Government Panic: Australia Central Bank Slashes Rate to Historic Low, as Japan’s Government Fires Up $274 billion Stimulus Backed by BOJ’s Asset Buying Expansion

The Australian central bank cut interest rates to historic low.

Here is how the BBC explained it

Australia's central bank has reduced interest rates to a record low, cutting its cash rate from 1.75% to 1.5%.

The decision by the Reserve Bank of Australia was widely expected after a recent run of weak inflation numbers.

The bank's board hopes the further cut will boost the labour market and economic growth.

Australia's economy has been moving towards growth less dependent on commodities after the end of an unprecedented mining boom.

While inflation numbers have indeed been weak, I believe that there have been bigger or more significant factors involved which the Australian central bank didn't say.

That other factor: Spiraling DEBT! Both private sector and government debt have now reached record levels! 

Debt may have such a level where interest payments have become so much a burden even at zero bound. So the sustained interest rate cuts.

Oh, the Japanese government also just approved a 28 trillion yen stimulus package, according to an updated report by CNBC.

However, I excerpted below an article prior to the approval. From Nikkei Asia

Prime Minister Shinzo Abe's Cabinet will approve an economic stimulus package worth 28.1 trillion yen ($274 billion) on Tuesday aimed at beating deflation and shoring up the economy.

The mechanics of the distribution of fiscal stimulus.

Due to fiscal constraints, the majority of the stimulus package will come from the fiscal loan and investment program, which is not based on the general budget.

The government plans to submit the draft budget to an extraordinary Diet session to be convened possibly in mid-September. During the Diet session, lawmakers will deliberate a revised bill to postpone the consumption tax hike to October 2019 from April 2017.

Among the state and local government expenditures, 1.7 trillion yen will be allocated to building infrastructure to boost tourism and agriculture, while 2.5 trillion yen will be used to enhance welfare such as nursing care and childcare.

The government will set aside 600 billion yen to help small and medium-sized companies deal with any possible negative effects from Britain's decision to leave the European Union and earmark 2.7 trillion yen to rebuild areas hit by the massive earthquakes in northeastern Japan in 2011 and southwestern Japan in April.

"There is a risk of the economy slowing down" following the Brexit vote, Finance Minister Taro Aso told a press conference, adding the government needs to provide a financial intermediary function so small and medium-sized companies do not have problems securing funds.

To bolster consumer spending, the government will distribute 15,000 yen in cash each to low-income earners.

Awesome. More spending that will bury Japan deeper into debt.

Since 1993, Japan has been throwing money after money at things that hasn’t worked.

From yesterday’s Bloomberg 

Prime Minister Shinzo Abe’s "bold" plan to revive the economy with a $273 billion package leaves him traveling down a well-trod path: it marks the 26th dose of fiscal stimulus since the country’s epic markets crash in 1990, in a warning for its effectiveness.

The nation has had extra budgets every year since at least 1993, and even with that extra spending, it has still had six recessions, an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor.

While some analysts say the latest round of spending may buy the economy time, few are convinced it will be enough to dramatically change the course. First off, much of the 28 trillion yen announced by Abe last week won’t be spending, but lending.

And if previous episodes are any guide, an initial sugar hit to markets and growth will quickly fade amid a realization that extra spending does little to cure the economy’s underlying problems. A Goldman Sachs Inc. study found that markets gave up their gains in the first month after the cabinet approved the stimulus in 18 of the 25 packages it studied since 1990….

There are other reasons to doubt the latest stimulus plan. Economists question how much of the headline announcement is new spending -- so-called "fresh water" -- that will trickle into the economy, as opposed to existing spending pledges that have been repackaged.

It’s likely that Abe’s net new spending will be much smaller than the headlines suggest, said Hideo Hayakawa, a former Bank of Japan official.

"We don’t need any fiscal stimulus," he said. "What we need is enhancement in productivity, thereby raising potential growth."

Abe came to power in late 2012 promising to drag Japan out of a deflationary malaise by changing the economy. The symbol of that was a new 2 percent inflation target, the achievement of which was meant to show that Japan had returned to a stable economic footing. Since then, the economy has contracted in five quarters, economic growth is forecast to have slowed sharply last quarter, and prices stopped rising and started falling again.

Emboldened by a thumping upper-house election win in July, Abe is doubling down the strategy that he unleashed in 2013 -- extreme monetary easing and fiscal stimulus. Initially at least, the plan seemed to work. The yen dropped, exporter’s profits surged and stocks rallied, but that glow has since faded.

Try and try until the Japanese die, must be the motto of Abe San.

Oh by the way too, last Friday, the Bank of Japan underwhelmed on heavy public expectations of a massive stimulus.

From CNBC

In an eagerly-awaited decision, the central bank said it would ramp up ETF purchases so that their amount outstanding will rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously.

It also doubled the size of a lending program for local companies to $24 billion. The program provides U.S. dollars to Japanese companies in a bid to support their overseas activities.

