Currency wars chip away at the neoliberal consensus

This could get seriously interesting / ugly.  After almost two decades of futzing around, Japan announces it is going to get serious about stimulating its economy.  Prime Minister Abe wants the Yen to depreciate and deflation to end.  He has many tools to accomplish this task but notice, he has used NONE of them so far.  All he had to do was talk about a cheaper Yen and the currency markets were happy to drive it down.

Japan's problems have opened up a breathing space that has allowed countries like Korea and China to grab market share in various endeavors.  Not surprisingly, it is these two countries that are squawking the loudest about Japan's new economic policies.

Japan adopts $142bn stimulation budget, its second largest

February 26, 2013

Japan’s parliament has passed a 13.1 trillion yen ($142 billion) additional budget, part of a wider stimulus package announced by Prime Minister Shinzo Abe's cabinet in January to boost the national economy and fight deflation.

The budget is the second largest in the country’s history. The extra money is destined for economy-boosting measures such as creating more jobs, upgrading Japan's ageing infrastructure, and rebuilding the areas that suffered from the March 2011 earthquake and tsunami.

Shinzo Abe’s Liberal Democratic Party came to power last December with a promise to revive the world's third-largest economy that was in a deep recession, shrinking for a third consecutive quarter between October and December, due mostly to low export demand.

Another measure directed to bolster economic growth is intervening to weaken the yen. The yen has fallen in value over 20% since November, and slid this Monday to its lowest against the dollar since 2010 on eurozone concerns and speculation about who will be named the new chief of the Bank of Japan.

At the end of last year, Japan's public debt reached a record of 983 trillion yen ($12.4 trillion), and by the end of the current fiscal year, which finishes on March 31, it could exceed a quadrillion yen (almost 11 trillion dollars), more than double the country's GDP.

The largest supplementary budget was adopted in Japan in February 2009 amounting to 14.7 trillion yen (159.7 billion dollars), and was intended to protect the economy from the consequences of the global financial crisis.

The original budget for the 2012 fiscal year amounted to 90.3 trillion yen ($1.16 trillion). The new budget for 2013 stands at 92.6 trillion yen ($1.02 trillion), relying on borrowing to cover 46.3% of the spending. more

And right on time, we have China's top central banker assuring us he is not going to roll over and play dead if Japan adopts a cheaper Yen policy.  I am not certain China should get into this war.  Her currency is already pretty cheap while the Yen is still grotesquely overvalued.  And so we see, China (yes, that China) is suddenly all concerned about international agreements like was fashioned at the recent G20 summit.  But whatever.  China would do well to stimulate her own domestic market.  There are only so many goods the rest of the world can absorb.  Besides, their economy sucks until those kids making iPhones can afford to buy iPhones.

Top Central Banker In China Says Beijing Is Ready For The 'Currency War' To Begin

Agence France Presse | Mar. 2, 2013

A top Chinese banker said Beijing is "fully prepared" for a currency war as he urged the world to abide by a consensus reached by the G20 to avert confrontation, state media reported on Saturday.

Yi Gang, deputy governor of China's central bank, issued the call after G20 finance ministers last month moved to calm fears of a looming war on the currency markets at a meeting in Moscow.

Those fears have largely been fueled by the recent steep decline in the Japanese yen, which critics have accused Tokyo of manipulating to give its manufacturers a competitive edge in key export markets over Asian rivals.

Yi said a currency war could be avoided if major countries observed the G20 consensus that monetary policy should primarily serve as a tool for domestic economy, the Xinhua report said.

But China "is fully prepared", he added.

"In terms of both monetary policies and other mechanism arrangement, China will take into full account the quantitative easing policies implemented by central banks of foreign countries."

South Korea's incoming president Park Geun-Hye has also signaled her willingness to step in to stabilize the won and protect exporters battling a stronger Korean currency and a weaker yen. more

If Russia would organize its economy properly, she would easily be the most prosperous on earth.  She has mineable amounts of every element on the periodic table, she has vast agricultural lands that haven't been farmed skillfully since the 1880s,  she has a scientific / technological infrastructure that once frightened the rest of the world with her subs and rockets, and she has an education system that can crank out world-class talent in almost any field she chooses to contest.  All she really needs to do is clamp down on corruption and realize that the "capitalism" peddled by Jeffrey Sachs was that idea's most stupid manifestation.  Poor bastards went from some Stalinist idea of Marxism to the Harvard version of neoliberalism.  They deserve MUCH better.

Now whether Sergei Glazyev is the enlightened central banker to lead them out of the wilderness of neoliberalism is hard to judge from this distance.  But anyone that frightens Reuters probably has some merit to his arguments.  They even resort to quoting Anatoly Chubais so they must REALLY be worried about Glazyev.

