Tuesday, April 24, 2018

Bill Mitchell – Bank of Japan’s QE strategy is failing

On April 20, 1018, the IMF presented its – Asia and Pacfic Department Press Briefing – in conjunction with the release of the April 2018 World Economic Outlook and the upcoming (May 9, 2018) release of its Asia and Pacific Regional Economy Outlook. The Deputy Director of the Asia and Pacific Department, one Odd Per Brekk, told the audience that Japan should continue its Quantitative Easing (QE) program and maintain transparency in its purchase volumes so as to ensure the strategy to accelerate the inflation rate up to the 2 per cent target is achieved. Part of this strategy involves shifting inflationary expectations from their recent low levels. Critics of the program shriek that the asset base of the Bank of Japan is now approaching the nominal GDP level and given that a high proportion of those assets are comprised of Japanese Government Bonds, that reversing the strategy eventually will be difficult and risks involving the Bank is huge losses, which might render it insolvent. Insolvency has no application in the case of a central bank which can never go broke. Further, the Bank never needs to reverse the QE purchases. There is no relevance in the rising assets to GDP ratio. The problem is that QE will not achieve the desired end. The Bank has expanded its QE program significantly yet the inflation rate and inflationary expectations remain well below the 2 per cent target. They will eventually work out that the mainstream theory that predicted otherwise is erroneous.
Bill Mitchell – billy blog
Bank of Japan’s QE strategy is failingBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

1 comment:

Ralph Musgrave said...

I agree with Bill that QE is not a very effective form of stimulus. Still, there’s something to be said for continuing with it until the Bank of Japan has bought back the entire Japanese national debt. The end result would be the one advocated by Milton Friedman and Warren Mosler, i.e. the abolition of all interest yielding state liabilities. I.e. the only state liability would then be base money (if you can call base money a liability of the state).

As I remember it, Warren actually set out the logic behind the latter scenario (if only implicitly) in his hypothetical “business card economy”. As he said, the parents can choose to control interest rates by paying interest on cards deposited with them. But what’s the point of that? I.e. what’s the point of rewarding children who choose to hoard cards? None! The effect is an entirely artificial rise in interest rates. Put another way, the free market rate of interest is achieved where parents pay no interest on cards, the equivalent of which in the real world, is cutting the national debt to zero: i.e. having the state pay no interest to anyone on its liabilities.

I expanded on the latter argument recently here: