You’d think that a central bank that is throwing ¥80 trillion (around $US730 billion) into the economy every year -- through government bonds, equities, ETFs, REITS – would be able to muster a little growth and inflation, right?
This is after all, 15 per cent of GDP it is printing -- every single year. Not to mention the fact that it follows quickly on the heels of the last ‘bold and aggressive’ easing a year and a half ago -- (¥60-¥70 trillion per year that time).
So what gives? Surely a central bank that’s been using quantitative easing in one form or another since 2001 would have mastered the art? Well, yes, and no. It really depends on what you think the policy goal is. Regardless, one thing is certain. The Japanese economy will never recover -- and the truth is, Abenomics was a failure before it even began.
The problem for Japan is that it has taken debt to a whole new level. The government has gross debt of around 240 per cent of GDP, which is the worst in the developed world (more than double the G20 average). Net debt is at 138 per cent of GDP -- the second worst, beaten only by Greece.
By itself this is bad enough, but not necessarily a disaster. The bigger issue is that there is no plan in place to remedy this. The budget deficit is expected at around 7 per cent this year, and 6 per cent next -- with no proposal for a sustainable surplus at any time on the horizon. Ironically, it’s a much less sustainable position than that of Italy, Spain or even Greece. What that means is that those debt ratios above will grow at an annual pace of 6-7 per cent. That is, unless the government manages to lift nominal GDP, which it is struggling to do.
Under those metrics, it’s naive to think that the Bank of Japan’s latest ‘bold’ action has anything to do with achieving an inflation target. The fact is, Japan can’t afford inflation. Already the government’s budget is straining under the weight of interest repayments. This may not be apparent when you consider that these repayments are only about 1.3 per cent of GDP, but recall that the 10-year Japanese bond is only 0.5 per cent. The inflation and growth outcomes that the government apparently wants would see that closer to 3 per cent, more perhaps. All of a sudden that 1.3 per cent debt servicing ratio is now 7-8 per cent of GDP, maybe more.
The situation is even worse when you realise that this would represent 15 per cent, or perhaps even 20 per cent, of total government expenditure. The government is already running a very large deficit, and this would see a further material increase. This is a country that already has to find 50 per cent of GDP every year to cover the budget deficit and roll over maturing debt. It can’t afford more, even with the vast wealth of Japanese households. Japan’s population is shrinking, it’s ageing. That vast wealth is all the country has and it is going to need it simply to live, not to pay off debt. Eventually, even if Abenomics was a success, the government would be forced to ramp up QE again simply to fund growing interest repayments.
When you think about all of this, you start to get a better sense of what the Japanese government is about, what it is trying to achieve -- and it isn’t inflation. The country is simply trying to stay afloat – to avoid a financial collapse.
It’s clear the government has given up on trying to reduce the debt burden -- printing money is working well enough for it, and it can’t rely on tax revenues given the shrinking/ageing population problem. Similarly, talk that the Bank of Japan should simply cancel the government’s debt is insane. Why would governments bother issuing debt at all?
So, instead, it has opted to work on the other side of the balance sheet -- buying assets, often foreign, with money printed by the central bank. So rather than applaud Abenomics and raise a cheer to the Bank of Japan’s creativity and courage, we should view these actions for what they are: the increasingly desperate acts of a nation in decay. That is insolvent.
By the way, this is why I don’t necessarily view Japanese QE as a failure. Sure, it’s done nothing to lift growth or inflation, but then I don’t think that was ever the goal, in at least in recent years. Instead, it’s worked a treat in terms of monetising the government’s deficits.
The plan has been a success. So much so that now Japan plans to buy, through its central bank and pension fund, a growing proportion of foreign assets with printed money, and the world will let it! On that basis you’d have to say that Japan’s QE program has been extremely successful.