Japan has finally joined the quantitative easing party - and better late than never

Central bank watchers in search of excitement must turn to Japan. The hope is that this dramatic action will break the two-decade deflationary spiral

Share
Fact File
  • 9 out of 17 The number of euro area countries with unemployment figures in double digits

Central bank watchers like me didn’t have much excitement in Europe last week, even though there were two decisions. The Monetary Policy Committee did nothing and didn’t even issue a statement explaining why not.

The likelihood is that Mervyn King was in the minority again, for the third month in a row. He only has two more meetings to go before he is replaced by Mark Carney, and it looks like he will not go out in a blaze of glory. That is what happens when you don’t spot the biggest recession in a hundred years, or the double-dip for that matter, and keep telling people the recovery is fast approaching.

In all likelihood he couldn’t even persuade Spencer Dale, Charlie Bean and Paul Tucker, whom he appointed, to vote with him. We will find out how the vote went when the minutes are published on 17 April. A governor in the minority has never happened in the US or in Europe, certainly not seven times.

The European Central Bank didn’t move either, although its governor, Mario Draghi, did suggest that they may cut rates down the road. It remains unclear why not now, given that inflation in the euro area fell this month to 1.7 per cent while unemployment remained at 12 per cent and having risen on the month in Spain (26.3 per cent); France (10.8 per cent); Cyprus (14.0 per cent) and the Netherlands (6.2 per cent). Of the 17 euro area countries, nine have double digit unemployment rates. Youth unemployment rates are 24 per cent for the euro area as a whole and 31 per cent in Ireland, 38 per cent in Italy and Portugal, 56 per cent in Spain and 58 per cent in Greece. This is the Great Depression #2 in those countries, with worse to come. Just as in the UK, austerity has failed miserably.

The big surprise last week, though, was the action by the Japanese central bank, whose governor, Haruhiko Kuroda, announced a commitment to meet its 2 per cent inflation target in two years by at long last joining the quantitative easing party. It represents a U-turn from its stance over the last couple of decades, and is now about to follow the strategy of monetary loosening being followed in Washington and London. Lack of growth will do that. Better late to the game than never.

The announcement caused much excitement, and the Nikkei 225 index of Japanese shares rose 2.2 per cent on the day of the announcement, while Japanese bonds swung wildly. The benchmark 10-year bond yield dipped as low as 0.325 per cent, beating the previous low set a decade ago, before bouncing back to 0.65 per cent.

The hope is that this dramatic action will break the deflationary spiral Japan has been in for two decades  – see first chart. To put this in context the second chart shows Japan’s annualised growth, which was weak during the 1990s. Over the last nine quarters, Q42010-Q42012, Japan hasn’t grown at all, with five of them being negative; which is comparable to the UK, which has also had no growth other than in the single Olympics quarter of Q32012. In both countries five of the last nine quarters have been negative. In contrast, the unemployment rate in Japan is 4.2 per cent compared with 7.7 per cent in the UK. My friend and colleague and Japan expert Adam Posen, formerly of the Bank of England and currently of the Peterson Institute, told me he heartily endorsed the Tokyo government’s plans for loose money and more aggressive inflation targeting from the Bank of Japan.  If it’s good for him it’s good for me!

Some commentators even went as far as saying that for the Japanese central bank to meet its inflation target will require a burst of inflation. The central bank announced that this would involve a major increase in asset purchases, including longer dated bonds and private sector assets. Planned purchases will expand the monetary base from 29 per cent of GDP to 55 per cent by the end of 2014.

This had a major effect on the yen, which depreciated sharply. This is part of the intention of the bank, making Japanese goods more competitive and encouraging domestic import substitution. Since last November, when it became clear that Japan would see the election of a new government on a platform of aggressive monetary stimulus, the Nikkei has risen by 40 per cent, while the yen has fallen by over 15 per cent against the dollar. The Japanese currency is still trading close to its weakest level in three and a half years, erasing all the gains it made in the wake of the Cyprus bailout.

This is QE wars aimed at weakening currencies. One central bank does QE that lowers their currency, which forces others to react, including the Fed and eventually the MPC. The ECB, though, remains stultified in inactivity so the euro strengthens, causing European firms to become less competitive and so unemployment rises further. The eurozone crisis worsens once again because of overly tight fiscal and monetary policies. Stagnation continues.

George Soros called the move to expand monetary easing “an avalanche” in the yen, suggesting that there is more depreciation to come. In an interview in Hong Kong he said: “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche. If what they’re doing gets something started, they may not be able to stop it.” So it looks like this really is the year of the central banks. Interesting days.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Lead Teacher of Thinking School Drive Team and Year 3 Form teacher

Competitive: Notting Hill Prep School: Spring Term 2015 Innovative, ambitious ...

Operations Data Analyst - London - up to £25,000

£20000 - £25000 per annum + Benefits: Ashdown Group: Operations Data Analyst -...

Programmatic Business Development Manager

£35 - £40000 per annum: Sauce Recruitment: As the Programmatic Business Develo...

Year 5 Teacher

Negotiable: Randstad Education Hull: Randstad Education is currently recruitin...

Day In a Page

Read Next
 

Daily catch-up: out of time, polling and immigration and old words

John Rentoul
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past