FXstreet.com (Barcelona) - The radical quantitative easing expansion eyed by Mr. Abe in Japan, because it appears to be doing no harm, "is grievous error", says Nomura economist Richard Koo.

"Mr. Abe and his advisors may believe that all they have to do once their anti-deflationary policies succeed and JGB yields start to rise is have the BOJ buy more bonds. However, bank reserves under quantitative easing have risen to a level capable of fueling a 500% inflation rate, in which case the BOJ would have to sell, not buy, JGBs" Mr. Koo notes.

Richard adds: "BOJ purchases of JGBs in that situation could cause the potential inflation rate to rise from 500% to 600% to 700% and trigger an economic collapse. It is extremely dangerous to assume that since quantitative easing does no harm in a balance sheet recession, it can be continuously expanded without concern. The real danger posed by this policy will become apparent only
after private-sector balance sheets are repaired, and then it will happen suddenly."

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