The Bank of Japan's massive new bid for inflation will create growth but to its chagrin much of it may well be concentrated in financial markets and outside of Japan.
So long as Japanese consumers remained convinced that the new program will bring more inflation in what they buy rather than in what they earn, much of the benefit will be felt in Europe, the U.S. and the other economies into which the newly minted money will actually leak.
The BOJ last week vowed to spend $1.4 trillion in less than two years buying up bonds and assets in a bid to hit its avowed 2.0 percent inflation goal. The central bank will create money and wade into markets, vacuuming up Japanese government debt and other assets while targeting the amount of money in the economy rather than the rate of interest at which it will make loans.
While this is a step change in scale, the logic behind the plan is no different than the monetary policies followed over most of the past two decades in Japan, policies notable mostly for their lack of success. To break the self-reinforcing spiral of falling prices, wages and output, the BOJ must convince businesses and households that cash spent or invested today will buy more than that tucked away for tomorrow.
By any standard this is a big plan, roughly three times the size of U.S. quantitative easing relative to the size of Japan's government bond issuance.
The question is where the money goes. Clearly the BOJ is already having a big impact on global markets, with the yen continuing to fall in value and Japanese government bond interest rates declining in sometimes frenetic and disorderly trading.
The problem is in the pessimism entrenched in Japanese consumers' thinking process after a generation of deflation and economic stagnation.
A survey released by the BOJ last week showed that almost three-quarters of households expect prices to rise a year from now, the most since 2008. On the surface, this looks like a great victory for monetary policy. Households, seeing inflation, surely will part with money?
Not necessarily. First off, expectations for rising prices are concentrated on the kinds of things which households must buy, notably food and energy. When it comes to durable goods, in other words the things one can choose not to buy, the expectation is still for falling prices in real terms.
Even worse, only 9.5 percent expect their own wages to keep pace with inflation.
The clear implication is that the money won't move, because households will cut back on spending to protect themselves from the rising cost of essentials.
That might possibly change if Japanese businesses start hiking wages, but while newly aggressive monetary policy may drive the yen down and make exports more competitive, it does nothing to improve Japan's poor allocation of capital and development of products.
THE GREAT LEAK
As with QE in the U.S., the real place to look for the impact of central bank action is in financial markets.
The BOJ will succeed in driving down the value of the yen and rate of interest on Japanese bonds. That is good for exporters, but bad for the many investors who depend on income. It will also drive up the price of stocks, at least in part as savers take on more risk.
If the great printing of money doesn't do much to move money around Japan's domestic economy, that money will sit on deposit at banks, insurance companies and pension funds, all of which will have to decide what to do with it.
Many, inevitably, will become increasingly desperate for extra yield and will choose to take risks by investing in overseas bond markets which offer higher returns, though also the additional risk of currency moves.
That will help to drive down interest rates in places like France, the United States and emerging markets like Brazil. This will be especially welcome in the euro zone, and may go some way to explaining why there has been so little criticism of Japanese policy outside of Asia.
A more committed Bank of Japan may have trouble defeating deflation, but will support riskier markets. Investors in high-yield bonds and equities alike will see prices supported by what should be a steady flow of money out of Japan and into just about anything but Japan.
In some ways this is all reasonably good news. More money printing will help Japan a bit, and is generally stimulative everywhere.
The real issue is the sustained, and widening, disconnection between financial markets and the world's real economies.
Japan may well be looking at a bull market but searching in vain for a recovering economy.
(James Saft is a Reuters columnist. The opinions expressed are his own)
(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)