What can the ECB learn from the Bank of Japan’s QE experience?

10th September 2014 by Shaun Richards

Today I intend to take one of my regular trips to the economy of the land of the rising sun which is in the throes of a rather extraordinary economic experiment. Japan is undertaking an extraordinary monetary – and less well publicised fiscal- stimulus to its economy in an attempt to raise its inflation rate to an annual rate of 2%. This will according to advocates of Abenomics solve the problems of the two lost decades (and counting…). Yesterday’s minutes from the Bank of Japan highlight the efforts it is making in this area.

The monetary base had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth had been in the range of 40-45 percent.

With respect to the Bank’s thinking behind its conduct of monetary policy, most members shared the recognition that the Bank would continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it was necessary for maintaining this target in a stable manner.

Before I cover the impact of this I would just like to point out that price stability or virtually unchanged prices was Japan’s previous position as opposed to 2% inflation. So there is an element of disinformation here. What was that about a lie repeated often enough….?

What about monetary economics?

Those who believe that monetary expansion is the cause of all inflation will be very nervous after seeing the monetary base increase at such a rate. A strict rule would be for 40% inflation to be hovering on the horizon. However this has not happened as the Bank of Japan has found itself doing the equivalent of what pre credit crunch was called “pushing on a string”. You see by the time we reach the M1 measure of money supply the rate of annual growth has dropped to 4.2% or somewhere around a tenth of the initial push. By the time we get to the broader measure M2 then we see this.

Against this backdrop, the year-on-year rate of increase in the amount outstanding of bank lending had been in the range of 2.0-2.5 percent.

So the gale force wind has become a gentle breeze by the time it reaches this area. Indeed M2 itself is expanding at an annual rate of 3% which is noticeable for the fact that a year ago it was expanding at 3.8%. In this respect Abenomics is showing signs of running out of puff.

So the European Central Bank (ECB) can learn that it requires an enormous effort at the monetary base level to get any noticeable effect in the wider monetary aggregates.

What about the currency?

This has again begun to fall and has today reached new depths or new heights depending on your perspective , if we look back overthe past six years. As I type this it takes 106.6 Yen to buy one US Dollar and even the currently weak UK Pound briefly regained the 172 Yen level. So after a spell of treading water the Yen appears to be in a new phase of decline as we wait to see how it pans out. What we do know is that a falling Yen has boosted the Japanese economy but that the subsequent inflation which has exceeded wage growth has sucked much of the boost back out of the system.

Thus the fall in the Yen is the one part of Abenomics in my view that has conformed to conventional economic theory. A currency fall boosts inflation and the economy albeit that in these times of low wage growth the economic boost also has a backwash.

However not everybody thinks that a fall in the value of the Yen puts upwards pressure on inflation as Bank of Japan Deputy Governor Iwata has demonstrated this morning in a speech in Ishikawa Prefecture.

However, statistical analysis for the period prior to the introduction of QQE  (Japanese for QE) shows no significant relationship between changes in the exchange rate of the yen and inflation in Japan. That is, a depreciation of the yen does not necessarily lead to inflation.

If we consider the situation in the Euro area then this will send a chill down the spine of the Governing Council of the ECB! One of the mechanisms they are hoping to deploy is a falling exchange rate as they attempt to lift inflation from its current low level there. They may get a little relief when they note that Deputy Governor Iwata has cunningly excluded the current period from his chart, presumably because it does not give the answer he wants.

Deputy Governor Iwata is rather keen on manipulations and spinning things as you can see below.

Real wages had been declining until recently. However, excluding the direct effects of the April consumption tax hike, the year-on-year rate of change in real wages turned positive for full-time workers in June and for part-time workers in July.

So if you exclude the largest source of inflation real wages are rising! Who said satire was dead?

However there is an area where he is joined by Mark Carney the Governor of the Bank of England and that is the belief that there is some sort of real wage fairy who will soon sprinkle gold dust.

Once future economic prospects and the outlook for firms’ profits become more favorable as the virtuous cycle among production, income, and spending continues, it is likely that wages will rise steadily in line with or above the rate of inflation.

Be careful of austerity

Japan has just had a taste of something very similar to Euro area austerity as it raised its Consumption Tax from 5% to 8%, and yes it really did do so on April 1st. The response was rather similar to what we have seen in Europe.

