Japan Takes Keynesian Expansion to Record Highs

by on December 16, 2013 7:46 pm GMT


According to individuals familiar with Japan’s budget, reporting to Reuters under anonymity, the 2014 fiscal year balance sheet will hit record levels of ¥92.6 trillion, or $930 billion. The expansion of the Japanese balance sheet reaches Keynesian proportions though spending through military spending and public debt expansion. Currently, the Bank of Japan (BoJ) purchases over ¥70 billion in government bonds (JGBs) monthly.

The budget is still in its draft process and is to be approved by Japanese Prime Minister Shinzo Abe’s cabinet next Tuesday, December 24. It will be important for Abe to figure out how the balance the budget in his (almost self-fulfilling) attempts to increase inflation as Japan’s public debt is now twice the size of the economy. Abe’s sales-tax increase, due out next April, will bring additional revenue while tax credits will ease the burden on Japanese citizens. The sale-tax increase is expected to increase tax revenues next fiscal year to seven year highs.

The yen is still largely down but futures have been battling Abe’s policies of late. After the shock and awe monetary policy was issued in April 2013, markets want more easing as results from the first installment of quantitative easing taper off (hint: check out the diminishing returns that led to the Fed to continuously increase QE). Also, equities are hitting peaks as the year ends, and the uncertainty heading into next year is causing spikes into the yen as a risk avoidance hedge.

One thing is for sure during this massive balance sheet expansion, inflation has increased. However, it is largely due to higher energy prices. Wages remain low and the Japanese do not seem to be feeling the growth that economic data represent. Abe still has a long road ahead of him, and the growth he is striving for have to be of quality and not just better than expected numbers.

4H Chart of 6J (Yen Futures)

4H Chart of 6J (Yen Futures)