Wednesday, October 13, 2010

Competitive devaluation strategies come to Japan

This gets interesting.  Japan's currency has value because they take the productive abilities of a nation and use it to make Lexus hybrid limos and state of the art video gear and a thousand other things like solar panels.  Folks still want Japanese stuff.

Of course, this means they will run a balance of trade surplus so the intrinsic value of the Yen is multiplied by the currency speculators.  This means Japanese exporters are getting hammered by the high Yen.

According to neoliberal monetary theory, the Japanese should be able to drive down the value of their currency by violating all the "rules" proper central bankers are taught to follow.  But this move is hardly without precedent.  The current "violations" of the Japanese central bank are almost precisely the sort of things that Marriner Eccles did to finance World War II in USA.  In other words, it is a Producer Class wet dream.

The Japanese will almost certainly be condemned by the central bank fraternity, (see that rabid dog reference below) but not for the reasons that will be offered.  The real reason these guys don't want the Japanese to go off the reservation is that this rule-breaking is almost certain to return prosperity to Japan and the central bankers who have caused the current economic calamity don't want a good example to trash their carefully constructed narratives.
Japan's Central Bank Threatens To Buy Up Even More Stocks, Bonds, And Real Estate
Vincent Fernando, CFA | Oct. 13, 2010, 4:09 AM 
Japan's central bank made the incredible announcement last week that it would buy stocks, bonds, and real estate in a bid to devalue the yen.
They've already set up a $61.1 billion fund targeting bonds, exchange-traded funds (ETFs), and real estate investment trusts (REITs) and it's a bid to fight deflation by blatantly inflating all kinds of asset prices.
As Joe Weisenthal has pointed out, this is part of Japan's new 'rabid dog' monetary policy -- They want speculators to be absolutely terrified by the unpredictable nature of the central bank. It could suddenly intervene in currency markets, suddenly start buying Nikkei ETFs, or just throw free money at banks and order them to lend. They're craaazy, so beware if you're long the yen.
Yet even Japan's wild actions to discredit its own currency hasn't stopped the yen from appreciating further. It's now below 82 per U.S. dollar and near year-to-date lows (ie. the strongest all year) more

IMF chief fears risk of currency war after Japan's zero interest rate move
The Bank of Japan’s surprise move to reinstate zero interest rates has led to a warning of the danger of a currency war from the head of the International Monetary Fund.
By Philip Aldrick and Jonathan Russell
Published: 11:34PM BST 05 Oct 2010
IMF chief Dominique Strauss-Kahn warns against using currencies as a policy weapon.
Dominique Strauss-Kahn warned that moves by central banks across the world to cut interest rates and carry out billions of pounds worth of quantitative easing could upset the global economy recovery as currencies chased each other ever lower.
In an interview with the Financial Times, he said: “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, such an idea would represent a very serious risk to the global recovery ... Any such approach would have a negative and very damaging longer-run impact.”
Japan surprised markets by adopting a zero interest rate policy and announcing plans for quantitative easing (QE) in an attempt to inject fresh stimulus into the economy.
The move led to an immediate fall in the value of the yen against the dollar.
The Japanese central bank has pledged to buy assets worth five trillion yen (£38bn) and cut its overnight rate to between zero and 0.1pc,from 0.1pc, reinstating the so-called “zero interest policy” that the Bank only ended in July 2006. more
Of course, there are a lot of countries that admire the Japanese model of economic development.  And there are important countries with export industries who a screaming about their over-valued currencies and demanding something be done. (Germany, Switzerland, etc.)

Into this mess steps the IMF which actually has no quarrel with the currency speculators but tries to placate finance ministers who want the speculators reined in.  The IMF position is doomed.  Their world-view has been utterly discredited so their ability to act as a broker has no credibility.  Look at this pablum from AP!
End to currency dispute eludes finance ministers
The Associated Press
WASHINGTON — Differences that threaten the outbreak of a currency war persisted after a weekend meeting of global finance ministers, who left without resolving what to do.
They did agree, however, that the 187-nation International Monetary Fund was the organization best suited to deal with rising global currency tensions that risk overshadowing next month's summit meeting of the Group of 20 nations in South Korea.
The G-20 includes traditional economic powers such as the United States and Europe along with fast-growing economies such as China, Brazil and India.
Various nations are seeking to devalue their currencies as a way to increase exports and jobs during hard economic times. The concern is that such efforts could trigger a repeat of the trade wars that contributed to the Great Depression of the 1930s as country after country raises protectionist barriers to imported goods.
"Currency disputes can easily become trade disputes," cautioned Canadian Finance Minister Jim Flaherty.
The International Monetary Fund ended two days of talks Saturday with a communique that pledged to "deepen its work" in the area of currency movements. This included giving the head of the IMF, Dominique Strauss-Kahn a mandate to operate as judge, arbiter and analyst in dealing with the main players in the currency dispute, The United States, the euro area, China and Japan.
The communique essentially papered-over sharp differences on currency policies between China and the United States.
French Finance Minister Christine Lagarde said that a successful resolution of the currency dispute with China would require a cooling of overheated rhetoric about currency wars. more
Boy, the neoliberals can certainly sing from the same hymnal, huh?

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