Japan intervention comments

Market Color

Short~medium term JGB rallied due to additional monetary ease expectation related to unsterilized FX intervention money.

First, intervention in this direction- buying dollars- does ‘work’ and is infinitely sustainable.
It’s a political decision, much like the ECB buying national govt. debt. There is no nominal limit.

Second, the only reason they stopped was political pressure from the US, with the then Treasury secretary resorting to name calling like ‘currency manipulator’ and ‘outlaw.’ Otherwise the yen probably would not have been allowed to go under 100.

Third, their institutional structure functions to support the classic export led growth model- suppress domestic demand with consumption type taxes, relatively tight fiscal given institutionally driven savings desires, etc.

Fourth, this strategy causes the currency to strengthen and requires the govt. buy dollars to sustain desired levels of exports and employment.

Net exports necessarily equal net domestic holdings of foreign currency. Think of it this way. If Japan sells something to the US, and we pay for it in dollars, they have two choices. Either hold the dollars, in which case nothing more happens in the real economies and Japan has net exported and the US net imported. Or buy something in the US or any other nation with the dollars and import it to Japan in which case there are no net exports.

Japanese government started FX intervention last night with JY100bn in Tokyo and continued their effort in overseas and ended up with selling JY2trn in total. Many market participants are now saying that it will lead to monetary ease since BOJ will not absorb this JY2trn from the market and this is one of the main reasons for JGB rally today. However, I don’t think it will cause any such impact since government issues T-Bill for that amount (JY2trn) anyway.

When the BOJ buys dollars for the MOF, and pays for them with yen, that adds yen deposits to the domestic economy, thereby increasing the yen net financial assets held domestically. That’s an inflationary bias which is what they are trying to do.

In the first instance those newly added yen sit as yen balances in member accounts at the BOJ. And since they earn no interest the marginal cost of funds is 0, which happens to be where the BOJ wants it anyway.

‘Sterilizing’ is simply offering alternative interest bearing accounts such as JGB’s to the holders of the clearing balances. This would need to be done if the BOJ wanted higher rates. Or, the BOJ could simply pay interest on clearing balances if it wanted higher rates.

But the quantity of balances per se is of no ‘monetary’ consequence. As I like to say, for central banking it’s necessarily about price (interest rates) and not quantities.

So with rates already at 0, there is no more ‘monetary easing’ possible. The only ‘monetary easing’ the BOJ can do at this point is bring longer rates down some, but there isn’t much scope for that either. And they probably know by now lowering long term rates does nothing of major consequence for the real economy.

The question now is how far they will go. They’d probably like the yen back to north of 100 vs the dollar, and will move slowly to see how much political pressure they get from the US as they move in that direction. In fact, they may already be getting political pressure. I don’t know either way.

With political pressure building for China to adjust their currency upward as the US elections approach, this move by Japan might attract more attention than otherwise.

The irony/tragedy for the US is, of course, we should welcome all such moves, open ourselves for virtually unlimited imports from anywhere in the world (with sufficient quality control restrictions- no poison dog food, contaminated wall board, etc.), and enjoy the tax cut that comes along with it so we have sufficient purchasing power to be able to buy all of our own domestic output at full employment plus whatever the rest of the world wants to net export to us.

And apparently that’s a LOT right now. So with current policy of grossly overtaxing us for the size govt. we currently have, the losses of grossly over taxing ourselves may be north of 30% of US gdp, which is a staggering loss for us, and gone forever.

The only thing between what we have now and unimaginable prosperity remains the space between the ears of our policy makers, etc.

Please feel free to distribute, plagiarize, post anywhere, whatever!

*Rinban Result*

*upto 1yr to maturity (310bn)

Highest: +0.1bp
Average: +0.3bp
Allocation: 27.7%


* 1yr~10yr to maturity (250bn)

Highest: +1.5bp
Average: +2.1bp
Allocation: 19.0%


table

This entry was posted in Asia, Currencies, Japan, USA. Bookmark the permalink.

