A Yen for a Loss

The Bank of Japan Governor, Haruhiko Kuroda, surprised investors today, adopting a negative interest-rate strategy designed to encourage banks to lend in the face of a weakening economy. This despite a jumbo qauntative easing programme never seen in the history of central banking, where the bank now effectively owns all outstanding Japanese government debt and is increasingly buying up the “free-float” of the Japanese stock-market via ETFs.

Despite the current QE programme and its earlier effort back in the 1990s, GDP is falling, as are industrial production and household spending, whilst the inflation goal of 2% annualised remains allusive, stuck near zero with the odd month still slipping into de-flation.

This latest desperate policy move by the BOJ is taking a page out of European policy makers’ script in the goal of stoking inflation, despite it failing within Europe and in the US come to that. In fact Kuroda has even started mimicking “super Mario” in using the phrase, “I’ll do whatever it takes,” when in reality the “tool-box” they talk of is empty. In a credit induced deflation, inflation will only rise once the asset values propelled ever higher by the credit binge find a floor and they are a long way from that.

In Japan, bank loans are still the dominant form of credit provision, accounting for 87% of lending, with corporate bonds making up the rest. But the purpose of this overview is to look at the deposit base and surmise to any likely effect of negative interest rates:

29 Jan 2016 Blog

There are ¥675 ($US5.6) Trillion on deposit as shown by the black line above, whilst the red-line is the overnight call rate offered by the B of J on unsecured deposits. The data only goes back to 1998 and 1990 respectively, whereas the green histogram shows Japan’s main stock-index, the Nikkei Dow 225, which shows its credit induced high of 40,000, give or take, of late 1989. Judging by the rising deposit base, despite next to nothing in the way of interest compensation, a move to a negative interest rate wouldn’t be expected to start a mass exit.

Or maybe it will if it actually costs people to allow the banks to play with their money. Add in the fact that Japan’s deposit insurance is currently a derisory ¥10m / $83K, at a time that Japan’s debt/gdp is put at 500% according to McKinsey, a better solution may be as follows:

29 Jan 2016 Blog 2

Either way, Albert Einstein is widely credited with saying “The definition of insanity is doing the same thing over and over again, but expecting different results,” but the central bankers’ appear to be oblivious to this.

You, dear reader do not have to be oblivious to the risk, nor to the cost of using negative deposit accounts, in Japan or elsewhere, unless of course you have a “yen for a loss.”

 

 

 

 

 

 

 

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5 responses to this post.

  1. […] hard to believe that it was only a fortnight ago that we commented on “A Yen for a loss,” which discussed the increasingly desperate measures by the Central Banks’ in their idiotic […]

    Reply

  2. […] by events. The former assisted in the observation made within the 29th January blog posting, “ A Yen for a Loss,” followed this week by, “A Yen for Gold.” One Socionomic observation is the propensity to […]

    Reply

  3. […] followers of this column will recall two postings of earlier this year, “A Yen for a loss” from the end of January and a “Yen for Gold” of mid-February. At its simplest these […]

    Reply

  4. […] within these postings, emphasising the relationship between these three asset classes via “A Yen for a Loss” penned in January, “A Yen for Gold” in February, moving on to, “A Yen for a Crash” […]

    Reply

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