BOJ's Shirai says stimulus support will continue beyond 2015

Amazing. Just two days ago the headline was that the BOJ was discussing how to taper off the stimulus spending. Clearly no one really knows where the Japanese economy is headed right now.

Clearly no one really knows where the Japanese economy is headed right now.

exactly, so better not to mention about time limit...or say "2015 and beyond (!)"

How about just saying " to infinity and beyond!"?

Zimbabwe?

Japan's debt is higher than that of Zimbabwe according to CIA figures. It "will make an exit from the policy difficult" At the very least, our children are screwed.

There is nothing to envy about Japan's economy. A few here will point out that wages are high in Japan, that Japan has a large middle class, and that unemployment numbers are low. On the surface this is true, and to most people these figures indicate that Japan is doing well in relation to other countries.

Unfortunately, the wages, lifestyle, and low unemployment are the result of the country living well beyond it's means. The wages, lifestyle, and low unemployment have all been financed by the current generation borrowing against the wealth of future generations.

The bankruptcy rate in America is three times as high as it is in Japan. Does this mean that American companies are run more poorly than companies in Japan? Hardly. The rate of new business starts in America is five times higher than in Japan, so despite the higher bankruptcy rate, growth is still good. Unlike many other countriee, bankruptcy in Japan is akin to a crime. A bankrupt person loses their right to vote, and cannot be hired as a "seisha" employee. So people and companies will go to any lengths to avoid bankruptcy. For larger companies this means endless restructuring of debt, and often even more borrowing. Many large Japanese companies are now largely owned by banks. Many board members in Japanese companies are bankers. Since the banks themselves hold a large share of a company, they will be hurt if the company fails, so they continue to finance the operation of these companies, hoping against hope theat things will turn around. Sony has lost countless billions of dollars every year for many years running, yet they are still around. Now you know part of the reason why. In other countries, Sony would have long since gone bamkrupt, or been restructured.

The same story is happening on a larger scale with the Japanese government and the national economy. They continue pouring borrowed money into an economy which is increasingly uncompetitive, and in which the population is shrinking. The current lifestyle the Japanese are enjoying is going to be quite expensive to future generations of Japanese.

The government can no longer continue spending as though there will be strong growth in the future. Strong growth is simply not possible when the population is falling quickly, entitlement spending is rapidly increasing, and when foreign competitors can provide high quality goods and services for much less than Japan can. Spending must be cut back to a sustainable level, and government must decrease it's size in step with the decline in the population and the shrinking size of the economy.

To encourage growth, one has to find a way to increase economic activity, which is mainly buying and selling. To increase both of these, goods must be priced at a level which buyers can afford. Right now an extensive list of tariffs is applied to nearly all imported goods. The cost of these tariffs adds about 40% to the cost of said goods. The tariffs also allow Japanese goods to be priced at a much higher level, as domestic goods don't have to compete with imports when tariffs are applied. And other goods which compete directly with certain Japanese goods are simply denied a market in Japan. Collusion between local manufacturers and sellers prevent many high quality, lost cost goods to be sold in Japan. What's worse, this same collusion allows domestic sellers and dustributors to agree on minimum prices for goods, which forces Japanese people to pay much more than they otherwise would. All of these things put together means that living in Japan has simply become too expensive, so people are buying less, and having fewer children. Hence deflation and declining population.

No amount of stimulus is going to help. You can't stimulate a rock to prevent it's sinking to the bottom of the pond. Unless the real problems Japan is facing are addressed, Japan will continue to sink.

The Japanese are in a damned-if-we do and damned-if-we-don't situation, and they don't seem to have the faintest idea of how to deal with it.

No amount of stimulus is going to help. You can't stimulate a rock to prevent it's sinking to the bottom of the pond. Unless the real problems Japan is facing are addressed, Japan will continue to sink.

sangetsu03 -- brilliant post. Too bad none of what you mention will happen.

Amazing. Just two days ago the headline was that the BOJ was discussing how to taper off the stimulus spending.

The story the other day (from the same reporter) was about private internal discussions on exit strategies, this story is about publicly made comments.

Kuroda-san says he doesn't want to talk publicly about exit strategy yet, for fear of sending an unintended signal to the markets which would undermine their current policy setting. (Markets do seem to be terrible at listening to central bankers, so he might have the right strategy there.)

But indeed, how will the BOJ exit?

If one generously assumes that the economy will get stronger as it is supposed to under Abenomics, then interest rates will need to be raised to contain inflation around the 2% target.

But if the BOJ starts selling its massive and rapidly growing stash of JGBs to raise interest rates in an attempt to contain this inflation, those higher interest rates will make it quite tough for the horrifically indebted government to service its obligations, which already pays something like half of tax revenue just to cover annual interest payments, even with rates at close to rock bottom.

What's more, the government currently has a plan to achieve just a primary balance surplus by 2020, 6 years from now. But a primary balance surplus doesn't include interest payments, so the government's finances will still be getting worse come 2020, according to the government's own target, even if (?) they achieve it.

Given the continually worsening state of the government's fiscal situation, who would be jumping in line to buy these "safe" JGBs from the BOJ, if the economy does improve and the BOJ needs to sell, and what will be the price of this debt when the BOJ is a seller rather than the dominant buyer? What percentage of tax revenue will the government be paying in interest then?

My personal exit strategy is simple: diversification away from the yen.

But if the BOJ starts selling its massive and rapidly growing stash of JGBs to raise interest rates in an attempt to contain this inflation, those higher interest rates will make it quite tough for the horrifically indebted government to service its obligations, which already pays something like half of tax revenue just to cover annual interest payments, even with rates at close to rock bottom.

Right now Japan spends 26% of all revenue collected toward debt servicing costs. This number will probably go up another point or two next year if inflation doesn't meet government estimates.

Given the continually worsening state of the government's fiscal situation, who would be jumping in line to buy these "safe" JGBs from the BOJ.

The BOJ is robbing Peter to pay Paul. Much collusion goes on between banks, companies, and regulators. Bond rates have been kept low because those who buy the bonds (mainly Japanese banks, pension funds, insurance companies, etc) are also given special favors. How much have these companies benefited from the recent "stimulus" programs, and monetary-easing policies? But by the end of next year, the amount of JGB's issued will have surpassed the deposit assets held by the domestic banks, which in any other country would mean insolvency. I am curious to see what happens to JGB yields at that time.

(Markets do seem to be terrible at listening to central bankers, so he might have the right strategy there.)

You can't blame the markets for being skeptical about central bankers; banks and businesses generally answer to their investors and customers, bureaucrats and politicians in Japan answer to no one but each other, so their words can only be taken with a generous helping of salt.

My personal exit strategy is simple: diversification away from the yen.

Good advice. Thankfully, I am paid in dollars.

“Under the BOJ’s so-called flexible inflation targeting framework, I maintain the view that it will likely take longer than ‘two years’ to achieve 2% inflation in a way that doesn’t impose excessive burdens on firms and households”

It's the parable of the lucky guess, from the gospel of haven't a clue.

The 5.5 trillion yen stimulus package (flexible fiscal policy - 2nd arrow) must have a clear route to achieving sustainable economic growth i.e. evidence must be seen in increased consumption through higher wages.