Japanese bank addresses growth concerns
Bold action is taken by Japan’s central bank, which is under pressure from the government to lift the country out of recession.PT2M10S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2d5ye 620 349 January 22, 2013
So, Japan may not slide into genteel oblivion after all. To the surprise of the Japanese, their country is smack in the middle of two riveting dramas that threaten to upturn the global strategic landscape in short order.
We all watch with disbelief as China and Japan rattle sabres over the Senkaku-Diaoyu islands, so like events that drew Europe’s alliance systems into conflict from 1911 onwards.
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Forces are being unleashed that could rock the world’s asset markets and trading system.
Both graduated to fighter jets last week: Japan sending in F-15s; China deploying J-10s, and mobilising the East China Sea fleet for live ammo drills. China’s purpose is to test Washington’s willingness to get behind its Asian allies at the risk of conflict. That is courting fate.
Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on every front. Photo: Reuters
Against this, Japan’s economic policy revolution seems tame. Yet forces are being unleashed that could rock the world’s asset markets and trading system. Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on every front with fiscal, monetary, and exchange stimulus.
This is a copy of what happened in the early 1930s under Takahashi Korekiyo, the first of his era to tear up rule book and pull his country out of the Great Depression. He took Japan off gold in December 1931. He ran ‘‘Keynesian’’ deficits, launching a New Deal blitz before Roosevelt.
He compelled the Bank of Japan (BoJ) to monetise debt until the economy was back on its feet, draining the liquidity later. He devalued the yen by 40 per cent.
Japan’s exports swept Asia, ultimately causing the British Empire to retaliate - and there lies the rub, you might say.
Takahasi was assassinated by army officers in 1936 when he tried to cut military costs. Policy degenerated. Japan later lurched into hyperinflation.
Few dispute that Japan pioneered the world’s most successful experiment from 1932 to 1936. The trick was to hit hard and combine all forms of stimulus, each leavening the other.
Monetarists say Japan’s mistake over the past 20 years has been to launch one spending spree after another without monetary backing. The result has been to push net public debt to 145 per cent of GDP this year (or gross debt of 245 per cent) without reaching ‘‘escape velocity’’.
The BoJ sat of on its hands for a decade. Only later did it buy bonds, but in dribs and drabs, on short maturities, from banks instead of the public, in a half-hearted spirit.
Mr Abe has lost patience. This time the BoJ will do what it is told. The next governor must be a soulmate ‘‘with the will and ability to pull the nation out of deflation’’, he said. Leaks suggest that the BoJ will set an inflation target of 2pc this week, backed by unlimited bond purchases.
The liquidity effects of this by the world’s top external creditor could be large enough to leak into everything from New Zealand bonds, to Brazilian equities, and Chelsea property, a ‘‘carry trade’’ on steroids.
On the fiscal side, Mr Abe will launch stimulus worth 20 trillion yen, or 4.4 per cent of GDP. No matter that the budget deficit is already 10 per cent of GDP, or that financing needs are 60 per cent of GDP this year.
The IMF advises Japan not to push its luck, warning that the country has reached the point where even a ‘‘relatively small’’ rise in borrowing costs could set off havoc.
‘‘Europe offers a cautionary tale. Once market confidence is lost, regaining it becomes very difficult,’’ it said.
Mr Abe cares not a wit about such opinions, yet he is taking a huge gamble. Japan is losing its safety buffers one by one. The trade surplus has evaporated. The work force is shrinking every year. The state pension fund has become a net seller of government bonds. Japan’s banks have become the buyers or last resort instead, pushing their holdings to 85 per cent of GDP, but that diverts lending away from small firms.
Former UK rate-setter Adam Posen says fiscal stimulus ceased to be any help years ago and is now counter-productive. The risk is not that Japan’s debt trajectory will fly out of control. The damage is insidious.
‘‘When a large country with its own currency reaches its fiscal limit, growth ends not with a bang but a whimper,’’ he said. Mr Posen advises Japan to rely on monetary policy alone to right the ship.
That too has perils. Japan could escape stable deflation - the devil it knows - only to see a panic flight from bonds as inflation picks up. As BoJ Governor Masaaki Shirakawa told the Diet, through gritted teeth: ‘‘Long-term yields could rise, that would be a problem for public finances.’’
Banks hold JGBs worth 900 per cent of their Tier 1 capital. Portfolios would be decimated if long rates punched above 2 per cent. Japan might then face a banking crisis. These are the hard choices that Mr Abe faces.
Nor can he continue to weaken the yen without irking Washington. His rhetoric alone has already triggered a 12 per cent fall in the yen against the US dollar, and 20 per cent against the euro.
Mr Abe’s frustration is understandable. Japan is cursed with a safen-haven currency that strengthens in times of trouble when least wanted. But should Japan now buy foreign bonds on a mass scale to suppress the yen, there will be trouble. Tokyo will be blamed for setting off currency wars.
Huge issues are at play. The world’s trade system is fragile. A record global savings rate of 24 per cent is acting like a wasting disease, leaving too little demand to go around. Everybody wants a weaker currency.
Japan’s adventure cuts both ways for the rest of us: stimulus helps lift the global economy, but yen manipulation snatches market share and takes us into the brave new world of ‘‘actively managed exchange rates’’, as Sir Mervyn King puts it.
We will find out soon which is the more powerful effect.
The Telegraph, London