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Japan: On The Doorstep Of Currency Crisis…

  • Written by Syndicated Publisher No Comments Comments
    November 22, 2012

    Japan’s grand experiment of decades-long QE coupled with Keynesian foolishness is about to take one last gigantic leap forward before it plunges straight off the cliff into a massive currency crisis.

    Please consider the New York Times article A Call for Japan to Take Bolder Monetary Action

     For years, proponents of aggressive monetary policy have offered this unusual piece of advice as a way to end Japan’s deflationary slump and invigorate the economy. Print lots of money, they said. Keep interest rates at zero. Convince the market that Japan will allow inflation for a while.

    Japan’s central bankers long scoffed at such recklessness, which they feared would ignite runaway inflation. But now, the bank’s hand could be forced by an unlikely alliance of economists and lawmakers who have argued for Japan to take more monetary action after more than a decade of weak growth and depressed prices.

    Championing their cause is the former prime minister Shinzo Abe, who is favored to return to the top job after nationwide elections next month. Otherwise deeply conservative, Mr. Abe surprised even his own supporters by calling for the Bank of Japan to be much bolder in tackling deflation, the damaging fall in prices, profits and wages that has choked Japan’s economy for 15 years.

    In escalating remarks over the last week, Mr. Abe has said that he will press the Bank of Japan to act on government orders if his Liberal Democratic Party wins the Dec. 16 election and even rewrite Japanese law to reduce the bank’s independence.

    In a speech in Tokyo on Thursday, Mr. Abe said he would call for the Bank of Japan to set an inflation target of 2 to 3 percent, far above its current goal of about 1 percent, with an explicit commitment to “unlimited monetary easing” — an open-endedness that has caused jitters among some economists. The bank’s benchmark interest rate should be brought back to zero percent from 0.1 percent, Mr. Abe added.

    He went even further over the weekend, saying in the southern city of Kumamoto that he would consider having the bank buy construction bonds directly from the government to finance public works and force money into the economy, according to local news reports. That raises concerns, however, the bank may be called on to bankroll unrestrained spending on more roads and bridges that Japan does not need.

    Economists cite several missteps by the central bank that have entrenched Japan’s deflationary mind-set and made consumers and businesses wary that the bank’s policies will stick. In early 1999, as the country’s economic woes deepened, the bank lowered a benchmark interest rate to virtually zero and said it would keep rates at zero until deflationary concerns disappeared. But an economic uptick in mid-2000 caused the bank to raise that rate to 0.25 percent despite protests from the government that the move was premature.

    Monetarist Mush

    Anyone who thinks an interest rate hike from 0% to .1% or even .25% has much influence on economic growth has “monetarist mush” for brains. Seriously.

    The NYT does not name the economists, but I have no doubt they exist. Highly respected (for no reason) Richard Koo is one of them.

    I have written about Koo on numerous occasions. From Japan’s decade long experiment resulting in public debt of a 1,000,000,000,000,000 yen (a quadrillion yen), Koo reckons Japan failed to defeat deflation because it did not do enough!

    Japan is in a crisis alright, and it was entirely self-made, by politicians listening to clueless economists all begging Japan to do something.

    One Thing Worse 

    Central banks are bad enough on their own, but history shows that one thing worse than central banks acting on their own is central banks acting under control of politicians.

     Committing to a little inflation will push stock prices higher, while a weaker yen will bolster Japan’s exporters and strengthen corporate balance sheets. Incomes will rise, fueling consumption and raising tax revenue for the government, said Kozo Yamamoto, a lawmaker of Mr. Abe’s Liberal Democratic Party.

    “Basically, it’s what the Bank of Japan should have been doing for the past 15 years,” he said. “A few percent of inflation is nothing to be worried about.”

    US Populist Position

    It’s not just Japan loaded up with populist fools. The US has its share of them as well.

    For example, Ellen Brown wants to end the Fed and put California politicians (state politicians in general) in charge of printing money to support “growth” as well as union causes.

    As I have said, the one thing worse than having a Fed in charge of monetary policy is having politicians in charge of monetary printing!

    For a discussion and an absurd video by Ellen Brown, please see Lawmakers Threaten to Take Over Monetary Policy

    Economic Nonsense Regarding Inflation, Consumption, Wages

    Kozo Yamamoto preaches widely believed economic nonsense.

    Inflation will not raise consumption. People do not stop buying things just because prices are falling. Computers are proof enough. Prices of computers and electronic goods have been falling for decades, yet every year the volume of merchandise sold reaches skyward.

    History suggests people buy things when they need to or want to not just because prices are rising. Government interference and tax breaks can shift demand forward by a few months (for no real economic benefit of course). There is only so much room to store things.

    How much food or clothing can you store? Will you buy a coat you do not need, just because prices are going up?

    US QE Example

    Take a look at the US.

    QE has put a floor (for now) on asset prices but it has not done a damn thing for wages.

    I discussed this at length with Lauren Lyster on Capital Account on November 3: Mish on Capital Account: Jobs, Real Wages, Income Distribution, Fiscal Stimulus

    I come in at about the 3:00 mark, but the first few minutes of Lauren are entertaining as usual.

    Average Hourly Earnings vs. CPI

    Average hourly earnings has been falling for years and lagging CPI inflation since September 2009. Simply put real wages have been declining. Add in increases in state taxes and the average Joe has been hammered pretty badly.

    If inflation and QE forces wages and hiring up, then why didn’t it?

    The fear for Japan should be rising interest rates not deflation. If interest rates rise a mere 2%, interest on the national debt will consume 100% of government revenues.

    When that happens a currency crisis awaits. I have long stated a currency crisis would happen far sooner in Japan than the US, and I believe we are about to find that out soon enough.

    Mike “Mish” Shedlock

    http://globaleconomicanalysis.blogspot.com

    Read more at

    http://globaleconomicanalysis.blogspot.com/2012/11/doorsteps-of-currency-crisis-economic.html#5TzOgeVthroE6cpH.99

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.
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