This is what I think is happening in Japan:
The CB of a country can increase the money supply without borrowing ... they just print more money. They have several mechanisms to put this money into circulation. The BOJ is printing Yen, buying dollars and then using the dollars to buy US treasuries. From the article I linked, I think this is unsterilized (if it was sterilized, the BOJ would be doing other transactions to reduce the money supply by an equivalent amount). If it was sterilized, they would be borrowing Yen by issuing notes to buy the dollars and increasing their outstanding debt. The evidence suggests this is unsterilized (essentially FREE money!)
What prevents some poor country from just printing a ton of money and doing the same thing? The exchange rate! The currency would depreciate in relation to the dollar, and the country would experience significant inflation.
Isn't that exactly what Japan wants?
The classical formulation is P = M/y. P(price), M(Money Supply) and y(consumption). As Japan increases the money supply, either they have inflation of more consumption or both ... exactly what they want.
Of course, the classical formulation ignores an intertemporal relationship (i.e. savings). The Japanese also need to convince everyone that they are actually going to have inflation. One of Japan's problems has been a reverse credibility gap ... nobody believes BOJ will really permit inflation to occur. If the increase in money supply just goes into the mattress, this doesn't work.
Paul Krugman suggested this course of action in the following article:
pkarchive.org
quoting:
"... there are only two serious remaining policy options. One is to extend open-market operations to those assets whose prices can still be driven up - most obviously, longer-term bonds and foreign currencies. The other is to try to bootstrap a recovery by convincing savers and investors that the future will bring not deflation but modest inflation, something that can best be accomplished by announcing an explicit inflation target, but could possibly be achieved through a less explicit policy of "quantitative easing" - essentially, producing attention-grabbing increases in the monetary base."
Another problem is the "beggar-thy-neighbor" aspect. Every $100 Billion in treasuries Japan buys, is another $100 B that Greenspan needs to push into our economy. IMO, that is why he is complaining about BOJ intervention.
As I said before, I think Japan will keep up this intervention until they start seeing sustained inflation in their economy.
CAVEAT AGAIN: I have no expertise in this area. |
