Wednesday, December 26, 2012

Japan threatens the monetary cranks

This story is destined to be one of the most interesting of 2013.  Japan's new prime minister is calling for the Bank of Japan to monetize a $10 Trillion Yen stimulus package.  The ability of a central bank to monetize debt is always an option available to them but it's an option that terrifies / angers / worries the hard money boys.  And for a politician to make this a winning campaign promise has the inflation hawks in a near-state of apoplexy.

Japan has an interesting problem.  Her currency is very expensive.  Now usually an overpriced currency is a problem of the oil countries because they have something everyone wants.  When Holland was shown to have offshore oil and natural gas reserves, her currency skyrocketed.  Good for the average Dutch consumer because now all imported goods could be cheaper, bad for the Dutch worker because now his labor was priced out of the international markets.  The guys who set the price for currencies understand commodity wealth, but the wealth created by human excellence and genius is far less likely to be evaluated accurately.  For example, gold bugs often claim that fiat money is "backed by nothing" because it can't be exchanged for a rare commodity.  But Japan is one of those few exceptions—her currency is expensive because of her ability to manufacture highly desirable goods.

Japan actually would benefit from a much cheaper Yen.  For example, the Prius sells for roughly $30,000 or 2,543,700 Yen.  If the Yen were at 140 instead of 84.79, that same car could sell for $18,169 (everything else being equal.)  A lot more people could buy an $18k Prius than a $30K one.  And suddenly, Toyota and all her suppliers would have to put on an extra shift.

So our Mr. Abe has discovered that if he could push down the value of the Yen, he could bring some much needed prosperity to Japan.  And supposedly, the best way to drive down the value of his currency would be to get the Bank of Japan to print a lot of free money—to horrify the world's bond vigilantes by actually monetizing the debt.  So his plan will not only improve his trade standing, but it will pump a bunch of money into his domestic economy.  Now all he has to do is terrorize those dullards over at the BOJ into going along with his plan.  Suppose they will whine about how they are supposed to be "independent?"  Does the sun rise in the east?

The truth is, Abe can spend money like a drunken sailor and not do any lasting damage to his currency.  This is because his country knows how to convert intellectual capital into world-class production.  His is a nation that can just about validate any amount of money they can print.  In fact, if he actually puts this plan into place, he could trigger a bout of prosperity that would discredit the hard-money guys for a generation or two.

Japan's Incoming Prime Minister Makes A Clear Threat To Strip The Bank Of Japan Of Its Independence

Joe Weisenthal | Dec. 23, 2012

The yen has been getting shellacked lately thanks to the ascendancy of Shinzo Abe, the forthcoming PM who has pledged to make the Bank of Japan pursue a 2% inflation target.

Japan, of course, has been famously mired in deflation, with the central bank attempting multiple rounds of QE to only mediocre effect.

From Japan Times:
Abe, who has specifically called for a target of at least 2 percent, issued the warning on a TV program.

"We expect (the BOJ) to discuss it at the next Policy Board meeting" on Jan. 21 and 22, he said of his inflation-busting recommendation.

If the policymakers don't give in, "we will revise the Bank of Japan law and set (the inflation target) by signing an accord with the BOJ," Abe said, using veiled language to disguise his threat to strip the central bank of its independence.
This will definitely be one of the biggest economic/monetary policy stories to emerge in 2013: Can Abe actually force such a mandate on the bank, and furthermore, will it work?  more
A 20-month low is still 85 yen to the dollar.  Since I was already an adult when the Yen was still at 400, I am just amazed that Japan's economy can even function at 85.

Japan's Incoming PM Reminds The World He's Serious, Scares The Yen To 20-Month Low

Tetsushi Kajimoto, Reuters | Dec. 25, 2012

TOKYO Incoming Japanese Prime Minister Shinzo Abe kept up his calls on Tuesday for the Bank of Japan to drastically ease monetary policy by setting an inflation target of 2 percent, and repeated that he wants to tame the strong yen to help revive the economy.

Abe, a security hardliner who will be sworn in as premier on Wednesday, when he is also expected to appoint his cabinet, is prescribing a mix of aggressive monetary policy easing and big fiscal spending to beat deflation and rein in the strong yen.

