The new Governor of the Bank of Japan, Haruhiko Kuroda, has announced $1.4 trillion of quantitative easing over the next two years. The FT reports (Japan starts monetary revolution, 5 April) that the BoJ will double Japan’s money supply in an effort to end decades of deflation, and that Barclays estimate this will be a 1% growth in GDP each month for this year followed by 1.1% monthly growth in 2014.
This bold move by the BoJ will certainly cause a reconsideration of strategy by both the Bank of England and the European Central Bank, both of whom recently announced no changes in their QE policies.
The UK Treasury will also show an interest, but perversely for a different reason. John Kay has written (Politicians bow to pressures to bend data, 13 March) about the growing tendency by the UK government to be very selective and misleading in its use of economic data, and to be fair he points the finger at previous governments too. Recently the UK government made its borrowing figures look better by counting as government income the extra interest payments that the BoE are receiving following its QE measures, while not counting the QE amount itself as increased public sector debt.
So the more QE is pumped into the UK, the better the government’s deficit will look on paper.
But can any increase in money supply be directed at jobs and sustainable growth, or is it doomed to be blown on asset price inflation and another bubble crisis? The USA approach to QE has changed recently to focus on employment levels as well as on inflation, and there have been discussions in the UK that the new Governor at the BoE this summer will somehow try to follow suit, with some early moves in that direction already started. Certainly the BoJ have accepted that inflation is better than deflation, and a modest growth in inflation in the UK, if accompanied by growth in the jobs market, might encourage personal savers to start spending more again at a time when UK personal savings are at their highest level since 2004.
The experience in the UK to date has been that QE has helped some large firms build up very strong cash reserves, but their finance directors have been mostly sitting on their hands waiting to see how the economy will develop; and small and medium firms have been denied almost any bank credit other than high-interest overdrafts and credit cards. The need now is for QE to reach smaller firms and not just the corporate head offices.