Have Central Banks Lost Credibility?

As you can see, the money creation is not as straightforward as it seems. The other ways of currency printing apart from mentioned above, e.g. helicopter money (giving money away, which is actually giving away worthless notes) also exist. However, those two which we have mentioned are important because they are linked to the second part of the article.

Japanese Lies

No central bank in the world is as involved in events on financial markets as the Bank of Japan. BOJ's share in Japanese bonds market is so large that it is virtually impossible to call it "the market" at all. Furthermore, the Bank of Japan is also the main player on the stock market owning huge amounts of Japanese ETFs. As in the chart below, in mid-2018, the value of the Japanese ETF market was about 27 trillion yen, of which 20 trillion yen was the Bank of Japan's share!

Along with the purchase of assets, BOJ for many years has been employing loose monetary policy by keeping their interest rates just below zero. During many of the conferences, the people in charge of BOJ explained that their aim is to reach the 2% inflation target.

The problem is that at least 40% of the data on which BOJ activities are based are simply false. This is not a rumor, this is the official fact which came from Japanese authorities. For example, the annual increase of wages in Japan has been overstated by 0.7 percentage points over the past year, which for Japan makes a significant difference.

In general, this scandal gives a lot of doubts whether it is worth listening to any news from Japan, at least for now. To make it short, it can be said, that BOJ activities are based on distorted data, additionally, it conducts currency printing based on its' own whim.

Due to the lack of transparency, Bank of Japan can become a very convenient liquidity provider to the financial markets. Ultimately, no one in the world will be outraged of their activities.

It is also worth noting that due to the course of events in Japan (strong growth before 1989, then stagnation and the highest debt in the world - in relation to GDP) it was the Bank of Japan who had the most time to prove that the policy of eternal currency printing will bring results. After all, considering the disappointing macroeconomic data in Japan, we believe that it is impossible to print prosperity.

ECB has no choice

In December, the European Central Bank has announced the end of asset purchases. It is worth recalling that the ECB has been purchasing mainly corporate bonds without any specific criteria in terms of the selection of companies whose debt would be bought. This policy has given an ideal incentive for corruption because for each enterprise it was better financially to hand over a specific bribe in the exchange for reducing the company's cost of debt.

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Moon Kil Woong 11 months ago Contributor's comment

Sadly Japan is in a QE hole they can pretty much never get out of without a serious collapse in their economy. Their economy is dependent on the funny liquidity and their markets are increasingly driven by it and the government. This is why their economy doesn't ever recover. Their people's future is not in their own hands thus it is hard for businesses to bet on what they can't control. Thus understandable no one wants to invest in growth.