The GDP statistics released this week show that after growing strongly at a rate of 1.5 percent quarter-on-quarter in the January-March quarter, real GDP fell substantially, by 1.8 percent, in the April-June quarter.

So the brakes were slammed on any economic expansion and so far in 2014 the economy of Japan has shrunk in size.

What about interest-rates?

Here we are mostly discussing bond yields as official interest-rates in both places are either effectively zero or in one case actually below it. Deputy Governor Iwata is very keen on real bond yields being a factor but they were already low in Japan and have been falling in the Euro area over the past two years. So the economic impact should already be here. Oh….

What about equity markets?

Central bankers love to trumpet wealth effects from higher equity markets these days. Frankly I think that this is mostly because it is about the only clear area where their policies have had an impact. As the Japanese Topix index rose to a six year high this morning Deputy Governor Iwata was keen to emphasise this.

The resulting rise in equity prices…… will stimulate private consumption through wealth effects.

Many of you reading this will no doubt be wondering how much of the paper gains described above are to be found in the hands of the 0.1% and how much in the hands of the rest of us.

Still the Bank of Japan is doing its best to boost the equity market and is presumably making a profit right now.

the Bank has also increased the amounts of purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).

Another central bank with apparent plans to become a hedge fund.


The lessons of the Abenomics experience so far will be very sobering for the ECB. It is attempting to advance into the arena of Quantitative Easing via the side-door of Asset Backed Securities and Covered Bonds. Also the size of its effort is relatively small for now at least. Therefore as the results of the much larger Abenomics effort have been patchy at best what does it expect to achieve?

Indeed if we consider the main transmission mechanism which is a hoped for fall in the value of the Euro we have something of a clash. If it falls against the Yen will the Bank of Japan retaliate with even more QQE? This week the Euro has risen to 138 Yen as the Bank of Japan wins the tug of war but are we facing a type of competitive devaluation via QE which mirrors that of the 1920s?

As we travel these roads one thing we have learned is that what is trumpeted by the media as a type of bazooka mostly turns-out to be more like a pea-shooter.



17 thoughts on “What can the ECB learn from the Bank of Japan’s QE experience?”

  1. forbin says:

    Hi shaun

    The lessons of the Abenomics experience was that it didn’t work!!

    and closing the Nukes cost them dearly ……

    Will the ECB follow anyway ? I’ll bet on that they will , after all they no other ideas in their collective heads………

    sad really


    1. Anonymous says:

      Hi Forbin

      There are ever more rumours and hints that Japan will restart its nuclear reactors. For example there was this in Japan Today earlier

      “TOKYO —

      Japan’s nuclear regulator gave final safety approval to restart two reactors at Kyushu Electric Power Co Inc’s Sendai plant on Wednesday, the regulator’s first major ruling since it was formed in the aftermath of the 2011 Fukushima disaster.”

      I tend to agree about the ECB.

    2. Noo 2 Economics says:

      Abenomics has never been fully implemented – structural changes, the “third arrow” haven’t even been attempted, so we see what is achieved with money printing and fiscal expenditure.

  2. Paul C says:

    Hi Shaun,
    Talking of Abenomics and their attempt to encourage inflation I saw a stunning figure yesterday. A 7% fall in consumer spending after the artificially created rush because of TVA/VAT tax increase. Consumers brought forward their spending which sounded fabulous for Japan when it happened but only a few months later the consequential falls are shocking.
    A great advertisment for QE and “administered” price increases?

    1. Anonymous says:

      Hi Paul C

      I agree that quite a brake has been applied to domestic demand and it is one we are familiar with in many respects after the rises in VAT in the UK and Europe. Also the latest consumer confidence figures are not exactly inspirational and do not fit the claims of Deputy Governor Iwata’s speech well at all.

      “The Consumer Confidence Index (seasonally adjusted series) in August 2014 was 41.2, down 0.3 points from the previous month.”

  3. baldand says:

    “[T]here is some sort of real wage fairy who will soon sprinkle gold dust.” Shaun, you are priceless!

    The residential property price index for Japan fell by 2.6% in May 2014, as opposed to a 3.3% decline in April. This was due partly to a 0.7% monthly decline for May 2013 falling out of the inflation rate, partly to a 0.8% increase in May 2014. The condo apartment components was up by 7.1% in May 2014, after a 5.6% increase in April. The May 2013 monthly increase for condos was 0.6%, while May 2014’s was 1.9%. If Abenomics has done nothing else it at least seems to be creating a bubble in condo prices, which troughed in December 2012 and have been rising ever since.

    It is a pity these data are so untimely. The June estimates won’t be available until the end of this month.

    1. Anonymous says:

      Hi Andrew

      There is rather a gap between ordinary house price behaviour and condominium’s. Are the condos in Tokyo and we are seeing a by now familiar split between the rest of a country and its capital?

      When you consider how extraordinarily expansionary monetary policy is then it is in many respects a surprise that they cannot get the overall residential index to rise. I remember writing a month or so ago about record lows for mortgage rates in Japan and variable rates can be as low as 0.8%. The UK market would explode if we got anything like that…

      1. baldand says:

        Shaun, it seems that strong condo price increases were not limited to Tokyo. The inflation rates are published for three metropolitan areas: Tokyo (8.0%), Koyoto-Osaka-Kobe (4.5%) and Nagoya (3.8%). There is a separate listing for Tokyo including suburbs (7.4%) There is also a separate listing for regions Only one of these, Shikoku, doesn’t show an increase of 3½% or more. Shikoku shows a decrease of 1.3%, but its index is based on a small sample of quotes.

  4. dutch says:

    The more they print,the more carefully people save and spend.

    Negative rates reduce velocity further…….Who’d have thought it? This doesn’t happen in the text books they read studying for their jobs in ivory tower CB’s.

    At least they didn’t have to pay £30,000 to be badly taught.

    1. Fraser Bailey says:

      ‘The more they print, the more carefully people save and spend’.

      Exactly. Something that economists and politicians, who have no knowledge of real people in the real world, always fail to understand.

      They should get Sandy Shaw to re-record ‘Puppet On A String’ as ‘Pushing On A String’ and enter it into the Eurozone Song Contest.

      1. dutch says:

        I should add Fraser,that it strikes me that the more they reduce interest rates the more people take care.

  5. zummerzetman says:

    I have long been of the opinion that wages in the ‘developed’ world are partly on a downard tragectory because we are competing with emerging economies where costs are dramatically lower. Poor wages and much lower standards of Health and Safety etc mean that they can churn out manufactured goods for next to nothing, and many service sector companies have outsourced work to the more highly educated workers in these countries.
    The only way to ‘add value’ and justify a higher wage ecomony now is to move towards high-tech and innovative industries. I can’t see that happening quickly enough for many. As an example, you now have countries like South Korea doing the things that Japan used to do so well. I am thinking about consumer electronics and vehicle production in particular.

    1. Anonymous says:

      Hi Zummerzetman

      I agree that many jobs in the western world are facing competition and downwards pressure on wages. This is happening also as societies age. Not every job is affected so we also see a rise in in equality.

      Japan has lost its ability to be fleet footed and there in many ways is the essence of its problem,

  6. forbin says:

    Hello Shaun,

    My black box of things to increase inflation and thereby the economic growth- two things QE anywhere seems to have dismally failed at

    would be to increase peoples wages – not just the top 0.1% who apparently when given more money keep it (!)

    and to directly put QE into people’s back pockets – would you fancy a ” stimulus check” for $10,000 / or pounds or yen

    ( there’s a third – tell China that they will receive 100% tax import duties if they don’t drop dictatorship and go full Swiss style democracy (( can we have some too please? ))

    Of course inflation has been seen, QE has pushed up asset prices , that I posit was its main purpose after the historical records showed the 1930’s depression was mainly ( or ended up as ) a asset bust.

    Never happen – the economy is the Banks and they run the show , so go back to you TV soaps and fast food ….. yes pull up a chair and eat your popcorn !!


  7. forbin says:

    Hello Shaun,

    you’ve seen this :- ” Santander appoints Ana Botin as chairwoman”

    So the major Banks are now hereditary ?

    Doesn’t that make our masters the new Kings and Queens?


    Munching that “royal ” food , popcorn……

    1. Anonymous says:

      Hi Forbin

      I had wondered that too, how did that work out in Spain’s neighbour Portugal with Banco Espirito Santo?

  8. forbin says:

    Hello Shaun,

    Perhaps the ECB and Japan should look here….

    Venezuela’s inflation rises to 63.4%

    Mind you if they calculated with the ONS method it would be 3.4% ?


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