Bonds to the Rescue

H. Kuroda, the new governor of Bank of Japan made a dramatic announcement today. Instead of trying to keep the interest rates low, the bank would henceforth buy long-term bonds to force more money into circulation. This, hopefully, will encourage everybody to spend more and pull the Japanese economy out of its 20-year-long doldrums.

The point that caught my attention came in this para of an NYT report:

"the central bank said it would buy longer-term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to ¥270 trillion by March 2015. Under that plan, the bank will buy ¥7 trillion of bonds each month, equivalent to over 1 percent of its gross domestic product — almost twice the pace of the U.S. Federal Reserve."

Yen 270 trillion translates into Rs. 1.55 Crore Crores (155*10^12) and US$ 2.83 Trillion!
According to BoJ, Japan's current monetary base stands at Yen 146 trillion. So if all goes well the expansion is going to be about 50 percent in two years.

What is India's current monetary base?

According to a Reserve Bank of India (RBI) press release dated 22 March, 2013, India's latest recorded money supply (M3) stands at Rs. 73 Lakh Crores (73.5*10^12).

So the difference in money cirulating now in India, to what Japan expects to have in 2015 is the difference more than double our current levels -- Rs. 82 Lakh Crores (82*10^12)!

Note: All figures in US$ Trillion; India's monetary expansion is assumed to be 16%

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LINKS & REFERENCES


Japan - Monetary Base 2013 - http://www.boj.or.jp/en/statistics/boj/other/mbt/mbt1303.pdf

RBI - Growth Rates for M3 -- http://rbi.org.in/scripts/SPF17.aspx

Tabuchi, Hiroko (2013): JAPAN INITIATES BOLD BID TO END FALLING PRICES, NYT, 4 April, 2013 --- url --- http://www.nytimes.com/2013/04/05/business/global/japan-initiates-a-bold-bid-to-end-years-of-falling-prices.html?partner=rss&emc=rss&smid=tw-nytimes&_r=0
- The central bank said it would aggressively buy longer-term bonds and double its holdings of government bonds in two years, doubling the amount of money in circulation in the process. The bank will aim for a robust 2 percent rate of inflation “at the earliest possible time,”
- The policies are part of a new asset purchase framework that focuses on the monetary base instead of the overnight interest rate, which has remained close to zero for years doing little to increase prices or otherwise help the real economy.

* RBI Press Release on Money Supply -- http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1658RM0413.pdf

* George Soros's view - http://www.businessinsider.com/george-soros-on-bank-of-japan-2013-4?goback=%2Egmp_49695%2Egde_49695_member_229425408