Watching Japan

Japan's economic experiment is barely under way and already the self-annointed experts are passing judgement.  Part of the problem is that for those steeped in the conventional wisdom, no country would actually TRY to drive down the exchange value of its currency.  Must be to please their exporters, muse the wags.

Yes, the declining Yen has made a lot of currency dealers rich—with no risk because the Bank of Japan told everyone what they intended to do well ahead of time.  Yes, I am sure that the exporters are delighted the Yen is back above 100 to the dollar.  And yes, the Nikkei is back above 15,000 so those who believe this is the only metric worth taking seriously are happy.  But as I see it, this is merely the sideshow to the big event—Japan intends to get into the business of massive infrastructure upgrades and they intend to issue the funds rather than issuing new debt.  The spirits of Edison and Ford are dancing with delight.  Yes!  Precisely!

And in the meantime, just the suggestion that Japan has changed course is spilling over into the economic debates in Europe.  Stay tuned—this could get very interesting.

What Everybody Is Getting Wrong About Japan's Great Monetary Policy Experiment

David Beckworth, Macro and Other Market Musings | May 12, 2013,

Lars Christensen nails it on the confusion surrounding Abenomics:

There has been a lot of focus on the fact that USD/JPY has now broken above 100 and that the slide in the yen is going to have a positive impact on Japanese exports. In fact it seems like most commentators and economists think that the easing of monetary policy we have seen in Japan is about the exchange rate and the impact on Japanese “competitiveness”. I think this focus is completely wrong.

While I strongly believe that the policies being undertaken by the Bank of Japan at the moment is likely to significantly boost Japanese nominal GDP growth – and likely also real GDP in the near-term – I doubt that the main contribution to growth will come from exports. Instead I believe that we are likely to see is a boost to domestic demand and that will be the main driver of growth. Yes, we are likely to see an improvement in Japanese export growth, but it is not really the most important channel for how monetary easing works.

This story is not new. The abandonment of the interwar gold standard in the 1930s by many countries spurred domestic demand and was behind the subsequent sharp recoveries, not any export growth generated by the competitive devaluations. For if everyone is devaluing, there is no place to send additional exports. That was true in the 1930s and is true today.

With that said, the competitive devaluation arising from Abenomics may be the catalyst to kick start the ECB into more serious efforts if they care about the Eurozone's external competitiveness. The ECB may ease to keep the Euro from getting too expensive and in the process shore up European domestic demand. How ironic it would be if Abenomics were to accomplish in the Eurozone what intense human suffering could not: moving the ECB to forcefully act.  more