According to the WSJ report, if the BOJ continues buying government bonds at the rate it is buying them now, it will run out of bonds to buy in about 18 months. So much for that brand of quantitative easing. The scary part is that there are not a lot of other options out there to replace those bonds with. Rates are already at rock bottom going into negative territory, which in plain English means that money holders have to pay banks to hold money for them. The only assets left to buy are mainly stocks.
So what is the problem with the BOJ or for that matter any other central bank that wants to buy stock? In simple terms, this is tantamount to the nationalization of the companies being traded in the stock exchange, because central banks are owned by the state – although they are somewhat independent from the government.
Nationalizing large portions of the stock available would prop up stock prices without creating any value. This move will effectively kill the markets as we know them, and it will generate a huge bubble in the process. For those who have significant amounts of stock in their portfolios, it could be a huge short term value booster to their portfolio, a great point to start selling and cashing in on all that money the banks will be printing. But gains will be short lived, as the economy will subsequently collapse, sending inflation from excess money supply, through the roof.
The solution to Japan’s woes and those of every other major economy on earth that has been throwing cheap central bank money to prop businesses up, is to do exactly the opposite. Central banks must start pulling away from negative rates and quantitative easing, and let the markets purge the malaise out. It is clear that current monetary policy is not working, and the ‘running out of ammo’ cliché, will soon become a harsh reality that no one will want to deal with.
