Let’s Do More of What Doesn’t Work

It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don’t work. It is regarded as evidence that there hasn’t been enough spending and printing yet.

BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I’m seeing?

Photo credit: Yuya Shino / Reuters

At the Bank of Japan this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn’t a superior economic system after all. Then this happened:

The Nikkei Index from 1989 to 2003. Japan’s seemingly never-ending boom coupled with forever rising stock prices, carefully administered by Tokyo’s powerful bureaucrats, suddenly became an intractable bust.

This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn’t such a good idea after all. That was not the conclusion of Japan’s movers and shakers though (or anyone else’s, for that matter). Instead it was decided that what was required were better planners, or at least a better plan.

For decades Japanese policy makers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of “policy paralysis” – after all, these efforts were obviously just not big and bold enough!

Going Big and Failing Again

After the reelection of Shinzo Abe and the installation of Haruhiko Kuroda as BoJ governor, the BoJ decided to simply continue doing what it has always done – more than 20 years of utter failure notwithstanding. However, in deference to the admonitions of the Bernankes and Krugmans of this world, it increased the size of its meddling by an order of magnitude:

Assets held by the Bank of Japan: since Kuroda has started this “QE on steroids” program in 2012, the central bank’s balance sheet has grown in parabolic fashion.

In short, over the past four years the BoJ has thrown all remaining caution to the wind, with the declared goal of reviving Japan’s economy and creating an annual “inflation” rate of 2%. However, it seems now that eventhat was not enough just yet!

As an aside to this: no-one knows or can sensibly explain what lowering the purchasing power of one’s currency by exactly 2% p.a. is supposed to achieve. There exists neither theoretical nor empirical evidence that could possibly support the notion that it is a desirable goal. It is just another Keynesian mantra. Central bankers have basically pulled the 2% figure out of their hats.

The BoJ has certainly succeeded in devaluing the yen’s external value and impoverishing Japan’s citizens accordingly. It has also created a short term windfall for people buying Japanese stocks. To give you a rough idea how its “success” has manifested itself otherwise, here are a few charts illustrating the situation. The first one shows the quarterly annualized growth rate of Japan’s machinery orders (note the most recent figure, which has been released only last week):