Gloves off from Kuroda and everyone is very excited... For those who need a rundown of what the BoJ actually did, here's a summary from Nomura: The bank introduced "quantitative and qualitative monetary easing," which consists of the following: (1) the introduction of monetary base controls; (2) an increase in JGB purchases and an extension of the maturity of JGBs eligible for purchase to 40yr; (3) an increase in risk asset purchases (ETFs and REITs); and (4) a commitment to keep easing until the 2% inflation target is steadily achieved. As a result of this new framework, the asset purchase program was scrapped and the banknote rule was suspended temporarily. The decision was almost unanimous, with only Mr. Kiuchi voting against the commitment to keep easing. The unanimous point is worth noting in light of worries that Kuroda would have trouble imposing himself quickly on the BoJ. Even more succinctly, the BoJ used the word "massive" in its release... that's code for "gosh, but we mean business" and this is thus shaping up as a very tasty monetarist experiment. As Chris Giles wrote in an excellent explainer, the idea behind monetary activism to raise inflation towards the 2 per cent target is that this will boost private spending in Japan. As he also wrote, no-one has a clue if this will actually work. We've written about the potential problems with the BoJ's great reflation trick before - demographics, expectations and the need for wages to start ticking up, to name a few - and obviously got involved in such conversations again this morning. One of the best responses we got was from UBS's Paul Donovan and we thought we might just put a chunk up here while we watch the yen tick down 3 per cent against the dollar towards the same lows it hit in mid-March: The Bank of Japan has announced an aggressive program, but it has done so against a backdrop of nearly a quarter century of poor economic performance and an embedded deflation mentality. Consumers do tend to have positive inflation expectations already (if you believe the survey evidence around 40% expect 2% inflation or higher) but not in a good way. They think things they HAVE to buy will rise in price (food, energy) but other things fall in price (washing machines, consumer electronics) - so they think their standard of living is going down and there is no point buying consumer durables now if they will be cheaper in the future. Expectations for nominal income remain very pessimistic which is a further problem. We need expectations of income inflation and that consumer durable goods will be more expensive in the future than they are today, in order to encourage consumer credit demand and consumer spending. Just printing money does not create inflation. The Bank of Japan has a balance sheet that is roughly 33% of GDP today (the balance sheet to GDP measure is like an index of money printing, t is the best economic measure of quantitative policy that we have). In comparison, the Fed is around 19% of GDP, the ECB is around 32%. So that does sound like aggressive money printing is already present in Japan, and it will get more aggressive. But then we consider Switzerland. The SNB balance sheet is around 85% of GDP, and Switzerland has not had positive inflation since 2011. If JUST printing money was the answer to deflation, then the Swiss (with a central bank balance sheet nearly three times the size of Japan's in relative terms) would have solved their deflation problem and be facing hyperinflation on the streets of Zurich. They are not. Printing money has never, ever, ever created inflation in economic history. It is printing EXCESS money that creates inflation. So the question in Japan is what it has been for most of the past two decades: not "what is happening with money supply?"; instead, "what is happening with money demand?." This is where the banks come in. If the banks take the cash provided by the Bank of Japan, and do nothing with it (just hoard it) then there is no economic impact. If consumers remain convinced that the price of durable goods will fall, they will not rush to spend money (reducing savings), instead they will hoard it. Hoarding money is high money demand, which negates the impact of printing. So I really do not care what Mr Kuroda does. I care what happens to the money AFTER it leaves the Bank of Japan. That tells you what the economic impact will be. One scenario that we may well see is that the Japanese banks take the money and lend it overseas (generally within the Asian region I would suggest). That would have the effect of weakening the yen somewhat, but the monetary stimulus (in the form of increased credit availability) is felt internationally and not at home in Japan. A weaker yen is a mixed blessing. It raises import prices (especially raw materials) which is negative for consumer and corporate alike. It helps exporters that sell their goods in foreign currency. However, about 40% of Japan's exports are priced in yen. Those exporters do not benefit from a weaker yen. The worst case scenario would come about if Abe has raised expectations that printing money solves all problems, and the monetarism does not then work. If expectations are raised and we get to the end of this year with negative inflation and maybe 1% real growth, the risk is that people lose even more faith in the ability of policy to do anything. That then creates an even larger hurdle that has to be overcome in the future. Related links: Expectations management for the BoJ - FT Alphaville Whatever it takes - Pragmatic Capitalism