The Bank of Japan has surprised the market last week by announcing an ultra-aggressive market monetary policy expansion.It said that a combination of weak demands and falling oil price meant that more actions were needed to banish a deflation mindset.They will mostly purchase longterm government bonds to insure Monetary base rise by $724 billion this year. This caught huge intention in the market and I’ve read several Blogs in Wall street journal,Bloomberg and Financial times stating different opinions about this.

One of the blogs which drew my attention was Bloomberg’s “Japan creates world’s biggest bubble“. It stated negatively about the action Haruhiko Kuroda did and said it is destroying Japan’s Market stand.

In my view, Japan has suffered liquidity trap, or in other words, deflationary trap since the 1990s. Therefore, there is no use to continue opening the liquidity channel (Keynes liquidity preference model), I think the way which the BOJ is doing is kind of like introducing or promoting the inflation channel or other channels which Milton Friedman stated in his well known claim.So in this way,what the BOJ has done is understandable.But I agree with the blog which it stated that Japan is creating a huge bubble in the bond market because a large purchase of long term government bonds. Once the government steps into the the market,it is very hard for them to exit and might lead to a debt monetization which would turn the central bank of Japan into a government tool.

Below is the Central Bank assets of some of the worlds important central banks including the BOJ

What they really need to focus on is to change the expectation of the Japanese which stayed there for 17 years. As I mentioned in my previous blog,never underestimate the power of people’s expectation!

Whether Haruhiko Kuroda is a genius or a madman we cannot judge now, since this is the only better and modern way which Japan could do. Lets just wait and see.

Reference

http://www.bloombergview.com/articles/2014-11-04/japan-creates-world-s-biggest-bond-bubble