Japan buying euro bonds
Posted by WARREN MOSLER on January 11th, 2011
JAPAN FINMIN NODA: JAPAN WILL BUY EURO BONDS TO HELP BOOST TRUST IN EFSF SCHEME
EURO RISES AFTER JAPAN FINMIN NODA SAYS JAPAN TO BUY EURO BONDS
JAPAN NODA: TO BUY ABOUT 20 PCT OF BONDS PLANNED TO BE ISSUED JOINTLY BY EURO ZONE LATER THIS MONTH
Japan Joins China in Assisting Debt-Crisis-Hit Europe
By Toru Fujioka
January 11 (Bloomberg) — Japan plans to buy euro-zone
sovereign bonds, its finance minister said, joining China in
assisting a region hit by a fund-raising crisis.
Finance Minister Yoshihiko Noda told a news conference in
Tokyo today that Japan will use its foreign-exchange reserves to
buy more than 20 percent of bonds to be issued under a special
assistance program to help Ireland.
“It’s appropriate for Japan to make a contribution as a
leading nation to increase trust in the deal,” he said.
China has also expressed support for the euro zone, with
Vice Premier Li Keqiang last week expressing confidence in
Spain’s financial markets and pledging more purchases of that
nation’s debt. Chinese Vice Premier Wang Qishan said on Dec. 21
his nation has taken “concrete action” to help the European
Union address its debt crisis.
The euro climbed immediately after Noda’s comments, rising
as high as $1.2991, before trading at $1.2952 at 11:50 a.m. in
Tokyo.
>
> This is being done in an effort to weaken ¥ vs €.
>
Yes, with the cover of helping the euro zone, just like China, who announced the same a short while ago to lead the way for Japan.
Japan has been actively seeking ways of weakening the yen to support their exporters.
They publicly bought some $ last year, and their US Tsy holdings have been falling, indicating something unannounced has been going on as well.
And their budget was somewhat expansionary.
Weakening the yen like this is one of the things somewhat subtly working to limit US aggregate demand growth, which should be a good thing for us (we can have lower taxes for a give size govt) but unfortunately our leadership simply lets aggregate demand languish.
January 12th, 2011 at 2:09 am
Europe has taken the decision that PIGS must endure X amount of austerity for Y years so as to rectify their mistakes. If some non European entity then lends to PIGS, that undermines a decision taken by Europe. But then Europe laid itself open to this “interference” by allowing PIG bonds to be traded internationally.
That point can be made in even more general terms, and as follows. Where ANY country allows its government bonds to be bought by foreigners, all it gains is a temporary balance of payments fillip. It achieves precious little in the long run.
Ground breaking and revolutionary conclusion: no country with its head screwed on would allow its government debt to be bought by foreign entities. (Incidentally, I estimate the number of countries on planet Earth with their heads screwed to be zero.)
Or have I missed something?
Reply
Neil Wilson Reply:
January 12th, 2011 at 4:30 am
I think that’s a narrow view. What is different in Europe is that their bonds are issued in a foreign currency. Much like the states of America. Or Ecuador.
Saying bonds shouldn’t be held by foreigners is the same as saying currency shouldn’t be held by foreigners, or bank deposits shouldn’t be owned by foreigners.
I can see the logic in saying that bonds denominated in a foreign currency shouldn’t be owned by foreigners, but that’s just a subset of “don’t issue bonds in a foreign currency”.
If they are using your domestic currency then it doesn’t matter. What has happened there is that some foreigners have decided to leave their domestic currency zone and join yours. They are then largely identical to domestic economic agents.
A better way of looking at it is that the best way to run an economy is to expand the influence of your currency zone over the people of the world. With that view Ecuador becomes an American State without any transfer payment liabilities.
Reply
WARREN MOSLER Reply:
January 12th, 2011 at 6:42 am
I’d say the eurozone would be best served by a 0 rate policy and easy funding for all member nations, with deficits controlled not by the limits of how much they can borrow but by political decision. And, of course, that political decision should be that deficits then go to the right size for full employment, by political decree, but that’s another story
Reply
Ralph Musgrave Reply:
January 13th, 2011 at 4:56 am
I like the idea of distributions rather than having the Euro as debt based system, which as I understand it, means Euro countries paying interest (via commercial banks) for every Euro they want from the ECB. For more on this see this Reuters article by James Saft: http://blogs.reuters.com/great-debate/2009/07/28/europe-borrows-from-peter-to-lend-to-peter/
James Saft just pokes fun at this system. What I’d like to know, more seriously, is the basic logic behind the system. I don’t get it.
