By James Saft
(Reuters) – The Bank of Japan’s massive new bid for inflation will create growth but to its chagrin much of it may well be concentrated in financial markets and outside of Japan.
So long as Japanese consumers remained convinced that the new program will bring more inflation in what they buy rather than in what they earn, much of the benefit will be felt in Europe, the U.S. and the other economies into which the newly minted money will actually leak.
The BOJ last week vowed to spend $1.4 trillion in less than two years buying up bonds and assets in a bid to hit its avowed 2.0 percent inflation goal. The central bank will create money and wade into markets, vacuuming up Japanese government debt and other assets while targeting the amount of money in the economy rather than the rate of interest at which it will make loans.
While this is a step change in scale, the logic behind the plan is no different than the monetary policies followed over most of the past two decades in Japan, policies notable mostly for their lack of success. To break the self-reinforcing spiral of falling prices, wages and output, the BOJ must convince businesses and households that cash spent or invested today will buy more than that tucked away for tomorrow.
By any standard this is a big plan, roughly three times the size of U.S. quantitative easing relative to the size of Japan’s government bond issuance.