Notably, the central bank left interest rates steady despite mounting pressure for aggressive easing from Prime Minister Shinzo Abe's administration.

So an 81% increase in stock market support plus $24 billion in dollar lending program. For the latter, it appears that Japanese firms have been having a difficult time sourcing “dollars”, so the US dollar program.

And curiously, the BoJ explained the reason for its supposed restraint

From Reuters:

The central bank, however, said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying program in September, suggesting that a major overhaul of its stimulus program may be forthcoming.

BOJ Governor Haruhiko Kuroda said the bank was conducting the review not because its policy tools have been exhausted but to come up with better ways to achieve its 2 percent target - keeping alive expectations of further monetary easing.

"I don't think we've reached the limits both in terms of the possibility of more rate cuts and increased asset purchases," Kuroda told reporters after the policy meeting.

Has the drying up of JGBs been the real cause behind the BOJ’s dithering?

Or has the BOJ been preparing a surprise for the market?

Stock markets on record highs while government and central banks have been in a panic

Truly Interesting developments

Helicopter Money: The Japanese Government’s Addiction to Destructive Monetary Inflationism

Former Fed chair Ben Bernanke’s meeting with Japanese authorities early last week sparked fervid speculations that the fresh electoral victory by PM Shinzo Abe would extrapolate to the administration’s introduction of the “helicopter money”.

The proposed adaption of Helicopter money represents essentially a fiscal policy. However, the difference with that of QE is that such increase government spending will be financed directly by the central bank through the printing press via debt purchasing. Or central banks will monetize government spending via the printing press. Another difference, spending targeted on the real economy rather than merely through financial channels.

Nevertheless the promise of “helicopter money” means that developed economy governments will likely inundate global economies with liquidity. With Japan as likely the first developed nation to experiment on Bernanke’s “helicopter money”, the yen crashed by a shocking 4.32%! But such crash has implied of the triggering of the yen carry or borrowing or shorting of the yen to finance arbitrages on assets of other ex-USD currencies.

Remember for Japan, after ZIRP, QE, NIRP and now comes helicopter money. Like a late stage cancer patient, every new applied medication provides a shot of adrenalin of hope. But eventually reality based on entropic economic forces will dominate.

Just look at how the Nikkei 225 has transformed into a humongous rollercoaster.

Since the Helicopter money was floated the Nikkei spiked by 9.2% this week and 12.19% includingFriday of the other week. To consider that the Bank of Japan has accounted for as top 10 shareholders of 90% of the Nikkei composite stocks!

Sustained interventions by the BOJ would mean that the pricing discovery function of Japan’s stock markets would lose its essence.

Furthermore, Nikkei companies has been transforming into wards of the Japanese government or as state owned enterprises. Should the Japanese government continue to muster shares, policy actions will now be coursed through the board room than through policies. In addition, given the Japanese government’s increased absorption of the private sector, this translates to a slippery slope of socialism of the Japan’s economy.

In other words, the effects from the aggregate interventions by the Japanese government and by the BOJ had little or no improvements to show. What it has done has been to amplify volatility and to accrue more systemic imbalances.

But there has been no accountability for policy errors. In fact, in the bizarre world of politics the Japanese rewarded the Abe with a landslide victory! And PM Abe’s recourse has been to double down on gambling with the citizenry’s wellbeing through more radical experiments! ZIRP, QE and NIRP had all failed. The Japanese government had also tried various forms of stimulus since its bubble bust in 1990! Perhaps Abe’s motto may have been “Try and try until the Japanese die”!

Yet via Bernanke, the Japanese government is now considering an emerging market policy path of fiscal deficit monetization by the central bank in order to combat deflation. In short, desperation seems to force the hand of the Japanese government to embrace the Argentine and Venezuela model. Except that such an experiment will be draped with technocratic tools such as perpetual bonds.

ZIRP, QE, NIRP and now Helicopter Money reveals of how central bankers have become totally addicted towards the use of destructive runway inflationism.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, recently explained at the Marketwatch that “Central banks around the world have cut interest rates a combined 659 times since Lehman Brothers filed for bankruptcy on Sept. 15, 2008, resulting in negative rates in many major economies”, in addition, central banks’ holdings of financial assets to swelled to $24.6 trillion just “to prop up their economies by continuously funneling funds in to the system”. $24 trillion would account for about 32% of the global economy!

And global central banks will continue to push such policies to the limits with almost no prospects of backing off.

Proof? This week, the new governor of Bank Negara Malaysia unexpectedly chopped interest rates. While the Bank of England (BoE) left rates unchanged also during the week, the BoE’s chief’s economist expects of a “significant” and “material” package of action by the English central bank in August.

Such radical experiments only postulates to accidents waiting to happen anytime!

With the exception of 30 and 40 year, the entire yield curve of Japanese government bonds (JGBs) have all drifted to negative territory, this means that if Bernanke’s squadron of monetary choppers will succeed in the cash bombardment of the Japanese economy to ignite inflation, what this entails could be a crash in JGBs! (if not a crash in global bonds)

So be careful of what you wish for.