Yesterday, in our post-mortem on the Jackson Hole symposium, we found one particular highlight most notable: according to Princeton University economist Christopher Sims, “policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.” And, as has been customary over the past year, the place where this “shock therapy” will be tested first, will be the same place where 30 years of unconventional monetary policy has so far failed: Japan.
That is the scenario envisioned by Mark Haefele, global chief investment officer at UBS Wealth Management who oversees the investment policy and strategy for about $2 trillion in invested assets.
In a Bloomberg Television interview, on Monday, Haegele said that the BOJ could announce a “massive stimulus program” as the nation desperately seeks to reach a 2% inflation target.
“It is how much they do, and whether they can create that kind of shock and awe at this point in the cycle,” said Haefele, adding “they could announce a massive stimulus program both on the monetary and fiscal side or they could end up reducing their inflation targets. Right now, it looks like they are going to use more stimulus.”
Indeed it does, the question is whether doing even more will lead to a different result: after all the BOJ already owns a third of all JGBs, and is rapidly nationalizing the entire stock market.
During his Jackson Hole appearance, BOJ Governor Haruhiko Kuroda said that the central bank won’t hesitate to boost monetary stimulus if needed, and there is ample space for additional easing. He also said that the central bank will carefully consider how to best use policy to achieve its price stability target.
As Bloomberg adds, consumer prices excluding fresh food — the BOJ’s benchmark inflation gauge — fell 0.5 percent in July from a year earlier, government data earlier this month showed. That was the steepest drop since March 2013, the month before Kuroda launched unprecedented stimulus.
It is Japan’s inability to achieve its inflation goals has “put that country and that central bank into some kind of jeopardy that they are going to have to work their way out of,” Haefele said.
The BOJ is currently undertaking a review of its monetary policy ahead of its next meeting Sept. 20-21. Whether the central bank adopts more stimulus with the yen at its current level or waits to see if it strengthens more is “an open question,” he said.
“It is hard to say that any one move is going to be enough given the history of stimulus in Japan has been erratic,” Haefele said. “But everybody is hoping that they will give it another try because clearly Japan, despite reaffirming their inflation targets, has not been able to hit them.“
By “everybody” he mostly meant corporations and shareholders; for everyone else another sharp plunge in the Yen will mean a surge in imported inflation, a drop in purchasing power, even more negative savings rates, deteriorating economic fundamentals, and a general decline in the standards of living. However, since Japan is now all in, its only option remains to double down, and when that fails, to double down again until its entire financial system finally cracks.