The bank will cap interest on the 10-year government bond at 0%, for as long as it takes to exceed its target of 2% inflation.
The Nikkei rose nearly 2% on the announcement, gold rallied $13, and silver $0.51.
Curiously, after an initial 1% decline, the Yen rose about 2% for a net gain of about 1% vs. the US dollar.
The Bank of Japan has launched a new kind of monetary easing as it set a cap on 10-year bond yields and vowed to overshoot its 2 per cent inflation target on purpose.
Its decision demonstrates that even eight years after the global financial crisis, central bankers are still willing to experiment with monetary policy tools as they struggle to escape from low inflation around the world.
“The price stability target of 2 per cent has not been achieved … [and] this is largely due to developments in inflation expectations,” said the BoJ on Wednesday. “Inflation expectations need to be raised further in order to achieve the price stability target.”
Although that commitment is vague, it marks a departure for global monetary policy, following the logic of economists such as Paul Krugman by making a deliberate “commitment to be irresponsible”.
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Is Abenomics Working?
On October 6, 2015 the Bloomberg editorial board made this ridiculous claim: Abenomics Is Working.
Yesterday we learned Japan Exports Fall More Than Expected.
Japan’s exports fell in August for a 11th consecutive month due to the yen strength and sluggish overseas demand, in a sign that an export-reliant economy may struggle to accelerate in the current quarter.
Ministry of Finance (MOF) data showed on Wednesday that exports fell 9.6 percent in the year to August, dragged down by shipments of cars and steel. The year-on-year fall was bigger than a 4.8 percent drop expected by economists in a Reuters poll, following a 14.0 percent decline in July.
U.S.-bound exports fell 14.5 percent, hurt by declines in car shipments, while exports to European Union fell 0.7 percent. Imports fell 17.3 percent in the year to August.
Bloomberg Editorial Board Nonsense
If the need to dig forever deeper into the loony bin of economic theory constitutes policy that is working, then Abenomics is the most successful economic policy ever.
In reality, there is no economic benefit from inflation. In reality, consumer price deflation is a benefit.
The problem with Japan is not lack of inflation. If Japan has a problem at all, it’s demographics.
Yen Sinks then Rallies
The Forex market is already doubting this bold new plan. The Yen initially declined about 1% then rallied about 2%. The net effect was a 1% gain in the Yen.
Commitment to be Irresponsible
The Financial Times mentioned the logic of economists such as Paul Krugman to make a deliberate “commitment to be irresponsible”.
One either belongs in an economic insane asylum or lives in some Bizarro World alternate universe to hold such views.
- Punishing savers is not going to change demographics.
- Low interest rates will not get people to spend.
- Setting an inflation target of above 2% when you cannot even get to 2% simply is not credible.
Real World Economics
In the real world, my challenge to Keynesians still stands unanswered: “Prove Rising Prices Provide an Overall Economic Benefit”.
Asset Deflation Not CPI Deflation!
Price deflation is an imagined problem. The real problem is asset price deflation fueled by economic bubbles in the fight against routine price deflation.
The BIS agrees with my statement.
I advise anyone who thinks price deflation is a problem to read and digest Historical Perspective on CPI Deflations: How Damaging are They?
Yet, if the goal is inflation, I have already outlined a surefire method to produce it.
Mish’s Four Pronged Proposal to End Japanese Deflation
- Negative Sales Taxes
- One Percent Tax, Per Month, on Government Bonds
- National Tax Free Lottery
For plan specifics, please see Mish’s Sure Fire Proposal to End Japanese Deflation: Negative Sales Taxes, 1% Monthly Tax on Gov’t Bonds.
What can possibly go wrong?
Mike “Mish” Shedlock