The demographics have driven the zero-growth of the last years. On the topic of inevitable destruction of Japan and hyperinflation --some of you guys forget: Deficit spending is just a wealth transfer from the government to the people. This is what has happened very slowly over the last few decades. The people of Japan are wealthy (relative to the US). Just as easily, the people can transfer their wealth back to the government to reduce debt burden (through taxes). And in Japan, they'll gladly do it (remember Kamikazes?)... after all, these are people who are now newly optimistic after recently losing 30% of their wealth through currency devaluation. The next 30% might be a little more painful, but are still doable. The 'happy ending' for Japan is that the weaker currency brings back growth, rates rise in due time (due to the economy becoming healthier), and Japan raises taxes (which it has a ton of capacity to do) to bring the budget back into balance given the new cost of money. Given their forex reserves and ability to tax (which can't be underestimated), they have a decent probability of landing on their feet....although i wouldn't be surprised at 150 yen/d. They do seem like buffoons trying to talk the rates down right now. They want their cake... What they need to do is literally hand out cash on the streets and get the yen to 120/d. Then it doesn't matter what rates do... (because lets face it, Japanese aren't going to start borrowing because money is cheap - that was already the case, and did nothing -- they'll only start borrowing if they GENUINELY think they can pay back those yen loans in cheaper future currency .. and as Krugman says, you have to appear reckless as a central bank to get that to happen). So my only criticism is that they aren't reckless enough if they are really serious about 2% ... This fear of going over 1% is absurd given the circumstances.
" after all, these are people who are now newly optimistic after recently losing 30% of their wealth through currency devaluation. " most people do not measure their wealth in anything other then their base currency. do you measure your wealth in swiss francs? "they'll only start borrowing if they GENUINELY think they can pay back those yen loans in cheaper future currency .. and as Krugman says, you have to appear reckless as a central bank to get that to happen)." that is a recipe for disaster . people will spend their time gaming the system rather than being productive. every 2 bit dictator in argentina, brazil.venezuela etc. has tried this at one time or another. it has never worked. you cannot devalue your way to prosperity. all you do is make the middle class poor. do any posters believe krugman's nonsense?
The Japs "WANT inflation @ 2% without rates backing up"... you know, "money printing without consequence (sort of)"... similar to what BS Bernanke is attempting to engineer in US.
this would be "monetizing the debt", what japan and us may be forced to do at some time. as far as i know when you start monetizing the debt, you get 2% inflation... per day
i don't believe central bankers can make an economy. my favorite example a few years ago we were told the markets would be low for a long time but now if you listen to people on tv this is the start of a major bull run. you can't look at history anymore because everything being done has never been done before. its like giving someone prozac and saying there are better now. what about the underlining problems? sure no jobs and no business sales growth but your home is up 5% this year so everything is ok.
Japan wants to create inflation to reduce its public debt. But itâs almost impossible to to stem the rise in interest rates and the Japanese know it very well, in fact ... http://www.zerohedge.com/news/2013-05-30/here-are-holdings-japanese-public-pension-fund
Kuroda would like to hit 2% inflation target by changing market expectations and behavior to steepen the yield curve (i.e. short-end gets lower or short-term interest rate gets lower & long-end gets higher or long-term interest rate gets higher) with a lower short-term interest rate and coupled with the recent fiscal stimulus administered by Shinzo Abe, both the government and BOJ wants consumers to spend more in order to stoke inflation if we work by Fischer equation, (i.e. real interest rate = nominal interest rate - inflation rate) or we could just refer to real int rate as inflation-adjusted rate. then by rising inflation rate, we'll have lower bond yield. building on this mechanism, Kuroda also wishes to steepen the curve to induce some risks taking behavior in the forms of business investments through lower costs of borrowing and taking up of banks' loans to provide even more liquidity to the Japanese economy. all in all, the government & BOJ hope to achieve greater growth & inflation rate now going back to your post, Kuroda's worried about rising bond yield in 10y because that's basically where the short-end is on the curve. bond vigilantes demand greater bond yield as they are pricing in future inflation expectations as it'd erode the current value of principal sums and coupon payments. as such, animal spirits and herd mentality in the bond market can really & easily destroy what Kuroda would like to achieve in the markets
All is well if "short end" = 2 years and under. But 10 yrs is a lot of duration - the central bankers are just complacent about it. If you are trying to achieve 2% annualized inflation in 3 years, then do the math even with a discrete switch at 3 yrs: (1.0* 1.0 * 1.0 * 1.02 * 1.02 * 1.02 * 1.02*1.02*1.02*1.02)^(1/10) = 1.396%. Just for zero real return in that case, you need nominal rates 50bp higher than where they are now. (and that assumes BOJ has -complete- control of inflation. If there exists the possibility that BOJ needs to buy up half the market to fix rates lower, inflation expectations should ramp up ... investors will need more real returns to compensate for the larger range of inflation possibilities.) The best thing that can happen to Japan is that rates hit 1.4-1.5% right now and stabilize there (without any further giant shock and awe programs). Otherwise, we'll see the yen devaluing quite significantly to where benefits are eroded... Sure it could hurt a few marginal banks, but at 110 yen/dollars, they'll make it back on economic growth.