Japan Tries a Futile Dose of Bernankeism

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Japan Tries a Futile Dose of Bernankeism

What's a nation to do, when its own freakishly strong currency just won't stop punishing its economy? How about trying one of Dr. Bernanke's folk remedies --

TOKYO — Japan promised a host of measures on Monday in a bid to kick-start its faltering economy and temper a punishingly strong yen. Prime Minister Naoto Kan proposed new stimulus steps, while the Bank of Japan, under pressure from the government, eased its already easy monetary policy. Figures released in August showed that Japan’s economy grew 0.1 percent in the April-June quarter.

But analysts called the measures too timid in the face of the problems facing Japan’s export-oriented economy. A yen that has paradoxically surged to 15-year highs despite weaknesses in the country’s economy, coupled with the damaging phenomenon of falling prices known as deflation, continues to hinder hopes of a strong recovery, analysts said.

The Bank of Japan announced Monday after an emergency meeting that it would expand the volume of money available to banks under a special fixed rate to 30 trillion yen ($351 billion) up from 20 trillion yen. It also introduced a six-month loan facility on top of a three-month program already in place. The bank’s board voted to leave its main overnight target rate at 0.1 percent.

The governor of the Bank of Japan, Masaaki Shirakawa, defended the steps, calling them timely and effective, and warned against too much monetary easing — for example, lowering the bank’s key interest rate to zero from 0.1 percent.

Meanwhile, Prime Minister Kan outlined a stimulus package of 900 billion yen ($10.8 billion), or about 0.2 percent of Japan’s gross domestic product ... [an] amount already incorporated into the government’s 2010 budget as emergency funds.

http://www.nytimes.com/2010/08/31/business/global/31yen.html?_r=1&hp

Raising bank reserves 50% when banks aren't lending anyway -- this futile gesture is pure Bernankeism. It's exactly what Ben threatened to do last Friday in his J-hole speech, if the US economy refuses to heed his magic flute and rise cobra-like from its dismal recumbency.

Shirakawa's 'warning' about slashing rates from 0.1% to zero is laughable. Forgive the vulgarity, but the potential impact of an 0.1% rate cut reminds me of a boy scout who accused a fellow troop member of self-pleasuring with a magnifying glass and tweezers -- how could anyone tell?

China successfully pegs its yuan to the dollar, keeping it undervalued, while Japan seems unable or unwilling to do the same. But broadly speaking, countries with undervalued currencies (a fortiori in Asia) are booming, while nations with overvalued currencies are stagnant. This is why I have suggested that devaluation is the most direct approach to defeat demon inflation.

As an example, in October 1998 it was rumored that a hedge fund (supposedly Julian Robertson's Tiger Management Corp.) got a margin call, and had to close out a massive short J-yen position. In 72 hours, the J-yen rocketed by 25% against the US dollar -- a move unprecedented since the floating rate era began in 1973. If a mere hedge fund could affect the yen's value that much, it's a mystery why Japan's government can't. Probably it's just due to ingrained rigid thinking.

In principle, the issuer of a fiat currency should be able to impose any desired external value on it, by adjusting the quantity outstanding. But Planet Japan may be subject to its own inscrutable economic laws. From the hypercompetent competitor pictured in 1980s business books, Japan has morphed into a passive victim that can't get out of its own way. Prime Minister Kan's $10 billion pocket change won't even build another bridge to nowhere.

But before engaging in too much schadenfreude at the plight of the Land of the Setting Sun, recall that the US is in the same jam, with the same sort of conventional thinkers in charge. Where's that long-lost yankee ingenuity when we need it? 

 

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Re: Japan Tries a Futile Dose of Bernankeism

Japan's disaffected youth retreat into 'fantasyrand' --

The creators [of Love Plus dating sim], Konami Digital Entertainment, have long thrilled young men obsessed with high-tech, manga and anime, known as "otaku", by letting them chase virtual girls in the alternative universe of their digital dreams.

The hit videogame made headlines when a 27-year-old Japanese man known only as "Sal 9000" staged a tuxedo wedding late last year, which was watched by thousands online, with his favourite cartoon girl, Nene Anegasaki. But in the latest edition, game makers have gone a step further and teamed up with the very real city of Atami, an onsen or hot spring town 100 kilometres (60 miles) southwest of the Japanese capital.

