Brendan Brown on The BOJ's Bloated Balance Sheet

He is the chief economist and head of economic research at Mitsubishi u f J Securities. But right now, let's go to Charlie Pett and the Bloomberg News from Corey Bloomberg Business Flash, and I think if him Fox, let us begin with the Bank of Japan. It kept its key monetary tools unchanged and will mount a comprehensive review of its policy framework due to quote considerable uncertainty about the outlook for inflation, which has consistently underperformed the central

banks forecast. James Sweeney is chief economist at Credit Suite Securities. I think a review makes sense. I mean, they're they're closing in on of the bond market owned by the BOJ and moving towards fifty and sixty on the on the current plans um hasn't worked so far, and market expectations are swinging around. I mean, this week, people really expected them to come in and and do helicopter money. I didn't think it seemed like that reasonable in expectation.

Now it's been disappointed. The US Commerce Department says the economy expanded in the second quarter at a one two percent raised, lesser than projected, after an eight tense of one percent advance in the first three months of the

year that was weaker than previously estimated. The medium forecast of economists surveyed by Bloomberg called for a two and a half percent second quarter increase, and consumer confidence is measured by the University of Michigan and slid in July from the prior month on tim reviews of the U S economy's prospects and lingering concerns among hiring common owners about global market conditions, x On Mobile and Chevron, missing

profit and production estimatess, wildfires, write downs and weak refining margins. Battered oil explorers already reeling under a glut driven price collapse. X On Mobile down one point seven percent and Chevron is up by four tenths of one percent. Crude Oil West Texas Intermediate of one percent forty one of fifty three for a barrel of crude gold up eighteen forty announced the thirteen fifty SMP of five, a gain of two tenths of one percent to thirty two on Wall Street.

Now we'll look at the other stories making news. Thank you, Charlie from the Bloomberg News Room. I'm Jill Schneider. Hillary Clinton and running mate Tin Kine are hitting the road today. The two were taking a bus trip through two battleground states, Pennsylvania and Ohio. Donald Trump is back on the road to appearing in Colorado Springs. Trump's run nate Mike Pants joined fellow bikers today in his home state of Indiana for the annual Motorcycle Ride with the group a bait

American Bikers aimed towards education. Before he redd off, the GOP vice presidential nominee spoke to reporters, Let's make it a safe ride. Let's make it a fun ride, but let's make it a ride. Let's make it a ride that sends a message all over this state that here in the state of Indiana, we stand with those who serve. There's more fallout from the Flint water controversy. Bloomberg's Michael

Barr has more. Michigan's attorney general has charged six more state employees with crimes related to the lead contaminated water crisis in Flint. According to the Flint Journal, a judge signed off on the charges filed by Michigan a g bill shooting. Flint, a city predominantly black with a population of about a hundred thousand people, used the Flint River for tap water eighteen months ago to save money, but the water was contaminated with lead after it flowed through

aging pipes. In April, two state regulators and a city employee were charged with official misconduct. Michael Barr Bloomberg Radio in Connecticut. Today, the public is getting a glimpse of the new Sandy Hook Elementary School built to replace the one where twenty first graders and six educators were murdered. The old facility was torn down in December two thousand twelve after the rampage. The new school was built on the same property, but not in the old footprint. It's

scheduled to open next month. Global News twenty four hours a day, powered by more than twenty journalists and analysts in more than one twenty countries. I'm Jill Schneider, and this is Bloomberg, Charlie, and we thank you, and again recapping a move higher for US equities SMP five hundred index trading very close to a record now up five a gain of two tenths of one percent. I'm Charlie Pellett. That's a Bloomberg business flash. You're listening to taking Stock

with Pim Fox and Kathleen Hayes on Broomberg Radio. All right, Matt Miller here with Pim Fox. We're gonna bring in Brendan Brown, Chief Economists and head of Economic Research MITSUBI U f J Securities on what I think is one of the most interesting topics of the week of the month. Really, I think the Bank of Japan is more exciting right now than a Bank of England, Bank of Europe, Bank

of England e C B OR or the Fed. Brendan to me, it's the idea, even though it's kind of been shot down of helicopter money, that keeps this story so fascinating. Why can't Carona do anything to get inflation going? Well, But they have been having a helicopter money for two years. We've had the budget deficit running at six of GDP and effectively of the Bank of Japan has been buying bonds essentially the next day after the issued from the banks.