People Are Worried By The Radical Economist Who Has Emerged As Leading Russian Central Bank Contender

Reuters Feb. 21, 2013

(Reuters) - A controversial economist and former presidential candidate who accuses the West of conspiring to turn Russia into an economic colony has emerged, sources said, as a leading contender to take charge at the country's central bank.

Sergei Glazyev, a Kremlin economic adviser, is being linked to the post a month before a deadline for his boss Vladimir Putin to nominate a successor to Sergei Ignatyev, who retires on June 23 after 11 years in the job.

Some insiders have been quick to write off Glazyev, who during his presidential run in 2004 lambasted Putin for running "a corrupt and irresponsible regime". Yet the speed with which Glazyev's star has risen since he endorsed the Russian leader's bid for a third Kremlin term a year ago has caught attention.

One high-ranking source in Moscow's liberal economic establishment said Glazyev is viewed favorably by both Putin and Prime Minister Dmitry Medvedev. A second source confirmed his status as a candidate and a third said he might get the job.

Putin's spokesman, Dmitry Peskov, declined to comment on the central bank succession. Glazyev, appointed by Putin last July to advise on regional economic integration, was not available to comment on Thursday, an aide said.

"Glazyev is under consideration because the others ... do not suit either Putin or Medvedev at all," the first source told Reuters, speaking on condition of anonymity.

Economists still lean towards the view that Putin will plump for an insider, like Ignatyev's deputy Alexei Ulyukayev, to complete the central bank's shift to a policy framework based on Western-style inflation targeting.  (Hard to imagine a bigger mistake!)

"I would find it difficult to believe in a volte face," said Jacob Nell, a Russia economist at Morgan Stanley in Moscow. "It wouldn't be consistent with how Putin has behaved in the past on economic policy."

CIRCLING THE WAGONS

Yet the liberals, who have controlled the Finance Ministry and the Bank of Russia since Putin rose to power, are concerned that radical change could endanger Russia's $2.1 trillion economy and the management of the world's fourth-largest foreign reserves.

They have collectively recoiled at the unorthodox views of Glazyev, 53, who was tasked by Putin last month with coordinating a new strategy to stabilize Russia's economy if the world slides back into crisis.

In a preliminary report to Putin, cited by the Vedomosti daily on January 18, Glazyev wrote: "As a result of the growing issuance of global currencies, the threat arises that Russian assets can be taken over by foreign capital."

Those comments drew a prompt and withering response from Anatoly Chubais (the biggest thief of the Yeltsin years by many accounts), a leading market reformer who worked in government with Glazyev 20 years ago and now heads Russia's state technology fund Rosnano.

"A person who argues in all seriousness that the United States and Europe are issuing money so that they can grab Russian assets on the cheap can be anyone, as long as he is healthy; just not an economist," Chubais deadpanned on his blog.

LOSING MOMENTUM

Russia's leaders have expressed increasing concern that the central bank has focused too much on bringing down inflation, to the detriment of growth that slowed last year to 3.4 percent - its lowest since the 2009 slump.

Putin, at a major Kremlin policy meeting at the end of January, complained about high borrowing costs, but Ignatyev held firm, saying that interest rates should only fall as inflation falls.

The institutional stand-off intensified on Wednesday, when Ignatyev went public with claims that $49 billion - or 2.5 percent of the national income - was illegally transferred out of the country last year.

Ignatyev said that "one well-organized group" was responsible for more than half of the outflows, in what analysts said was a coded accusation that the Russian security services were complicit.

Ulyukayev, the central bank's first deputy chairman, agrees with Ignatyev that the economy is running close to capacity and has pushed back against easing policy until inflation falls.

Other contenders, central banker Sergei Shvetsov - in charge of market operations - and former Finance Minister Mikhail Zadornov, now head of state bank VTB'sretail arm, share similar orthodox views.

Also in the frame, but regarded as long shots, are VTB CEO Andrei Kostin and Andrei Bugrov, a former financial diplomat who now holds a senior position at billionaire Vladimir Potanin's investment company Interros.

PROMISES, PROMISES

Of all the candidates, Glazyev has been the readiest to say that the Kremlin's call to boost economic growth rates to 5 percent or more are realistic - and even to suggest that they lack ambition.

In his January article, Glazyev wrote that Russia could boost growth to a rate of 8 percent, while industrial production could surge by 10 percent per year.

Such views would get a favorable hearing from the pro-Kremlin majority in parliament's lower house, who would need to ratify Putin's choice. Ignatyev's hawkish inflation stance drew hostile questions when he testified to lawmakers on Wednesday.

Alexei Kudrin, a former finance minister respected by financial markets, has meanwhile ruled himself out of contention after turning down the central bank job following his resignation from government in September 2011, sources say. more