It’s kind of pincer movement. On one hand you have a new (or newish – he has held the position before) Prime Minister of Japan: Shinzo Abe, who is changing Japan’s central bank target. On the other hand you have the new governor of the Bank of Japan, Haruhiko Kuroda, going so dovish, they may need to build a special dovecot, just to hold him and his rate setting committee. Mr Abe said he wants the central bank to target 2 per cent inflation.
Mr Kuroda said Japan is entering a “new phase of monetary easing.”
Inflation is in the sight of both Abe and Kuroda. It’s the new double act – like Ant and Dec, but without the screaming celebrities.
The Bank of Japan does in fact aim to double the monetary base over the next two years. The markets love it, with the Nikkei rising sharply on the news, and no doubt the yen will wilt.
There is a snag. Creating inflation is not that easy. In Japan crashing asset prices left consumers and businesses with just about zero confidence, hence they saved. The government can buy bonds to its heart content, but if no one wants to borrow, so what?
It could of course print money and fund massive tax credits; it could scatter money across Japan’s two main islands from a helicopter, but even that may not work. The recipients of this money may, after all, decide to save it.
Funnily enough, however, things may be set to change in Japan anyway. Some inflation over the next year is inevitable thanks to rising commodity prices and planned changes to consumption tax –Japan’s equivalent of VAT.
But something else has been afoot. Japan’s household savings ratio has crashed faster than a dove without wings. These days UK consumers are positively frugal in comparison with Japan’s big spenders.
Maybe the real factor at play here is demographics. When Japan’s baby boomers approached retirement they saved as much as they could. Now they have retired, they have no choice but to spend their savings.
Japan’s demographics may mean internal demand is set to exceed internal supply. Abe and Kuroda may get their wish, regardless of the QE they promote.
If they fail, however, it will be a case of “Good night from me, and good night from him.”
©2013 Investment and Business News.
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