So helicopter money is here. But the reality is you can only get inflation up if there's about of strong growth. You need to have strong demand growth in the economy,

and that they failed to have all together. And I would say the main two reasons for that have been, first of all, the extent of uncertainty created by all this monetary experimentation, and secondly, of course we've had the complete lack of economic reform, which was meant to be the third pillar of the RB economic But Brendon, how can it be impossible to get inflation going if you're

just sitting there printing money. And the Bank of Japan now has a balance sheet that's the size of or surpassing the Feds any day now, Um, it's more than I think eight percent of their entire g d P. And if you're just printing money, willy nilly, who's going to continue to put faith in your fee currency. Well, that's a big question the Japanese themselves. When are they going to run out of the end? When are we

going to get capital flight out of Japan. What we had in the first two or three years of urb economics is there was a huge amount of speculation against the end, essentially foreigners going short in the end borrowing yen. But the Japanese themselves and not go head over tails into buying foreign assets, so they continue to have this

bias in favor of their domestic market. For the for the policy to um produce high inflation, you either have to have some sort of capital flight like in the ultimate you had in them republic um, or you have to have very strong domestic demand being stimulated by this. But but neither of that have happened. I think one or two of those will happen if they continued with

this policy for the next five years. You know, if you if you look at the future for Japan, there will be a discontinuous shift at some point into high inflation. But it's not something that happens gradually. It happens in a discontinuous version. Is there a bond bubble definitely there's a bond bubble because you're looking at ten year yields in the j GB market, which slightly negative minus nor

point two. Yet if you take any reasonable scenario approaches to what's going to be happening in Japan the next five to ten years, you would have to put a significant probability on this high inflation the yen collapse at

some point. So anyone buying jgbs at these sort of yields um using some sort of fantasy, fantasy calculation, I would say nobody is buying bonds at these low yields and negative yields except for the Bank of Japan itself or foreigners doing an arbitrage in two dollars and getting

a hundred basis points over treasuries. So the bubble is actually in the sense that you've got a lot of institutions and investors holding these bonds that huge profits compared to where they bought them, but they're not going out and taking the profits. At some point they will that's when the bubble will best, all right. So that's describing what's going on at the Bank of Japan with the Government of Japan. They are proposing a twenty three cent

an hour increase in the minimum wage. They also want to increase the benefit to low income individuals for about ninety five dollars a year, and they want to lower the unemployment insurance pre meum over a number of years. Why do all of these very small things if they're

not going to have any effect on the larger picture. Well, as you say, in in and arithmetic terms, the budget proposals which have been leaked out of the RB administration amount net net net about nor point six or nor point seven percent of GDP, So that's not going to

be a game changer. Although I would say that when you take account of all the subsidized lending that explodes that package by about three times, I would very much expect the credit rating agencies to be downgrading japan debt and that may be one of the triggers eventually two

a week a year and bursting the bond bubble. But I but I think the package, once seen so far as one knows about it, it's very much carrying out the pledges that were made in the Upper House elections two weeks ago and rewarding basically the core groups for support the LDP governments, such as the construc auction companies, so you're seeing a package which has weighted towards those political interests. Brendan Corona Themes seems to want to have a rethink here. What do you think he's going to

come up with? Is it possible that we'll get in about face. I don't think Kuroda himself doing an about faith. Central bankers don't in general, and I don't think Coroda is an exception um walk back on their policies in that way. If it's going to be any change to the monetary targets or monetary policy in Japan, it would have to come from RB himself deciding to replace the leadership in the Bank of Japan and explaining that the policy has failed. But I don't see any signs of that.

Thank you very much for joining us Brendan Brown as chief economist and head of economic research at Mitsubishi u f J Securities, giving us his perspective on the Bank of Japan and their efforts to stimulate the economy. This is Bloomberg. This Hampton's Commuter Minute is brought to you by land Rover. When towers seem like trees and roads become rivers, the range Rover evoke as they are, to guide you through the twists and turns of the urban jungle.

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