Tuesday, December 30, 2014
8 to 12 trillion new Yen per month? Stick a fork in it.
On Dec 30th the Bank of Japan announced that it will start making 8 to 12 trillion new Yen per month. To get an idea of the scale of this, the Government of Japan averages less than 5 trillion per month in taxes collected.
On Apr 4th 2013 the BOJ announced it would double the monetary base in 2 years. This came to around 50-70 trillion Yen per year for 2 years. The monetary base seemed to go up about 0.6% every 10 days.
However, as we started to near the end of the 2 year time period a new policy was announced on Oct 31st of 80 trillion Yen per year with no end date. This was 10 to 30 trillion Yen per year more than previously. The monetary base seemed to go up around 1% every 10 days.
If the Dec 30th rate stays fixed for the whole year, then multiplying by 12 gives a new yearly target of 96 to 144 trillion Yen. After the initial 2 year period is over, in Apr 2015, instead of stopping it now seems they will be printing about twice as fast. The monetary base should go up well over 1% every 10 days.
However, one familiar with how these things work, or able to spot a trend, should not expect a fixed 8 to 12 trillion Yen per month for the whole year but instead to see more increases in the rate of Yen printing. If you did not spot the trend, read the previous 3 paragraphs again. :-)
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Am I correct in thinking that if this rate continues for about 6 years, all outstanding Japan government bonds will be owned by the BOJ?
ReplyDeleteI think so. The existing debt is over 1000 trillion but I think the central bank already has over 20%. So less than 800 trillion. If they do 144 trillion per year that would finish in just under 6 years.
ReplyDeleteHowever, they are adding around 50 trillion in new debt each year. So this could get you up to 9 I think.
I think things will fall apart long before then.
And most of the world is asleep. Now we are here, I suppose it's just a matter of watching the various tipping points? p.s. Vincent how much of a knock-on effect do you think this will have for the other currencies? i.e. I'm on the lookout for those counter-intuitive things where value/capital flees to the US Dollar as things get worse and worse. Do we have enough tools to construct a roadmap?
ReplyDeleteIf we have theory that lets us predict when one currency will fail we have done well. To know the ripples from that is really hard. My guess is initially there will be a rush into dollars, as when the Russian Rubble was crashing. But longer term it will make people nervous to hold bonds in the USA, UK, or Eurozone. So then these will start to get trouble as well. Not sure if long term is 3 months or 3 years or what. As the reserve currencies fail the backing for paper money everywhere will be in trouble and so paper money everwhere will be in trouble.
DeleteDoug - JGBD look at the chart going back to late 2011 ... there is simply no chart on the planet for any financial instrument that looks like this.
ReplyDeleteWhat do you mean? Every chart is unique but JGBD is only down 25% during this time and it's based on bonds. It doesn't seem to be affected by moves in the yen.
DeleteHey Vincent, It's been a year since you first predicted 26% annual inflation in Japan for more than 1 month in a row starting in 2016, right? So another year to go on that.
ReplyDeleteSo about 2% per month inflation starting in Jan 2016, and running through what... March or so? Later? Care to make any mid course corrections?
DeleteJapan increased their money supply by 1.5% in the last 10 days. The banks government bond holdings are up 2% in 10 days. The interest rate on the 2 year and 5 year bonds has gone negative, because the central bank is buying so fast. I still think that it will happen by Jan 2016. Note though that as an investment I don't need to take even odds on such a bet. So it is more reasonable as an investment idea than as a friendly bet.
DeleteLink showing last 10 days and 1.5% increase:
Deletehttp://www.bloomberg.com/quote/BJACTOTL:IND
Venezuela, Argentina, Russia, Belarus, have shown once again that when a government/central bank is compelled to print money the value of the money goes down. I think it is only a matter of time before the market realizes that Japan is compelled to print money. If you can think of any realistic way that Japan could stop printing money, please explain.
DeleteIf the price of oil had not cut in half, I think the strain in Japan would be getting obvious by now. This has bought them a bit of time.
DeleteJason made a correction to his Japan analysis BTW: http://informationtransfereconomics.blogspot.com/2015/01/updates-for-japan-and-major-correction.html
DeleteDid you come up with an idea of why this increased monetary base doesn't translate into inflation?
ReplyDeleteMy theory: When the central bank buys bonds, this new money doesn't go to the general population, it goes to banks. Banks then have to lend it to create this inflation. If lending rates are low (because they don't find solvent borrowers or everyone is so in debt that they don't want new loans because of the deflation) then this money is stuck. Thus, following the lending rate could lead us to the rate of inflation.
If the central bank gives money directly to people, i think in the current situation it would translate to increase deflation in the short term. When everyone has too much debt and low inflation (and this is a result of getting to the 0% interest rate), every new income goes to the payment of debt and even if one does not have debt, it won't be long until it finds someone with debt. This paid debt will shrink the monetary base. After all the debts are paid, then the inflation problem could arise.