Bank of Japan Governor Haruhiko Kuroda took the market by surprise two weeks ago when he announced a sharp increase to the nation’s QE program just three days after testifying that the economy was well on its way to target 2% inflation. Nomura Research Institute chief economist Richard Koo says that the orchestrated shock is evidence of Kuroda’s experience with currency interventions, but that it will only make exiting a failed policy that much harder in the future.
Richard Koo – BOJ QE vote split 5-4, bureaucrats v businessmen
“No matter how much the BOJ eases policy during this kind of balance sheet recession, the liquidity it supplies will not enter the real economy as long as there are no private sector borrowers. The only result is likely to be the creation of mini-bubbles in the financial markets,” Koo writes in a November 11 report.
Koo has argued before that QE is a flawed theory, and he points out that the BOJ decision was approved on a 5-4 Policy Board vote, with five former government bureaucrats voting in favor of the measure and all four former businessmen voting against it. After 18 months of QE there has been essentially no impact on the money supply because there is no appetite for debt so the extra liquidity isn’t getting converted into real economic growth. Instead, the liquidity just creates mini-bubbles in various financial assets.
Richard Koo – Forward guidance no longer an option for BOJ
But QE isn’t just ineffective, the boom/bust of asset micro-bubbles can harm other parts of the economy, and having so much inflationary tinder lying around has the potential to create big problems if appetite for debt picks up. And when Kuroda eventually decides that it’s time to end the program his recent surprise announcement could come back to haunt him.
“With the 31 October easing announcement Mr. Kuroda deliberately chose to shock the markets. By doing so, he effectively removed forward guidance from the BOJ’s toolkit,” Richard Koo writes.
Koo attributes this to Kuroda’s background in currency interventions, where surprise announcements have a big effect on speculators, and a much smaller impact on everyone else who will continue doing business more or less as planned.
When former Fed chief Ben Bernanke first mentioned the possibility of tapering, markets threw a fit. But because of the long lead-in time and the market’s faith that Bernanke would stick to forward guidance as much as possible, the end of QE in the US has been relatively pain-free (though it’s certainly too early for a final judgment). If Kuroda had the same kind of relationship with the market before, he doesn’t any longer and he could have a hard time guiding the market in for an easy end to QE.