Godzilla QE | FT Alphaville

Godzilla QE

Either Willem Buiter is setting out to shock, or he really is worried about Japanese deflation this time.

Because Citi’s chief economist really is thinking BIG on what to do about it:

The 5trn yen ($60bn) additional QE announced recently by the BoJ is far too small to achieve anything, in our view. The UK did £200bn ($300bn) worth of QE in 2009, for an economy less than half the size of Japan. To give a UK-size stimulus would mean, for Japan, additional QE worth 50trn yen. Given the worse circumstances of Japan, 100trn would be more appropriate, in our view.

Which is, ooh, only about $1,200bn or so. That’s not all.

Buiter has gone back to a recent theme and is advocating that Japan does this Godzilla QE through a monetary-fiscal alliance:

Boosting inflation or eliminating unwanted deflation should be very easy. Just have the MoF send a cheque for, say, ¥100,000 to every adult in Japan, fund this by selling to the central bank [Japanese government bonds] JGBs equal in value to the amount of the cash transfer from the Treasury to the household sector, while making a solemn promise never to reverse either the transfer or the funding through the Bank of Japan. If Japanese consumers refuse to spend the cheque and save it instead, either attach an expiry date to the cheque (requiring it to be spent on goods and services by a certain day or become worthless) or send another cheque, this time for ¥ 1,000,000. Repeat this, adding zeros, until the consumer gives in and starts spending. Alternatively, the government could itself spend on infrastructure or current programmes.

Expiring money. Very modish.

And it would appear Buiter thinks the time for reservations is past, firstly with regard to the asymmetric risks of deflation:

We recognise that the last time something like this second ‘helicopter money drop’ scenario was tried in Japan was during World War II, when the Bank of Japan was forced to monetise government military expenditures. Hyperinflation was the result. Does this mean that any proposal for helicopter money drops is dangerous and should be rejected?…

That would be the same kind of logic that would lead a man to refuse to drink a glass of water when he is thirsty just because people have been known to drown in water; or that would lead one not to take two tablets for a headache because it is possible to overdose on a bottle of the stuff. Any policy to reverse deflation and to create a low but positive rate of inflation is at risk of getting the dosage wrong. But that is no reason not to try, say, by clearly stating what the inflation target is and by deliberately engaging in QE or helicopter money drops, gradually but steadily increasing the scale and scope of these measures and then stopping once the target is achieved.

And secondly, with regard to Japanese sovereign risk and fears that domestic investors won’t be happy to hoover up JGBs for much longer:

Japan is not Greece, but it is in trouble. The sovereign has the means to redress the situation, either by monetising public sector deficits and debt (an option not open to Greece) or by eliminating the public sector deficit through spending cuts or tax increases, something Greece is unlikely to be able to do on a large enough scale for a long enough period. Japan’s authorities should act of their own accord soon, in our view, lest they are forced by the markets to act suboptimally at some later date.

Note also that while Buiter is talking about Japan, there is pretty clearly an implicit message here for the US just as the Fed revs up the QE2 engine:

In the current economic climate, we would argue that the effect of lower long-term Treasury bond yields in countries like Japan (or the US) would be minor, holding other asset prices constant. It is not the cost of capital, and certainly not the risk-free component of it, that is stopping business investment from growing strongly, as non-financial corporates have quite strong balance sheets and cash flow positions. It is lack of confidence about future demand, concerns about social security (health costs in the US) and uncertainty aversion…

Lower long-term yields also boost the valuations of stock and other long-term assets like land and real estate. This will boost investment through ‘Tobin’s q’ channels and household consumption through wealth effects and through an increase in the amount of collateralisable wealth. Again, these effects are likely to be quantitatively minor under current economic conditions in Japan… if households were to be willing to borrow against the increase in the value of their assets, this could provide a sizeable boost to consumption, especially of durables and discretionary spending items, but we regard this as an unlikely prospect for Japan and, under current conditions, with households still deleveraging, also in the US.

Somehow, we sense Buiter won’t be very impressed with Ben next week.

Related links:
BoJ says ‘bye, bye, bank note rule’ – FT Alphaville
Nikkei 63,000,000 – FT Alphaville
Mr Bernanke: you playing Wii, not mini golf – Money Illusion