We know that Japan's QE program has been triple that of the U.S Fed for a little bit more than one year, until last week when it was even increased again. The BOJ is now buying 100% of newly issued Japanese government bonds (JGB).
I read somewhere that this situation equates to Japan using printers and copy machines to print and counterfeit Yen all day to pay off their debts. I understand this point of view, if you are a Westerner who has carefully learned his economy classes: open and free markets, open and free competition.
But living in Japan taught me to look at things a bit differently. In this case things are simply (unofficially) going back to normal: a country's central bank buying its own government bonds to pay debts and fund its development is not blasphemous. And the current system we see in the West where privately-owned financial institutions charge interests to a country and are paid with taxpayers' money is not that old (20th century) anyway.
One of Japan's (not so) secret weapon that allowed them to stay afloat after the bubble burst is low-interest domestically-owned debt. Until the 2008 crisis, Japanese debt was mainly owned by Japanese financial institutions and pension funds. After the shock many smaller banks, local banks and funds either went bankrupt of couldn't afford not to sell assets to cover their needs of cash. Bonds were sold, pushing yields higher, and when the financial system was revived, financial institutions preferred to invest in the equity markets.
Now the BOJ is buying JGBs to push bond prices up and mechanically drag yields down. Is that really surprising?
During 20 years of deflation and low economic growth, keeping interest rates to the floor and keeping debt in the country was the only solution for Japan to survive and keep investing in its own development, education, roads, infrastructure, health etc. What other bank would have wanted to buy no-risk 0.1% yielding bond anyway? Goldman Sachs? Lehman Brothers? A Japanese pension fund, paying 0.1% interest to the Japanese Government to fund retirement pensions of hard-working Japanese taxpayers, that makes a lot more sense. Especially in a country where there is a sense of social-consciousness and responsibility in the economic and financial worlds.
This debt-management strategy is one of Japan's way to do what I consider to be "socialist capitalism": free market capitalism is the rule, but it has to serve the best interest of the country.
And it works. There is no welfare in Japan, because there are jobs; lots of jobs, and jobs that Westerners consider useless: they still have cashiers in 2014 and even hire people to welcome you and guide you to the right line in the bank. That's another side of Japan's socialist capitalism. There are many others, and I might write about that in details.
Anyway, I read a lot of headlines recently, saying that Japan is over. Please come to Japan and judge by yourself. If this is a country that is over, I guess many others wish they were over too, with impeccable roads, hospitals everywhere, the best public transportation system in the world, top notch research and development in universities and major companies...
I read somewhere that this situation equates to Japan using printers and copy machines to print and counterfeit Yen all day to pay off their debts. I understand this point of view, if you are a Westerner who has carefully learned his economy classes: open and free markets, open and free competition.
But living in Japan taught me to look at things a bit differently. In this case things are simply (unofficially) going back to normal: a country's central bank buying its own government bonds to pay debts and fund its development is not blasphemous. And the current system we see in the West where privately-owned financial institutions charge interests to a country and are paid with taxpayers' money is not that old (20th century) anyway.
One of Japan's (not so) secret weapon that allowed them to stay afloat after the bubble burst is low-interest domestically-owned debt. Until the 2008 crisis, Japanese debt was mainly owned by Japanese financial institutions and pension funds. After the shock many smaller banks, local banks and funds either went bankrupt of couldn't afford not to sell assets to cover their needs of cash. Bonds were sold, pushing yields higher, and when the financial system was revived, financial institutions preferred to invest in the equity markets.
Now the BOJ is buying JGBs to push bond prices up and mechanically drag yields down. Is that really surprising?
During 20 years of deflation and low economic growth, keeping interest rates to the floor and keeping debt in the country was the only solution for Japan to survive and keep investing in its own development, education, roads, infrastructure, health etc. What other bank would have wanted to buy no-risk 0.1% yielding bond anyway? Goldman Sachs? Lehman Brothers? A Japanese pension fund, paying 0.1% interest to the Japanese Government to fund retirement pensions of hard-working Japanese taxpayers, that makes a lot more sense. Especially in a country where there is a sense of social-consciousness and responsibility in the economic and financial worlds.
This debt-management strategy is one of Japan's way to do what I consider to be "socialist capitalism": free market capitalism is the rule, but it has to serve the best interest of the country.
And it works. There is no welfare in Japan, because there are jobs; lots of jobs, and jobs that Westerners consider useless: they still have cashiers in 2014 and even hire people to welcome you and guide you to the right line in the bank. That's another side of Japan's socialist capitalism. There are many others, and I might write about that in details.
Anyway, I read a lot of headlines recently, saying that Japan is over. Please come to Japan and judge by yourself. If this is a country that is over, I guess many others wish they were over too, with impeccable roads, hospitals everywhere, the best public transportation system in the world, top notch research and development in universities and major companies...
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