The Bank Of Japan Forced Into The Helicopters? Troubling Questions For Macroeconomists

A Benjamin Cole post

Under the stalwart but still cautious leadership of Governor Haruhiko Kuroda, the Bank of Japan has followed a path of quantitative easing, and then negative interest rates, in a mixed battle against deflation and a soaring yen.

Yet in mid-August the yen rose to less than 100 per U.S. dollar, from 120 at the start of the year. Meanwhile, Japan plays peek-a-boo with deflation.

And now the Bank of Japan may be running out of Japanese government bonds to buy. With the BoJ having purchased one-third of the national bonds outstanding, the largest banks in Japan say they are running out of inventory.

Moreover, the BoJ has been buying exchange-traded funds (ETFs). “Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings,” reported Bloomberg recently.

No doubt, critics will cite Japan as an example that QE does not work. But we don’t know the counter-factual, and it is probable Japan would have sunk into recession-deflation without QE.

But perhaps the long-term critics of QE, who have predicted inflationary holocausts for years, finally have a real issue: The BoJ will run out of securities to buy. Although in a laughable twist, the BoJ will run out of securities to buy long before it “runs of out ammo,” says one of the other long-standing if insane critiques of QE. The BoJ has unlimited ammo.

Sikorsky, Huey, Chinook

The Bank of Japan could sidestep the whole problem of building a balance sheet by instead engaging in “helicopter drops” also called “money-financed fiscal programs.”

Though rarely discussed in U.S. macroeconomic circles, Japan used helicopter drops successfully in the Great Depression, under the leadership of Finance Minister Korekiyo Takahashi. While American and Europe remained mired in depressions until WWII, Japan’s economy grew solidly from 1932 to 1936, when Korekiyo was assassinated by militarists. The island economy kept growing thereafter, but ran into inflation, as the soldiers kept printing money to finance wars.


Who in 2008 could have predicted that central-bank quantitative easing programs on three continents would be met by whimpering bond markets, zero-lower bound and borderline deflation through much of the developed world?

Who can deny that the Bank of Japan has paid off one-third of the once-towering Japanese national debt, with no inflationary consequence? So what is the importance of the national debt in this new context?

What recourse has the Bank of Japan now, but to ponder helicopter drops?

Orthodoxy and convention have nearly ossified the craft of macroeconomics. Practitioners genuflect to totems even as events make a mockery of the most exalted maxims.

Do the Rube Goldberg operations of the Federal Reserve, with bond-buying and selling, and reverse repos, and interest on excess reserves, and erratic posturing by various unelected regional bank presidents, make more sense than a simple program of money-financed fiscal programs?

PS A real world experiment:

It is quite unfortunate that Schacht’s lesson was lost while Eucken’s paradigm carried the day. Schacht’s programme resembles a variation of the ‘helicopter money’ policy and its free-lunch effects (Bossone 2016), which several economists today consider an effective demand management tool for fiscally constrained economies trapped in deep depression.

Central Bankers are in a “Permanent State of Readiness”

Sounds like they all attended the same “Military Academy”!

The latest:

SENDAI, Japan—Bank of Japan Gov. Haruhiko Kuroda said he would act quickly if the yen’s rise threatens his inflation goal, highlighting his caution over exchange rates ahead of a major international convention.

“Be it exchange rates or anything, if it has negative effects on our efforts to achieve our price-stability target, and from that perspective if we figure that action is necessary, we will undertake additional easing measures,” Mr. Kuroda told reporters Thursday.

The remarks by Mr. Kuroda come at a time of tension between the U.S. and Japan over whether the yen’s appreciation seen earlier this year is sharp enough to warrant intervention by authorities. Investors are closely watching whether Tokyo and Washington will continue to clash over yen policy during a meeting in northern Japan Friday and Saturday of finance chiefs from the Group of Seven leading industrialized nations.

A few other examples picked randomly:

Dovish Draghi drives down the euro after promising more QE ‘if necessary’

As consumer debt grows, Mark Carney says ready to act ‘if necessary’

Bernanke: Fed Remains Ready To Act, If Necessary

I´m being cute. Obviously central bankers must always be ready to act. I just wish that sometimes they really did! After all, the world economy situation is in such dire straits because of, on the one hand, from some lack of action and, on the other, from some bad ones.

And going on to the G7 meeting we travel back thirty odd years to another “time of tension between the US and Japan”. In short, it seems the Yen can never depreciate against the dollar, in what is one of the most blatant cases of “currency discrimination” the world has ever known.

