Apr 29, 2022 (advisorperspectives.com) - Over the last three decades, the Bank of Japan (BOJ) has employed the world's easiest monetary policy.
Initially, the motivation for the bank was to soften the blow resulting from the popping of enormous equity and property bubbles over 30 years ago. While the bubbles are well in the past, Japan has become reliant on the BOJ.
The BOJ's policies to avoid a massive liquidity crisis not only severely degraded Japan's markets and economy but have and continue to benefit asset prices around the world.
With inflation finally perking up in Japan, this massive source of liquidity for global markets may be on the verge of drying up, resulting in a liquidity crisis felt around the world.
In late 1991, Japan's real estate and financial market bubbles popped. Instead of allowing significant bankruptcies and defaults in its banking/investment sectors, the government and central banks supported the banks by enabling them to hold onto non-performing, defunct assets. Instead of having a bad recession or even a depression lasting multiple years, they stymied growth for decades. The nominal GDP is currently at the same level as in 1998.
As an aside, stagnant economic growth is not entirely the fault of the BOJ and government. A poor demographic profile also hamstrings Japan's economy. The working-age population is almost 15% below its peak of 1995. To make matters worse, over a third of its population is 65 or older and quickly becoming dependent on the remaining population.
One of the BOJ's critical policy tools of the last 30 years has been extremely easy monetary policy. Low and even negative interest rates and later quantitative easing (QE) supported massive government deficits and kept interest rates extraordinarily low. Banks could fund non- or poorly-performing assets given borrowing money was nearly free. They did not need to write off the loans and take appropriate losses. However, their ability to conduct new lending was hindered.
The excessive liquidity spewed by the BOJ grossly distorted asset and interest rate markets in Japan and provided liquidity to the world. Japanese citizens and large pension funds were crowded out of local bond markets by the BOJ. Between the BOJ's massive holdings and the large number of bonds held to maturity by pension funds, liquidity in its bond market evaporated. The lack of supply resulted in negative rates and no incentive to invest in bonds.
With limited choices, domestic retail and institutional investors went to foreign markets and sent their money abroad in search of extra yield and liquidity. ...continue reading
