Great article from FT today on a proposed solution for Japan (can be applied abroad) to QE problem. Markets punish those central banks being pushed into QE by buying governmental bonds.
Here Takatoshi Ito (University of Tokyo professor & Harvard Ph.D) sets forth some really interesting ideas. Investing in foreign-currency dominated assets & exchange traded equity funds would allow for inflation through an increase in asset prices, and would encourage investors to do the same.
I'll hold on to my opinions for now and let you all discuss:
"On February 14 the Bank of Japan presented the world with what appeared to be a Valentine gift. After more than a decade in which it refused to contemplate an inflation target to rid the country of persistent deflation, the BoJ finally agreed to adopt an inflation “goal” of 1 per cent. It said it would pursue “powerful monetary easing” to ensure that goal was met. As a sign of good faith, it immediately expanded a fund to purchase assets by ¥10tn ($123bn). It looked an impressive about-turn for a central bank that had previously all-out thrown in the towel in the battle against inflation.
The market certainly took it that way. Many investors thought the bank had finally got it. In the following weeks, the yen depreciated against the US dollar and Japanese equities rose, leading some to believe that Japan had finally turned an important psychological corner.
However, there were – and still are – reasons to be sceptical. The Japanese translation of “goal” – taken by some to be a synonym for “target” – is far more non-committal than in English. Ben Bernanke uses the terms goal and target interchangeably: the US Federal Reserve appears confident that, by adopting a flexible inflation target, it can manage inflation in the longer run. Not so with the BoJ, which has offered no clues as to how it seeks to achieve its 1 per cent goal.
The fact that the BoJ took no additional action during its two subsequent meetings supports the sceptical view that it is still not serious in the battle against deflation. The market has reacted accordingly, with equities softening and the yen edging back up again.
The BoJ has one chance to redeem itself. All eyes are now on its semi-annual “outlook” report to be published on Friday. This report traditionally contains growth and inflation forecasts for the next few years. If the BoJ forecasts inflation for 2013 of anything below 1 per cent, the market will rightly conclude that it has no confidence in being able to meet its own goal. But if the BoJ forecasts 1 per cent inflation, it will be signalling that it knows what needs to be done to get Japanese prices back on track.
Politicians have rightly been angry with the BoJ for failing to break out of 15 years of very damaging deflation. Such is the level of frustration that a group of politicians is proposing that parliament should be able to dismiss any central bank governor unable to hit an announced inflation target.
How can the BoJ avoid a complete communications disaster on April 27?
First, it should expand the scope and size of the assets it buys. It is understandable that the BoJ is nervous about increasing purchases of Japanese government bonds of long duration, especially if it is seen to do so under pressure from the government. Many would conclude the government was monetising its debt by forcing the BoJ to buy it.
To avoid that impression, the BoJ should increase its purchase of exchange-traded equity index funds. It could also buy property investment trust assets and foreign currency-denominated assets. In return for a bolder policy, the government should explicitly absolve the central bank of all responsibility for paper “losses” on its balance sheet from risky asset purchases.
Second, the BoJ should explicitly acknowledge quantitative easing can affect inflation through increased asset prices – purchases by the BoJ encourage investors to do likewise.
Last, and most important, the BoJ should follow the Fed’s lead in clearly expressing its belief that a central bank matters. In the long run, it is the central bank that determines the level of prices and the central bank that influences inflationary expectations.
For too long the BoJ has acted as if it is powerless to affect change. As such it has been complicit in Japan’s years of economic stagnation. If it jettisons that defeatist attitude, it would be much closer to adding “muscle” to the skeleton of the inflation goal announced in February. In short, it would be well on the way to having a workable inflation target and reversing a decade of miserable failure.