They have selected 13 romantic locations which can be overlaid with images of Rinko or her teenage friends Manaka and Nene, who have all swapped their usual sailor-style school uniforms for casual summer wear. Local souvenir shops in the resort town have caught on and capitalised on the love-struck new clientele, selling Love Plus-themed souvenirs, from good-luck charms to steamed buns and fish sausages.

The local Ohnoya hotel even offers traditional rooms to the unusual couples, which feature two sets of futon beds and another barcode panel that allows the men to visualise their girlfriends in a flattering summer kimono.

http://www.physorg.com/news202359650.html

As Japan-enamored s.f. author William Gibson foresaw, on the ashes of Japan's high-tech economy is being erected the consensual reality of a web-based otaku empire. 

Let's create some virtual yen to spend on virtual dates! Kiss

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Re: Japan Tries a Futile Dose of Bernankeism

More from Bloomberg:

Traders are attracted to Japan’s current-account surplus. The country doesn’t need to rely on foreign capital to fund a trade deficit, making the currency a haven in times of crisis. Exports exceeded imports by 804.2 billion yen ($9.36 billion) in July, more than the 466.3 billion-yen median estimate of 24 economists surveyed by Bloomberg.

Japan hasn’t intervened in the currency market since March 2004, when the yen was at about 109 per dollar. The Bank of Japan sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. The action failed to keep the currency from rising to 102.63 to the dollar by the end of that year.

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aFmu8hMdjVJM&pos=15

Nothing ventured, nothing gained ...

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Re: Japan Tries a Futile Dose of Bernankeism

Superbear Ambrose E-P weighs in on Japan's feeble gesture:

The sums are tiny, a sign of Mr Kan's limited room for manoeuvre as public debt reaches 225pc of GDP. Rating agencies are already circling ominously.

The economy stalled in the second quarter, growing just 0.1pc. Prices have fallen for the past 17 months. Core deflation is running at -1.1pc.

The Bank of Japan's move was too timid to stabilise exchange markets. The yen appreciated sharply to ¥84.6 against the dollar. It is once again closing in on a 15-year high.

While the yen has at times been stronger against the dollar in real terms, it is the rate against China's yuan that worries Tokyo. This cross-rate is wildly out of kilter.

Japan's curse is that the yen strengthens in times of crisis as investors repatriate money for safety. Life insurers and pension funds rotate from US bonds back into Japanese bonds as the yield gap narrows, which compounds Japan's deflation woes.

http://www.telegraph.co.uk/finance/economics/7972098/Japan-renews-QE-as-recovery-falters.html

Here is great mystery: why can China peg its currency to the dollar, while Japan can't? 

Not one economist in a hundred can tell you the reason. And if I revealed the answer, I'd have to kill you. Tongue out

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Re: Japan Tries a Futile Dose of Bernankeism

Is Japan sucking up to the U.S., for some reason? Maybe they're worried the U.S. will shut down it's bases over there, if they step out of line.  They must have a morbid fear of being vulnerable to the Chinese, who, given their long history are likely still smarting over the Nanking massacre.  I sure would be!

 

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Re: Japan Tries a Futile Dose of Bernankeism

Another day, another whackage, as the market rebels against Japan's feckless bureaucrats:

The yen traded at 84.33 per dollar at 4:45 p.m. in Tokyo, after weakening to 85.91 yesterday before the announcements, on speculation the BOJ would act to shore up growth. The Nikkei 225 Stock Average tumbled 3.6 percent, its biggest drop in almost three months, as government reports today showing the recovery remains intact failed to reassure investors.

“If the yen were to strengthen to around 80, they risk being accused of doing nothing, so chances for intervention would likely increase,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. Japan hasn’t intervened in the currency market to sell yen since 2004. Authorities in most developed economies let their currencies float, with Switzerland standing out in mounting series of interventions to hold down the franc.

The yen pared some of its gains today after Vice Finance Minister Motohisa Ikeda said that any currency intervention by Japan’s needs to be “unsterilized” in order to be successful. In such a scenario, the central bank leaves the ext ra yen in the system without mopping up the liquidity through bill sales.

“We will take bold measures to respond to sudden movements -- that’s in our authority and we won’t rule out the option,” Ikeda said at a forum in Tokyo today. “It would need to be clear that it’s unsterilized, that’s the key to success.”

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aFMstRtVOHew&pos=2

Well, I guess the Japanese read my memo, even if Bernanke didn't.

Let's review: on Monday they announced a 50% increase in QE, and a negligible fiscal stimulus which was already budgeted. Today the yen strengthened (the opposite of what was wanted), and the Nikkei sank 3.6% (ditto).