20 Responses to Japan intervention comments

  1. Land of the Setting Sun says:

    Can Mr. Mosler or anyone else who is knowledgeable in MMT counter an argument by Kyle Bass of Hayman Capital regarding Japanese Govt. Bonds?

    He describes the demographic headwinds (becoming net sellers vs. net buyers) and an approaching eclipse of revenue vs. expenditures, what he calls an example of the ‘Keynesian endpoint.’

    See attached link to argument. Thanks in advance.

    http://www.businessinsider.com/kyle-bass-hayman-2010-8

    Reply

  2. JKH says:

    “Net exports necessarily equals net domestic holdings of foreign currency”

    Net Exports = net domestic holdings of foreign currency – NFX*

    Where NFX*

    = net foreign currency holdings attributable to the currency mismatch on the international capital account balance sheet, beyond that which offsets “net exports” (where “net exports” = cumulative current account surplus)

    = net foreign currency holdings attributable to the currency mismatch against outstanding international liabilities due to cumulative gross capital inflows

    Reply

  3. Shannon Eoff says:

    About imports-exports, the president is pushing to double our exports. However, wouldn’t it be smarter in the long-term to half imports therefore supporting the concept of buying domestically> increase need for diversity in American-made goods> create jobs?

    It’s great to have a healthy market of exports, but the problem is that Americans aren’t buying American and big business is not paying American.

    Reply

    WARREN MOSLER Reply:

    see ‘the 7 deadly innocent frauds of economic policy’ in the left margin of the home page of this website

    Reply

  4. Ramanan says:

    Tim Geithner on China

    “But we also face substantial challenges in this relationship with China. I want to provide a candid assessment of where we are making progress, where progress remains inadequate, and where we are going to concentrate our efforts in the months and years ahead.

    To address these challenges, we are focusing on three core objectives with China: encouraging China to change its growth model to rely more on domestic demand and less on exports; moving toward a more market-determined Chinese exchange rate; and leveling the playing field for U.S. firms, workers, ranchers, farmers, and service providers to trade and compete with China. With China’s economy on a strong footing, it is past time for China to move ”

    http://ustreas.gov/press/releases/tg858.htm

    Testimony of Treasury Secretary Timothy F. Geithner
    China’s Currency Policies and the U.S.-China Economic Relationship
    Senate Committee on Banking, Housing, and Urban Affairs

    Reply

    Tom Hickey Reply:

    US Treasury Secretary Timothy Geithner on Thursday said it was “past time” for China to lift barriers to US exports, as he faced angry lawmakers’ demands for sanctions against Beijing.

    Geithner abandoned his previously restrained approach to bluntly warn China it must let the yuan rise in value against the dollar to end trade distortions.

    Facing November elections shaped by voter anger at the sour economy, US lawmakers are weighing bills that would slap sanctions on Chinese goods, amid accusations that Beijing keeps its currency — and thereby its exports — artificially cheap.

    “It is past time for China to move” Geithner said, listing currency and other trade distortions as “core objectives” with China.

    AFP via Raw Story
    http://rawstory.com/news/afp/US_toughens_demands_for_China_curre_09162010.html

    Reply

    Matt Franko Reply:

    Does anybody think that if this goes thru, it could result in what some (including The Fed) are going to label “inflation” in the US? Coupled with the “price of gold” now going up….

    Then Volcker/1980 policy rate redux?

    Resp,

    Reply

    Dr. Higgington Reply:

    –encouraging China to change its growth model to rely more on domestic demand and less on exports;

    Why would china want to buy all that plastic star wars yoda toy junk that we buy? Or why would china want to buy lady gaga and snoopy doggy doggy rappy songs?