If you don´t believe me, believe the data.

State of Readiness

In the first half of the 1980s, the dollar appreciated a lot against all currencies, except, you guess, the Yen! To make it visually clean, the chart compares the Yen and the DM against the dollar.

When the sages gathered at the Plaza to “talk the dollar down”, then, yes, the Yen could appreciate freely!

So, Mr Kuroda, never mind “hurting” the “feelings” of Secretary Lew. Just don´t let him force on you what Secretaries Donald Regan and James Baker forced on your predecessor in the 1980s!

Haruhiko Kuroda Again The Globe’s Best Central Banker. FOMC Look Like Fops

A Benjamin Cole post

In Japan, the inflation rate is about 1.2% by the Bank of Japan’s alternative index, and the unemployment rate is a scant 3.1%. The stock market is up 15.1% in the last year. Capital spending by Japanese companies in Q3 was up 11.2% year-over-year.

Haruhiko Kuroda is the Governor of the Bank of Japan, and the world’s best central banker. Kuroda could wring his hands about “long and variable lags,” and curtail the Bank of Japan’s quantitative easing program, now running about $50 billion a month in an economy half the size of the United States economy. BTW, the Bank of Japan pays 0.10% interest on excess reserves.

Instead Kuroda shows steel and resolve. Read this from Nov. 30, Reuters: “Bank of Japan’s governor has dismissed calls from critics to go slow on hitting the central bank’s 2% inflation target and stressed the need to take ‘whatever steps necessary’ to achieve its ambitious consumer price goal.”

Kuroda told an audience of Toyota auto execs and others, “In order to overcome deflation—in other words, break the deadlock—somebody has to show an unwavering resolve and change the situation. When price developments are at stake, the BOJ must be the first to move.”

Contrast the stalwart Kuroda with the feeble, dithering, inflation-cowering of Chairman Janet Yellen and Vice Chairman Stanley Fischer of the U.S. Federal Reserve Board.

But first consider: The U.S. unemployment rate is 5.0%, much higher than Japan’s 3.1% rate. The core U.S. PCE inflation rate is 1.3%, about the same as Japan’s, and below target. The S&P 500 is about back to where it was a year ago, not up 15.1% like the Japan’s stock market. U.S. capital spending is weak, while Japan capital spending is strong.

While the mediocre U.S. economy compares unfavorably to Japan’s on many levels, the Fed is actually and presently tightening monetary policy. Think about it: Where Japan does $50 billion monthly in QE, the Fed is shrinking its balance sheet, or reverse QE. Where the Bank of Japan pays 0.10% IOER, the Fed pays 0.25%. And the Fed, after endless fretting, appears ready to raise rates at their Dec. 16 meeting.

So we have the U.S. central bank conducting reverse QE, raising interest rates, and paying banks not to lend through IOER. All this while the PCE price index is below target and falling, and real growth is sluggish.

Please Mr. Kuroda, come to America. We need you at our central bank.

Kuroda nails it!

In the conclusion to “Opening Remarks at the 2015 BOJ-IMES Conference Hosted by the Institute for Monetary and Economic Studies, Bank of Japan” Governor Kuroda says:

Every word and deed of central banks around the globe has been drawing more attention as the diverging directions of monetary policy among advanced economies become apparent. The issues I have raised so far are all complex, and there are no quick, definitive solutions for them. Nevertheless, I strongly believe that, at this one-and-a-half day conference, we will address the issues we currently face and find our way forward through lively discussions.

I trust that many of you are familiar with the story of Peter Pan, in which it says, “the moment you doubt whether you can fly, you cease forever to be able to do it.” Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions. I am sure that we all can share a conviction backed by our collective experience and wisdom. I would like to close my remarks now as we ready ourselves for discussion.

The IMF Tells the Bank Of Japan To Hit The Gas? What About The U.S. Federal Reserve?

A Benjamin Cole post

The International Monetary Fund on May 22 badgered the Bank of Japan to adopt a more-aggressive growth stance, even though the island nation posted Q1 real GDP growth of 2.4%, and an annual inflation rate of 2.3%—along with an unemployment rate of 3.4%.

Moreover, under the leadership of Governor Haruhiko Kuroda, the BoJ is buying about $83 billion in bonds a month, a quantitative easing program equal in size to that of the U.S. Federal Reserves’ Q3 at its peak—except that Japan has an economy one-half the size of the United States.

