Japan’s sumo-sized quantitative easing programme has featured on the Deep End before. More than six months in to this remarkable experiment, how’s it working out?

First of all, a quick re-cap from Reiji Yoshida of the Japan Times:

“Haruhiko Kuroda hit the ground running when he was appointed by Prime Minister Shinzo Abe in March to take charge of the Bank of Japan.

“Out of the blue, the central bank’s new governor unveiled a super-aggressive easing policy the next month to double the nation’s monetary base in just two years. He said the BOJ would buy more than ¥7 trillion in long-term Japanese government bonds per month to flood the financial system with money to end more than a decade of deflation.”

It should be noted that stoking inflation was the deliberate intent of this policy – as an antidote to the debt and deflation that has poisoned the Japanese economy for twenty years:

“There are growing signs of inflation, but not the sort heralding the start of Abe’s much-advertised recovery and rising wages. Instead, imported fuel and other products have become more expensive because of the weak yen ushered in by Kuroda and Abe, and this bodes ill for the public’s living standards.”

Still, it’s surprising that the inflationary impact of so much money-printing should be limited to the exchange rate effect. One would surely expect domestic sources of inflation in addition to the pricier imports. After all, this is QE on a massive scale:

“Since April, the BOJ has been gobbling up JGBs [Japanese Government Bonds] from banks and the open market. Its purchases amount to roughly 70 percent of the value of all new JGBs issued.”

To be clear, the banks aren’t being paid in Monopoly money. They’re handing over their bonds in return for hard cash that they’re free to lend out:

“But the banks are just stowing that money in their accounts at the BOJ because they can’t find any companies interested in borrowing it.”

This is a pattern we’re familiar with back home. QE creates money, but it doesn’t reach the real economy because not enough people want to borrow it from the banks.

And that’s because people – whether British or Japanese – aren’t stupid. Or at least they’re not stupid if no one else is being stupid. Using loose monetary (or fiscal) policy to revive a moribund economy is a bit like getting your guests drunk at a party – no one joins in unless other people are joining in.

In the midst of a debt-fueled boom, with speculative bubbles inflating all over the place, it’s easy to get carried away: ‘oh go on then, just the one buy-to-let apartment.’ The bursting of a bubble economy, however, has a sobering effect – suddenly everyone sees clearly. This is why economies are so unresponsive to QE or to debt-funded stimulus programmes. The only thing that rekindles economic confidence is the restoration of economic order.

There is however one major difference between Britain and Japan – which is the size of their respective sovereign debts:

“[The Japanese government] has already racked up a public debt totaling almost 200 percent of gross domestic product — the highest of all developed countries. Nearly half of Japan’s ¥92.6 trillion general account for fiscal 2013 is barely being financed by fresh JGB issues.

“…if the average JGB yield jumps to 4 percent in fiscal 2014, debt-serving costs will leap to a staggering ¥50 trillion in fiscal 2025 alone, which is more than half the size of the fiscal 2013 budget.”

So, the next time some faux-Keynesian idiot tells you that sovereign debt doesn’t matter, ask them about Japan.