Is the party over for the Bank of Japan?
That was the clever metaphor used by reporter Patti Domm of CNBC to explain a hugely important issue with is hidden behind a horrible, jargonistic name: Quantitative & Qualitative Easing (QQE).
In an excellent piece of journalism, Ms Domm invited her readers to picture the Bank of Japan’s headquarters in Tokyo as somewhere like the Playboy Mansion in California. (It is actually an imposing castle-like building in Mitsukoshi Mae, filled with sober civil servants.)
“The Bank of Japan is seen as the last grown-up in the room actively filling the global liquidity punch bowl with both hands,” declared Ms Domm.
That brought a smile to my face. Another way to explain the concept “creating liquidity” is to suggest that central banks “print more money.” Of course, they do arrange for the printing of bank notes but their QE policies are based upon the acquisition of government debt through the purchase of assets.
Flurry of panic
The Bank of Japan appeared to be continuing this asset buying programme with enthusiasm until last week, when it modestly trimmed its purchases of long-term government bonds by about $20 billion.
As Ms Domm explained on CNBC: “A slight tweak to its bond-buying program caused a flurry across financial markets, sparking speculation that the BoJ was joining the Federal Reserve and European Central Bank in cutting back on asset purchases, a move that could ultimately help drive up global interest rates.”
It could also be a sign that the BoJ is feeling more optimistic about Japan’s economic outlook this year. There have been signs that growth will be sustained and deflation, caused by falling prices, is under control.
Forget the consequences
The problem with buying bonds is that is it raises the national debt. Sometimes, the scenario does indeed seem to resemble the actions of irresponsible drinkers at a wild party, as the government borrows vast sums of money from the central bank without a moment’s thought as to the consequences.
The Americans are also hooked on the punch bowl. The Bank of Japan has been helping America to get deeper into debt by buying US Treasury bonds. By October 2017, Japan owned $1.1 trillion dollars worth of US Treasury bonds, accounting for more than five percent of the total Federal debt. America owes a similar sum to China.
The king of debt
“I’m the king of debt. I love debt,” Donald Trump proudly told CNN during his election campaign. As a New York businessman, he thrived on taking financial risks and borrowing money to grow his empire. Now he’s running up record levels of national debt for the United States.
“Beautiful” tax cuts
The Centre for Economic Policy and Research in Washington projects that the national debt will rise by a further $1.5 trillion over the next decade, largely due to a tax cut approved by Congress in December. President Trump said it fulfilled a promise to “give the American people a big, beautiful tax cut for Christmas.” But like many extravagant presents, the real cost will have to be reckoned with long after it is delivered.