Willem Buiter is back — with more criticism of Japan’s monetary policies.
They are, Citi’s chief economist writes on Friday in an 88-page note, simply too small to fight off that decade-long deflation. They need to be GODZILLA-SIZED! :
To be effective, the scale of the additional Quantitative Easing announced by the Bank of Japan on October 5, 2010, should be increased from ¥5trn of outright purchases to about ¥83trn.
Savvy readers will note, however, that that’s not quite as big as Buiter wanted before. Late last month Buiter was recommending the princely QE sum of $100,000bn yen.
The amount may have declined in Buiter’s latest note, but the process has been subtly tweaked. The economist is now talking about smarter asset purchase:
Another relevant dimension is the maturity of the assets purchased. In early October, when the BoJ decided to introduce a new asset purchase program, the BoJ limited its JGB purchases to those with a remaining maturity of up to two years. But two-year Japanese government bond yields were around 0.127% in October, so the potential to lower yields is clearly very limited. By contrast, the QE done in the UK covered the entire yield curve but was heavily concentrated at longer maturities, a strategy that would increase the effectiveness of the purchases and therefore make more sense, in our view.
And intriguingly — unsterilised FX purchases:
One particular variant of the QE measures that were applied between 2001 and 2007 that we regard to be of interest requires action on the part of the Ministry of Finance. This would be to expand the BoJ balance sheet by purchasing Japanese government securities from the MoF, and the MoF using the proceeds of this sale to purchase foreign denominated assets. On the BoJ’s balance sheet, the operation would be financed by an increase in base money. The combined actions of the BoJ and MoF would amount to unsterilized foreign exchange intervention: on the consolidated balance sheet of the BoJ and the MoF it would show up as a purchase of foreign exchange reserves financed by base money issuance. The reason unsterilised foreign exchange market intervention in Japan has to be conducted in this way is that the Ministry of Finance has authority over exchange rates and the Bank of Japan can only act as an agent of the MoF for FX interventions.
That would be taking the QE-as-currency-war meme to a whole new level — though there’s already been some talk of unsterilised currency intervention by Japan.
And this form of QE certainly won’t go down a treat internationally:
One major impediment is that Japanese FX intervention would … likely be interpreted as a ‘beggar-thy-neighbour’ policy by the world outside Japan. This is currently more problematic than usual for Japan, given the sluggish growth prospects of the other main advanced industrialised countries, which would not welcome the prospect of supplying the appreciation counterpart of Japan’s effective exchange rate depreciation. The open hostility of many EMs (including China, Brazil and South Africa) to the ‘zero interest rate and unbounded liquidity’ policies of the leading advanced industrial countries is also a concern to Japan’s policy-makers.
Buiter figures Japan can still get away with it, however. The yen, in his opinion, is not substantially undervalued (like, say, the renminbi). Plus, get away with it, it must.
Since Buiter reckons Japan is (still) messing up its policy response:
For a while, from 2001 till 2006, the BoJ did seem to get serious about fighting deflation, as it initiated and quickly expanded its excess reserve targets and long-term bond purchases. But in our view, these measures were started too late and ended prematurely in 2006 when the balance of risks surrounding the inflation outlook still appeared to be tilted to the downside.
And now:
The proposed actions of the BoJ look like very little, very late.
So beggar-thy-neighbor it is then, in Buiter’s opinion.
Did we mention his note comes with a nifty cartoon?
Related links:
Godzilla QE – FT Alphaville
QE wars, Japan edition – FT Alphaville
And the Oscar for ‘best supporting C.banker’ goes to… - FT Alphaville