonds, totalling ¥30 trillion  ($299.1 billion) per year. Technically, the BoJ is correct in declining “helicopter money”, however, with investors snapping up the JGB in order to sell it back to the Bank for a profit, the implications of these new implementations are clear.

For the past decade and a half the Bank of Japan has been flooding the Japanese economy with cash in the hopes of fighting off deflation and it is apparent that the economy is still struggling and the sovereign debt has soared. With no signs of recovery in sight, to what end is the BoJ willing to intervene in the endless battle against deflation? Only time will tell, but what is certain is that the abyss is a formidable place and let’s hope they have a plan to escape it.

picture via flicker, courtesy of Day Donaldson

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Reuters: Business News