A problem with the distribution idea is that it does not solve one of the main PIG problems, namely what to do about PIGs with balance of payments deficits. The present system for dealing with the latter problem is prolonged deflation and unemployment, which is hopeless. So long as this is the so called solution, it is just not possible to have deficits the “right size for full employment”.
WARREN MOSLER Reply:
January 13th, 2011 at 7:52 am
why would the individual balance of payments matter? as long as their deficits are kept at a full employment type level doesn’t seem that would be an issue?
no one even knows the balance of payments deficits/surpluses between the US states, for example
Ramanan Reply:
January 13th, 2011 at 11:49 am
The reason nobody knows the balance of payments between the US states is that the US Federal Government makes “fiscal transfers” without anyone noticing!
Matt Franko Reply:
January 12th, 2011 at 8:03 am
Neil & Ralph,
“A better way of looking at it is that the best way to run an economy is to expand the influence of your currency zone over the people of the world”
Ive been looking into the Roman currency use in Brittania years ago.
This find looks like it was from the first century AD, and the Romans were using 250 yr old currency “tokens” in Brittania. Smaller amount (1,000 coins) buried in a clay jar. Older years of issue perhaps sent to the periphery, newer coins used near Rome. (200 BC coins in this find with older Ceasar image)
http://www.dailymail.co.uk/news/article-1200126/Treasure-trove-silver-Roman-coins-worth-thousands-buried-field.html
Then this one is from 250 years later (much larger, 52,000 coins) contemporary issuance, same thing buried in clay jar. http://www.guardian.co.uk/science/2010/jul/08/hoard-roman-coins-somerset
so it seems in the 250 years from mid-first to end of 3rd century, the use of the external roman currency/tokens was indeed expanding in Brittania. I would have to think that at least by the end of the third century, based on the size of that 52,000 coin find, that Brittania was probably exclusively using this external currency for everyday transactions, effectively operating their economy (or trying to) in an external fiat currency (w/ no bonds). Probably not a good idea in general. Perhaps buried clay jars was part of how they constructed their banks/Treasury.
Interesting excerpt from the second article: “the largest ever found set of coins minted by the self proclaimed emperor Carausius, who lasted seven years before he was murdered by his finance minister.”
Reply
WARREN MOSLER Reply:
January 12th, 2011 at 8:06 am
old coins in good shape can indicate they didn’t actually circulate. Usually because the denominations were relatively large. Maybe used to pay mercenaries, and other large scale exchanges?
WARREN MOSLER Reply:
January 12th, 2011 at 6:40 am
But in this case lending to a nation doesn’t mean it will run a larger deficit and consume more, etc.
The member nation deficits are being reduced by ecb terms and conditions, which is deflationary austerity/pain no matter who buys their bonds.
What foreign accumulation of euro financial assets does is drive imports to the eurozone, which, for a given size deficit, reduces eurozone aggregate demand and adds to the austerity/pain/deflation.
Reply
January 13th, 2011 at 1:02 pm
“What foreign accumulation of euro financial assets does is drive imports to the eurozone, which, for a given size deficit, reduces eurozone aggregate demand and adds to the austerity/pain/deflation.”
Warren, isn’t it the other way around? they are in the position to accumulate euro financial assets (Japan and China buying Spain and Ireland bonds)BECAUSE they drove imports to the eurozone and got paid in euro.
They don’t have to “buy” euros to export to the euro region, they simply get paid in euro. If they don’t “spend” the euro, they buy bonds and the money stays in the ECB…reducing aggregate demand because there are less euro circulating and keeping the value of the currency where they want it.
I see one LESS currency transaction in my understanding…
Reply
WARREN MOSLER Reply:
January 13th, 2011 at 1:48 pm
it’s about market forces and prices.
when something from japan gets sold in euro the company then needs to sell the euro for yen to pay its workers, etc.
this would drive the euro down/yen up to the point where the sale wouldn’t have gotten made in the first place, unless those euro were spent by the company or the workers it paid, etc. on euro zone goods and services.
So on an ongoing basis, to support net exports, a nation needs to continuously buy the currency of the ‘target’ nation directly or indirectly from its exporters.
And Japan can buy euro at will in the fx markets and then buy any euro denominated asset it wants with those euro, ahead of selling exports.
Reply
Tom Hickey Reply:
January 13th, 2011 at 2:59 pm
Michael Pettis pointed out that this is what China has been doing to keep the RMB down relative to the $ by buying tsy’s. Now China is expanding its export influence by buying other country’s bonds.
Reply
January 13th, 2011 at 1:13 pm
“Japan will use its foreign-exchange reserves to
buy more than 20 percent of bonds to be issued under a special
assistance program to help Ireland.”
Just like when they buy U.S. