The Bank Of Japan Still Trying To Push A String
Abenomics Still Isn't Working
The Bank of Japan is still firmly attached to the ultra-loose money policies of Abenomics, having recently recommitted itself to maintaining its ultra low interest rate policies for the foreseeable future.
The Bank of Japan is set to keep ultra-low interest rates on Friday but may make minor tweaks to extend the lifespan of its yield control policy, which is facing scrutiny amid prospects of sustained inflation.
The Nikkei newspaper reported the central bank will maintain its 0.5% cap for the 10-year government bond yield, but discuss allowing long-term interest rates to rise above that level by a certain degree.
Perversely, this is commiting to a policy of failure, as I concluded last month in my deep dive on Abenomics and their impact on Japan’s economy.
Yet despite validating these monetarist theories and models, what Abenomics has never managed to do has been to reverse the stagnation that has set in within Japan’s economy. Abenomics arguably ended deflation within the Japanese economy, but only just barely. It would take the external shock of the COVID pandemic and the resultant government lockdowns worldwide before Japan experienced sustained inflation at or above the 2% mark.
Abenomics thus highlights the reality that government policy is a poor substitute for healthy, free, and unfettered markets. Government policies can tank an economy, as the BoJ’s careless whiplash from loose to tight monetary policy did in the 1990s, but government policy cannot resurrect an economy once it has tanked.
Japan’s ultra-loose policies have thus far failed to stimulate significant economic growth, and the country remains stuck with the same low-growth/no-growth conundrum it has had for the past 30 years. The Bank of Japan’s stubborness on interest rates arguably is a cautionary tale for other central banks, including the Fed, that, try as they might, central banks still cannot push a string.
We should note, however, that Japan has not been alone in pursuing an “easy money” policy. Last year, in particular, the People’s Bank of China was quite committed to an expansionist monetary policy, at a time when other central banks—in particular the Federal Reserve—were pursuing tighter policies.
As the comparison between the PBOC and the Federal Reserve showed last year, central bank interventions in the economy, whether expansionary or contractionary, invariably do damage to the economy. Neither approach is a good approach for any central bank.
Will the Bank of Japan have any better luck with their currency manipulations? Given their lack of success so far, it is difficult to see how they can going forward.
One point that we do well to remember is that the Bank of Japan has always kept its core rates lower than other central banks, and lower than the Federal Reserve’s federal funds rate especially.
Even before the bursting of Japan’s real estate bubble in the late 80s which led to the deflation of the 90s, Japan generally kept its central bank rates lower than the Federal Reserve. Because of the bank’s efforts to jump start Japan’s stagnating economy, the BoJ was actually one of the first banks to test taking interest rates all the way down to near zero.
The major difference was that it held its key rate steady throughout the 2007-2009 Great Financial Crisis, whereas both the Federal Reserve and the European Central Bank slashed their rates to at or below the 0.3% of the Bank of Japan.
This ultra-low rate environment would prevail for several years, until the Federal Reserve began pushing the federal funds rate up again in late 2015, even as the ECB began its hitherto unheard-of policy of pushing its key rate into negative territory.
The Bank of Japan continued to keep its key rate steady throughout the remainder of the 2010s, while the Fed continued to push up the federal funds rate and the ECB pushed its Deposit Facility Rate further into negative terrain.
Consequently, in the immediate aftermath of the Pandemic Panic Recession, the Bank of Japan initially held its key rate at a higher level than either the Fed or the ECB, and would do so until the Fed began its current campaign of rate hikes in March of last year.
Unsurprisingly, Japan’s long term sovereign debt yields have been, much like their central bank rates, significantly lower than that of either the US Treasury or major Euro economies such as Germany.
Germany’s debt yields eventually trended below that of Japan’s as the ECB’s negative interest rate policy took hold, but the US Treasury’s debt yield remain over 2 percentage points higher than Japan’s. Even after the Fed slashed rates to near zero in response to the Pandemic Panic Recession, US debt yields remained significantly higher than Japan’s.
Interestingly, while Japan has had notionally the loosest monetary policy, complete with extremely low interest rates, it has not had the surge of monetary growth which we have seen in the dollar or the euro in recent years. A look at relative growth trends for the yen, the euro, and the dollar shows that Japan has had of the three the most conservative money growth trend since 2000.
This slower monetary growth curve was particularly true during the Pandemic Panic Recession, as the dollar by far had the greatest surge of monetary growth, while the yen continued on an almost linear growth trend.
While Japan still has had less growth in the M3 measurement of the money supply, the wide disparity between the yen and both the dollar and the euro began to narrow starting in 2022. As the Fed and later the ECB began tightening their policies, the BoJ kept its money supply growth on the same steady trajectory.
This is not to say that the BoJ had a conservative monetary policy. If we look at the narrower M1 money supply, we see that Japan the most aggressive money supply growth in the early 2000, and maintained a greater pace of money supply growth than the US dollar until the dollar overtook it in 2012.
If we look at the percentage growth year on year among the Japanese, European, and US M1 money supplies prior to 2020, we see that, outside of a single surge in the M1 in 2001-2003, the yen by far showed the most stable growth of the three.
This is true even after the Pandemic Panic Recession. At a time when the M1 money supply for both the euro and the dollar rose significantly and then fell somewhat less significantly, the M1 money supply for the Japanese yen has steadily trended up ward in an almost lineal fashion.
As a result of the BoJ steadily growing the M1 money supply, the Japan’s money supply growth took over both the ECB and the Federal Reserve around december 2023.
While the Bank of Japan has maintained notionally the loosest monetary policy, the one thing it has not achieved is the most significant economic growth.
Even accounting for the impacts of the Pandemic Panic Recession, since 1999 the US economy has grown by 62%, the european economy by 36%, and the Japanese economy by 17%.
Even if we focus on the period right before the Great Financial Crisis on forward, Japan still has the weakest economic growth, growing a mere 4% since 2007.
The performance gets weaker as we start closer to the present day. From 2021 through the first quarter of this year Japan has managed just 2.4% growth—that’s 2.4% over 2 years (8 quarters).
While the US and the Euro area saw modest rebounds in 2021 in the wake of the Pandemic Panic Recession, Japan’s economy remained stuck in the slow growth lane.
While the BoJ’s policies have been problematic for Japan, they have been wonderful for the US dollar. Since the beginning of 2022, and in particular after the Fed began raising the federal funds rate, the dollar has gained significant strength against the yen.
The dollar has done well against most of the major currencies, but it has particularly prospered against the yen.
Indeed, the great mystery of Abenomics is why Japan is still pursuing the low-rate ultra-loose monetary policy, when it has completely failed to reinvigorate the Japanese economy. It has arguably weakened the yen significantly
If we extrapolate future economic performance from the recent past, assuming Japan continues to hold its interest rates low, by the end of 2025 Japan presumably would grow its economy by another 2.4%, while the US economy would grow by another 5.6%.
Of the three, only the Euro area economy is likely to underperform relative to Japan based on recent trends. The Euro area economy has largely plateaued since the third quarter of last year, and if that trend continues there will be little or no growth at all in Europe over the next 8 quarters. This of course is hardly surprising given the impacts of the Russo-Ukrainian War and the related economic sanctions on Russia. That Europe has managed any economic growth at all is itself surprising.
As we saw last year with the PBOC we are seeing again this year with the BoJ—there is still no central bank around that will ever have any luck pushing the limp string of a country’s economy.
The Bank of Japan is committed to preserving the interest rate status quo. That is unfortunate, for the Japanese economy desperately needs a change of the status quo.