The Federal Reserve loves injecting funny money into the economy, but it’s a piker compared to the Bank of Japan. The BOJ’s stimulus efforts are far larger than the Fed’s, relative to the size of each economy.
Ben Bernanke and Janet Yellen have used the Fed’s balance sheet to buy Treasury and mortgage-backed bonds, hoping the liquidity would trickle down to the broader economy.
This is called “quantitative easing.” The European Central Bank is doing something similar.
BOJ chief Haruhiko Kuroda sees no need for a middleman. Under his leadership, the BOJ conducts monthly outright purchases of corporate bonds and other private assets.
Kuroda’s program reached a milestone last week when the BOJ
bought corporate bonds at a below-zero interest rate. It wasn’t wildly negative, just 0.03 percent, but big storms always start small.
Think about what this means.
A top central bank is lending money to private businesses and paying them to take the cash. That’s weird, any way you look at it.
Yes, Japan’s concept of “private business” is different. Businesses and government there cooperate more than in the U.S. or Europe. Kuroda and Prime Minister Shinzo Abe’s “Abenomics” reforms include other unprecedented steps, too. Yet negative corporate yields are probably a step too far.
The yen will fall further against other currencies if this practice persists. Kuroda probably sees this as a benefit; it helps make Japanese exports more competitive. Yet it will also bring some very negative side effects.
Yields reflect credit risk. The interest rate at which a company can borrow gives everyone important information about its stability and credit worthiness.
This very useful data get distorted when a central bank sprays cash into the economy without regard for whether the recipient deserves it. This would be the case even if they let the borrowers pay interest. Taking the yield negative adds even more camouflage.
The BOJ’s action is also inconsistent with free trade.
When businesses in Country A can borrow better-than-free cash from their central bank and businesses in Country B can’t, trade between the two is not on equal footing. Country A is subsidizing the home team. Country B will likely respond by imposing tariffs to negate the advantage.
That is how trade wars begin.
The BOJ is far from alone in distorting the economy it supposedly shepherds, but it just pioneered a new technique. Other central banks will observe and may do likewise.
If you needed more proof that
global deflation is a serious threat, the BOJ just gave you some. This won’t end well — for Japan or anyone else.
Patrick Watson is an Austin-based financial writer. Follow him on Twitter
@PatrickW
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