ZIRP Failed in Japan, So They're Doing It Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup