At All Costs

Bank of Japan governor says all available means will be used to beat deflation

Bank of Japan governor Haruhiko Kuroda said the central bank will use all options available to achieve its 2 per cent inflation target, reinforcing expectations of bold monetary stimulus ahead of his first policy-setting meeting on Thursday.

But his pledge for aggressive stimulus faced heat in parliament for relying too much on the psychological impact of any action, while a plunge in workers' bonus payments underscored the challenges the central bank faces in trying to put an end to nearly two decades of grinding deflation.

Prime minister Shinzo Abe also said he is not necessarily asking the BOJ to achieve its price target "at all costs," as factors beyond the bank's control, such as global economic developments, may sway future price moves.

Current account deposits commercial banks park with the BOJ soared 72.2 per cent to 47.4 trillion yen as the bank pumped money into the economy through asset purchases, the data showed.

But the huge pile of money has failed to end deflation or boost wages. Wage earners' total cash earnings fell 0.7 per cent in February from a year earlier as winter bonus payments declined the most in three years, a separate data showed today.

Some central bankers, such as former BOJ governor Masaaki Shirakawa, have also warned that by buying too much government bonds, the central bank can trigger a spike in bond yields by giving markets the impression it is monetising public debt.

My view:

Japan is truly in a no win situation.

Its workforce is old and will soon be elderly.

Its population is falling.

The average age is 45.4 and rising.

The percentage of population over 65 is 23.9% (2012 estimate)

Older people save money rather than spend it as they prepare for retirement as it is the rational thing to do.

This factor alone makes deflation much more difficult to tame as the last 15 years of Japanese history show.

As we have discussed previously on this blog, it will not be long before the debt saturation point is reached.

How long will Japanese investors be satisfied with 0.5% or less returns on their money?

Japan has not yet tipped over into the deflationary black hole, but if we look carefully, we can see it on the horizon.

Image courtesy of Business Insider