"The economy, diplomacy, education and rebuilding in the northeast (hit by the 2011 tsunami, quake and nuclear disaster) are in a critical situation. I want to create a cabinet which can overcome this crisis," Abe told a news conference.

"We have advocated beating deflation, correcting the strong yen and achieving economic growth during the election, so we must restore a strong economy," he said, adding that the stagnant economy was also undermining Japan's diplomatic clout.

Abe - who quit abruptly as prime minister in 2007 after a troubled year in office - repeated that his new government hopes to sign an accord with the BOJ to aim for 2 percent inflation, double the central bank's current target.

"Once I become prime minister, I will leave it up to the BOJ to decide on specific measures on monetary policy," Abe told a meeting with officials from major business lobby, Keidanren.

"I hope the BOJ pursues unconventional measures, including bold monetary easing," he added, maintaining pressure on the central bank to expand monetary stimulus more forcefully in order to tackle the deflation that has dogged Japan for more than a decade.

Abe's opposition Liberal Democratic Party (LDP) won by a landslide in this month's lower house election just three years after suffering a crushing defeat.

The party has threatened to revise a law guaranteeing the BOJ's independence unless the central bank sets a 2 percent inflation target. The BOJ, which eased monetary policy in December, has promised to debate setting a new price target at its next policy-setting meeting on January 21-22.

A source close to Abe said that revising the BOJ law was unlikely to be necessary since the central bank would probably give in to Abe's pressure to adopt the 2 percent target.

"I don't think it will go so far as revising the BOJ law," the source said. "The BOJ has compromised quite a bit ... and I think it will adopt a 2 percent inflation target. In that case, it will not be necessary to revise the BOJ law."


Abe and his coalition partner, the head of the small New Komeito party, agreed on Tuesday to set the inflation target and compile a big stimulus budget, New Komeito leader Natsuo Yamaguchi told reporters after the two met.

Abe is expected to draft an extra budget by mid-January with markets looking for 10 trillion yen ($117.93 billion) in new spending, part of which would need to be covered by additional borrowing.

Critics have suggested that the LDP, which ruled Japan almost non-stop for more than 50 years until it suffered a huge election defeat in 2009, was returning to the wasteful spending that characterized much of its past reign.

The source close to Abe said, however, that public works spending in that budget was unlikely to exceed 5 trillion yen.

"The extra budget will be presented to parliament towards the end of January. We cannot find 10 trillion yen worth of public works projects by then," the source told Reuters, adding that the 10 trillion yen total figure was not set in stone.

"The scale will be 10 trillion yen but it will not be limited to public works spending. The most we could manage on public works would be 5 trillion." The remainder could include such steps as tax breaks for purchases of fuel-efficient cars, and government funding for basic pension payouts, he added.

($1 = 84.7950 Japanese yen) more
(Boxing Day update.  Notice how Abe's goal of lowering the Yen's value is describe as the Yen getting "massacred".  Also note the handwringing of BOJ "independence.")

Japan Is On The Verge Of A Watershed Moment In Central Banking, And The Yen Is Getting Massacred

Joe Weisenthal | Dec. 26, 2012

Really big story unfolding in currency markets: The decline of the yen.
Today is Shinzo Abe's first day in office as new Japanese Prime Minister, and it's filled with fresh headlines about what he wants to do to the Bank of Japan in terms of much more aggressive easing.

Economist Tim Duy argues that everyone is missing the big story in Japan, which is Abe's desire for the BOJ to engage in outright monetization of the national debt, i.e. bond purchases for the express purchase of funding stimulus. This is a much bigger deal, he notes, than the 2% inflation guidance, which probably won't work, seeing as the BOJ is already missing its 1% inflation goal.

Says Duy:

I don't have much faith that renaming the "goal" a "target" and increasing it to 2 percent will be like waving a magic wand. But something much more significant is afoot - the possibility of explicit cooperation, albeit perhaps forced cooperation, between fiscal and monetary authorities. The loss of the Bank of Japan's independence to force the direct monetization of deficit spending is the real story.

The Bank of Japan is on the verge of totally losing its independence, a watershed change for a national central bank.

So the yen is taking it on the chin.  more

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