Nevertheless, the IMF warned the “BOJ needs to stand ready for further easing, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2% inflation target.”

Fair enough. Maybe the BoJ needs to really pour it on.

Um. What About the Fed?

So, the United States’ posted Q1 real GDP dead in the water, and many are forecasting Q2 not much better. The core PCE deflator is now running at 1.3% YOY, with headline deflation, and the Fed has not reached its 2% inflation target for seven years, except once, and that fleetingly. The U.S. producer price index has been in deflation for several months. The U.S. unemployment rate is 5.4%, and a squishy figure at that.

Yet Fed Chair Janet Yellen never misses a chance to rhapsodize about raising interest rates, and on May 21 warned that Fed cannot wait too long before tightening the monetary noose or it will “risk overheating the economy.”

BTW, also from the Fed: “Industrial production decreased 0.3% in April for its fifth consecutive monthly loss.” Capacity utilization is at 78.2%, below the long-term average.


Yellen has new definition of “overheat,” and that is any room temperature warm enough to melt ice cream. And the IMF…well, what can you say. They appear seriously confused.

Fiscal deficits continue to be the best advice!

A recent example from Simon Wren-Lewis:

 …I would much prefer additional public investment, for which there is a strong microeconomic as well as macroeconomic case. [1] Michael Spence [2] is one of a huge list of eminent economists, which includes Ken Rogoff, who think additional public investment across the OECD would be beneficial.

We should continue to urge governments to recognise this, but we also have to accept the awkward fact that they are not listening. In political terms, the need to reduce deficits trumps pretty well anything else. (Perhaps things are turning in the US, but until the Republicans start losing power I’m not counting chickens.) One of the many depressing things about the Conservative election victory in the UK is that it looks like deficit obsession is an economic strategy that can win, as long as the austerity is front loaded, which is why Osborne fully intends to do it all over again.

Why, then, did Japan not grow for the last quarter century despite doing all sorts of public investments (even building an airport over water) and running persistently very high public deficits?

Appealing to the opinion of “eminent economists” is not evidence. In 1981 a list of 364 British economists, many of them “eminent” signed a letter saying that the Howe budget would “destroy” Britain. It certainly didn´t, quite the opposite happened!

What did happen in Japan to offset any fiscal stimulus was a very tight monetary policy (don´t confuse that with high interest rates). In fact, interest rates were essentially zero. Just look at what happened to nominal spending (NGDP) after 1990. No growth and even sometimes contraction.

SWL Advice

After something has been dormant for so long it´s hard to make it move up, despite the best efforts being made by Abe and Kuroda!

The Tale Of Two Central Banks

A Benjamin Cole post

  • Haruhiko Kuroda, Governor of the Bank of Japan, on May 22 said he will maintain his bank’s QE package of about $83 billion a month—but said he will do more if necessary, if Japan’s inflation rate does not consistently hit the BoJ’s 2% target by 2016. Japan just reported Q1 real GDP growth at 2.4% YOY and headline inflation of 2.3%. The Nippon unemployment rate is 3.4%.
  • Janet Yellen, Chairman of the Federal Reserve Board, on May 22 insisted the Fed is on track to raise interest rates this year. The U.S. real GDP came in just about flat in Q1, and H1 may be flat, or close to it. The headline CPI is…negative 0.2% in April YOY. The U.S. unemployment rate is 5.4%

Add on: Kuroda’s $83 billion a month of QE is bigger than the Fed’s QE at its peak, and yet Japan’s economy is about one-half the size of the U.S. economy.


Yes, I have played a little fast and loose with the above numbers. Headline inflation is not core inflation—although the inflation-hysterics trumpet headline inflation after every oil-price spike.

The proper Fed inflation gauge is the PCE chain-type index, which is up 0.3% in April YOY.

In you want PCE core, it is up 1.3% in April YOY.

The truth remains that PCE core is well below the Fed’s 2% official inflation target.

The Feeble Feckless Fed

The Fed remains utterly cowed by the prospect of inflation even approaching its 2% IT, despite the fact the U.S. economy is far less inflation-prone than in the 1970s, or despite the fact that 3% inflation for a few years would merely offset the sub-2% seen 2008.


Of course, as Marcus Nunes tirelessly points out, a NGDPLT is much better than an IT, not least for the abject cowardice an IT seems to impart to the Fed.

We will see how the U.S. and Japan economies play out in the next couple of years.

My money is on Haruhiko Kuroda. Oh, did I mention the Nikkei 225 is up 45% YOY?