And they're waiting for the yen to strengthen to 80 before mounting an unsterilized intervention? Kan fiddles while TKY-town burns.

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Re: Japan Tries a Futile Dose of Bernankeism

What I want to know, is if Japan has been in free fall since 1990, will the US hang on for another ten years or more. Why hasn't Japan collapsed as of yet? They are in bigger debt than the US as far as GDP. And to top it off, China is dumping US treasuries for Yen?  Please explain...............

This is part of the Casey report:
Japan Revisited

Dear Reader,

Chris here. David is still finishing up our new edition of The Casey Report due out this week, so I’ll be covering today’s Dispatch with ample assistance from a couple of my esteemed colleagues.

I read an article in The New York Times yesterday indicating that the prime minister of Japan, Naoto Kan, has recently proposed new stimulus steps to jumpstart the economy, while the Bank of Japan, under pressure from the government, further eased its already easy monetary policy.

Curious, I thought. Hasn’t Japan been engaged in government stimulus for the past couple decades? Why is this news?

The answers to those questions are: (i) yes, Japan has been involved in stimulus for quite some time; and (ii) it’s only news in the sense that it has yet to work.

As you can see in the chart below, the Nikkei has basically been in free fall for the past 20 years, from a peak of 40,000 at the beginning of 1990 down to about 9,000 today, with a couple drops below 8,000 along the way.

Not long after the Japanese stock bubble burst in 1990, the government began enacting stimulus measures to get the economy back on track. These measures amounted to dropping central bank interest rates to basically zero and flooding the system with debt in an effort to prop it up. Sound familiar? The result today is gross government debt equal to 250% of GDP.

So even though these Japanese “stimulus” measures have failed to work for the past 15 years, and the Japanese economy has floundered along accumulating more and more debt along the way, the wizards in Washington and at the Fed have chosen this very pattern to repeat. Maybe it will work this time…

I don’t have a crystal ball, of course, but I’d expect things in Japan and the U.S. to play out in a similar fashion in the near future. In addition to huge debt levels and virtual certainty of climbing interest rates not far down the road, both countries have the demographic problem of an aging population that must be subsidized by fewer workers per retiree each year. In Japan, the demographic situation is probably worse because their population is actually declining, while we’re still seeing modest growth in the U.S.

Another important difference to note is the fact that Japan’s bubbles have, for the most part, already burst. We’ve seen this to some extent in the U.S. obviously, but not to the extent you’d expect given all the malinvestment that occurred in recent boom times. In the end, I don’t know how much these differences will matter. It will be extremely difficult, if not impossible, for both Japan and the U.S. to handle their debt loads once interest rates start to rise, further shattering confidence in their respective currencies and pushing rates even higher.

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Re: Japan Tries a Futile Dose of Bernankeism
investorzzo wrote:

What I want to know, is if Japan has been in free fall since 1990, will the US hang on for another ten years or more. Why hasn't Japan collapsed as of yet? They are in bigger debt than the US as far as GDP. And to top it off, China is dumping US treasuries for Yen?  Please explain...............

Japan is a trade-surplus country. It isn't dependent on external financing. Unlike the US, Japan can fund all of its government deficit in its home market. Although this eventually may cause inflation, it is sustainable until it does.

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Re: Japan Tries a Futile Dose of Bernankeism
machinehead wrote:

 

Japan is a trade-surplus country. It isn't dependent on external financing. Unlike the US, Japan can fund all of its government deficit in its home market. Although this eventually may cause inflation, it is sustainable until it does.

But for how much longer?  With oil this high and the Yen in orbit, it might go negative and persist until the Yen is once again used for home construction in lieu of rice paper.

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Re: Japan Tries a Futile Dose of Bernankeism

Nice chart! 

Here the US trade balance chart for comparison:

It's a race to the bottom, but I feel we are still ahead. USA No. 1!

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Re: Japan Tries a Futile Dose of Bernankeism
machinehead wrote:
investorzzo wrote:

What I want to know, is if Japan has been in free fall since 1990, will the US hang on for another ten years or more. Why hasn't Japan collapsed as of yet? They are in bigger debt than the US as far as GDP. And to top it off, China is dumping US treasuries for Yen?  Please explain...............

Japan is a trade-surplus country. It isn't dependent on external financing. Unlike the US, Japan can fund all of its government deficit in its home market. Although this eventually may cause inflation, it is sustainable until it does.

Machinehead, thanks for the insight, Jon

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