    –moving toward a more market-determined Chinese exchange rate;

    I read about nanosecond high frequency trading algorithms contributing to 80% of the “market” and wonder why the exchange rate should be turned over to some trading computer? Why does the trading computer and its HFT nanosecond bid/sell algorithms know better how to value the currency than say some japanese housewife with a little cash and time on her hands?

    –and leveling the playing field for U.S. firms, workers, ranchers, farmers, and service providers to trade and compete with China. With China’s economy on a strong footing, it is past time for China to move ”

    I read that US firms don’t care about the US domestic market anymore, its irrelevant, US movie houses don’t care about the US domestic consumer either – they are making movies know with little care to its offense of US families and US children because they are irrelevant. I went into my local sweetbay and couldn’t find any fruit made in the USA, I want to buy fruit made in the USA though because it has better standards and government watchdogs. But I could not buy any made in USA fruit at any price, it was not for sale. Mr. Mosler, the world has moved on, even the USA capitalists in the USA and USA shareholders no longer care about USA customers.

    Reply

  5. Tom Hickey says:

    Obama reiterates his intention to double US exports in five years. Stand by for a trade war and possible protectionism. All nations trying to dig out with exports is a recipe for disaster. Don’t these people learn anything from history?

    Reply

    ESM Reply:

    Fortunately, doubling of exports in five years will happen naturally if the government does nothing. Remember, these are gross numbers. It’s the usual strategy of picking a goal which sounds impressive but actually requires no effort.

    Reply

    Tom Hickey Reply:

    Right, I was understanding “net exports” but Obama just said “exports” (volume), and the volume of imports is likely go up proportionately or more, given the trend. So export increases are unlikely to affect the employment rate if we keep exporting jobs too. And that is really the issue.

    href=”http://rawstory.com/news/afp/Obama_insists_export_target_is_reac_09162010.html”>Obama insists export target is reachable

    The China trade issue is getting hotter as the politics heats up around it.

    href=”http://rawstory.com/news/afp/US_toughens_demands_for_China_curre_09162010.html”>US toughens demands for China currency action

    Reply

    WARREN MOSLER Reply:

    good point. the problem would be from any proactive measures to drive exports

    Reply

    pebird Reply:

    I think he means exports of jobs.

    Reply

  6. “Thats mixing flows and stocks. Net exports may also reduce Yen liabilities instead of increasing dollar assets. Net exports may also reduce dollar liabilities instead of increasing dollar denominated assets.”

    yes, that’s what the word ‘net’ means

    and yes, you’ve identified one channel of ‘inflation’ which is the fx channel. The other is domestic demand which increases via the ‘savings’ channel/increased yen financial assets channel, which works if the propensity to consume from increased financial assets of a currency is greater than 0.

    In fact, both were the inflation channels in the infamous Weimar examples from their buying of fx.

    Reply

    Ramanan Reply:

    I made the distinction to separate exports in one period with accumulated holdings – which is the holdings in previous accounting periods plus the latest period, but I guess you were talking of net exports accumulated, so no issues on that one.

    Haven’t studied the Weimar story, so no comments – am sure the BoJ won’t do anything as silly as that.

    The foreign exchange transactions happen mainly with financial institutions and it changes their balance sheets, not their net worth except perhaps due to changes in the value of the currency and how they do the valuation. The extra Yen deposits created may be used by the financial sector to reduce their indebtedness to banks.

    The non-financial sector doesn’t care much. The producers won’t borrow more and neither would the the consumers start consuming more. Consumption happens “out of” wages and wealth not deposits.

    Reply

  7. Winslow R. says:

    Just a few years ago I’d say it would be crazy for America to follow Japan’s path but I am fairly convinced that it is the ‘natural’ path. It is much easier to have government spend and allow people to accumulate savings they will never spend than it is to tax them back into circulation. How’s that for plagiarism?

    If the Dems get blown out in the midterm, I’d say it would be a good indication the population won’t put up with deflation. Low interest rates maybe, but not deflation.

    “Pimco Makes $8.1 Billion Bet Against `Lost Decade’ of Deflation

    ………….We have seen tremendous growth since the end of last year, less so in inflation caps and more so in floors,” said Allan Levin, head of structured rates for North America at Deutsche Bank Securities Inc. in New York. “It reflects an increasing fear of deflation.

    ……“We don’t care as much about our dollar,” said Ratajczak. “People who are betting on ten years of deflation are making a bad bet.””

    http://www.bloomberg.com/news/2010-09-15/pimco-makes-8-1-billion-bet-against-lost-decade-of-deflation.html

    Reply

  8. Ramanan says:

    “Net exports necessarily equal net domestic holdings of foreign currency”

    Thats mixing flows and stocks. Net exports may also reduce Yen liabilities instead of increasing dollar assets. Net exports may also reduce dollar liabilities instead of increasing dollar denominated assets.

    “When the BOJ buys dollars for the MOF, and pays for them with yen, that adds yen deposits to the domestic economy, thereby increasing the yen net financial assets held domestically. That’s an inflationary bias which is what they are trying to do.”

    The BoJ purchases of dollars does nothing to prices except indirect effects from possible currency depreciation. Its a bit Monetarist to say that currency operations increase or decrease prices.

    Reply

  9. james hogan says:

    …”The irony/tragedy for the US is, of course, we should welcome all such moves, open ourselves for virtually unlimited imports from anywhere in the world (with sufficient quality control restrictions…and enjoy the tax cut that comes along with it so we have sufficient purchasing power to be able to buy all of our own domestic output at full employment plus whatever the rest of the world wants to net export to us.”

    I’m confused. Don’t we already import a great deal of the products we use from China, Mexico and other low wage countries? And at the expense of the loss of domestic jobs? So isn’t the process: loss of manufacturing>loss of jobs>loss of income>loss of purchasing power>lower sales…and so on. (We were told not to worry about that because the emphasis was going to be shifted to the FIRE [finance, insurance, real estate] sector, which ultimately collapsed and had to be rescued by the public.)

    If the reports in the economic media are correct, the number one issue holding back the creation of private sector jobs is the lack of demand, which is caused by a drop in the purchasing power (PP) of the public. For a number of years this PP was financed through the use of housing as an ATM. Now that has come to a complete halt and may not rebound for the forseeable future.

    I wish you would develop a clear presentation of how we are supposed to get from where we are today to where you want to take the country. If it entails a major public works program along the lines of the Interstate Highway System or TVA or BPA, then you need to explain to the public why this would be transferring one form of wealth for another and not “wasteful government spending”, which is surely what some will call it.

    Reply

    warren mosler Reply:

    check out my proposals on this website and my moslerforsenate.com website. most everything is covered, but if not, let me know!

    to immediately restore private sector demand i’m proposing a full payroll tax (FICA) holiday, for example

    Reply

    Calgacus Reply:

    James Hogan – you are missing the crucial phrase:
    enjoy the tax cut that comes along with it so we have sufficient purchasing power to be able to buy all of our own domestic output at full employment plus whatever the rest of the world wants to net export to us.

    This means we follow the MMT policy of cutting taxes (or increasing government spending). These increase the government budget deficit, so that the private sector will have more money – replacing the $ leaked away to China etc – and more demand – so the imports will not be “at the expense of the loss of domestic jobs”. It may be at the expense of the loss of some particular domestic jobs; but growth will occur in other areas, wherever those newly created dollars are targetted.

    There are a great many things the government could spend more on. Just bring the present infrastructure up to acceptable quality levels – so bridges don’t collapse and levees don’t fail. One would be crazy to call this wasteful – although rabid ideologues would. This wouldn’t so much be “transferring one form of wealth for another” rather than creating real wealth for nothing. It would be transforming the financial wealth, the dollars spent on it, into real wealth at bargain prices, by not wasting enormous real wealth by keeping millions unemployed.

    Reply

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