NPC Ford Motor Co. coal truck, Washington, DC 1925
I think I should come back to what I wrote yesterday in The Revenge Of A Government On Its People, because in my view the essence of that essay deserves far more attention than I see it get, either in reactions to my piece or in the financial press as a whole.
That essence is that, as reported by Reuters yesterday morning, Bank of Japan Governor Haruhiko Kuroda, in a speech at a seminar, stated that last Friday’s surprise QE9 measures were a reaction to one thing, and one only: falling oil prices. This was not announced on Friday, and nobody is addressing it now, though it is a crucial piece of information. First, here’s Reuters:
“There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind ..” [..] “There are no limits to our policy tools, including purchases of Japanese government bonds .. ”
Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set.
“In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms ..” While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.
That is to say, plunging oil prices scared Kuroda to such an extent that he couldn’t even wait for their effect to play out. He felt sure about what the effects would be: more deflation, aka less consumer spending. Kuroda was convinced beforehand that the Japanese people would not use their ‘oil savings’ to make alternative purchases, he very strongly suspected they would keep the savings in their pocket. Well, not if he can help it. As I wrote:
You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.
Kuroda makes money available to the system because he is afraid, make that convinced, that other available money, from lower gas prices, will not be spent ‘properly’. He doesn’t have faith in consumers’ contribution to inflation/deflation, even if they have more money available. So he launches another step of QE, which he knows will never reach consumers, to keep deflation at bay. There is something very peculiar about all this. Where does QE end up? Here:
The Bank of Japan’s unexpected stimulus has already made the country’s richest even wealthier, adding more than $3 billion to the four top billionaires’ net worth. Fast Retailing Chairman Tadashi Yanai, Japan’s richest person, saw his fortune grow by about $2 billion in the three trading days since the central bank’s Oct. 31 announcement that sparked a plunge in the yen and a rally in stocks. While billionaires such as Yanai gained, the central bank’s unprecedented asset purchases to support economic growth have yet to show evidence of spreading beyond Japan’s wealthiest people and corporations.
What consumers see of this is that since Kuroda’s QE9 ‘policy’ is aimed at sinking the yen, oil becomes more expensive for the Japanese people. A shrewd way of denying people the benefits of lower oil prices, while at the same time enriching Tokyo’s elites. Kuroda – and PM Abe’s – own stated goals are more important than the people of Japan who are supposed to benefit from these goals. They’ve sworn to raise inflation rates to 2%, and you better not stand in their way. If Japan doesn’t get rid of the duo, and fast, even crazier ideas will be tried out. And the game doesn’t stop there. Europe, too, will be affected:
Mario Draghi has something new to worry about as he prepares for tomorrow’s European Central Bank policy meeting: the euro-yen exchange rate. The yen approached a six-year low versus the shared European currency after Bank of Japan Governor Haruhiko Kuroda surprised investors late last week by extending his record stimulus program. Kuroda’s actions jeopardize the weaker euro that analysts say Draghi needs to reflate the economy, heaping pressure on him to come up with a policy response. “Kuroda has thrown down the gauntlet to Draghi,” Robert Rennie at Westpac Banking Corp. said: “Whether Draghi will, or can, accept the challenge remains to be seen.”
The question then becomes if Draghi et al are pondering the same line of thought that Kuroda does. Deflation is a major issue in Europe already. Lower oil prices can be as much of a threat there as in Japan. My first idea would be that Europeans are more likely to spend the cheap oil savings into the economy than the Japanese are, but on the other hand there’s so much poverty all over the old continent that many people won’t have much at all to spend.
In the run-up to today’s ECB meetings there’s been lots of criticism of Draghi ‘going it alone’ and communicating very poorly with eurozone members’ central bankers. And he seems to be on course for his perhaps most serious confrontations:
Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany. The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. [..] .. a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann. They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB’s two German members, lest they use them in their guerrilla campaign to head off quantitative easing.
[..] We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this. [..]
The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc.
As I said, there’s neither love nor trust lost between the Japanese government/central bank and the people of Japan. And though Abe and Kuroda understand the link between deflation and consumer spending much better than most western ‘leaders’, what they don’t – want to – understand is that there is no magic wand to boost spending, other than raising wages. But wages have been falling for 20 years in Japan, and companies have n incentive to raise them in the present environment.
What will happen if oil and gas prices fall further? What is other commodity prices also start falling? What will Kuroda come up with then? Will he tell Abe to raise taxes? The 2nd part of the sales tax rise, of which part 1 hammered the economy after April 1, is already bitterly discussed. Other tax hikes seem even less plausible.
Japan is slowballing its way into a dead end street. Europe may be doing the same, just at an earlier stage, but picking up speed. While the US and UK are in a detour to that same dead end, blissfully unaware that no matter what you spend, you still end up in the same place, just poorer. Whoever can get his citizens to borrow most will seem strongest the longest, and then still break down.
But that’s tomorrow’s tale. Kuroda’s statement that QE9 (or whatever one may label it) was the direct, even pre-emptive, reaction to plummeting global oil prices, should give us lots of things to ponder. What will happen to European in/deflation numbers? They already look ugly, and where additional spending should come from is entirely unclear. What about the US? How far is it still removed from a deflationary threat? And what will it do when that threat intensifies, for instance when commodities’ prices sink?
Kuroda has thrown the first stone, and he’s named it. Central bank policies are no longer about the general state of an economy, or about jobs numbers, they’re about the threat of specific price levels. Now, I think that unlike the western press, Yellen and Draghi and other central bankers are acutely aware of what Kuroda stated yesterday. But perhaps I give them too much credit.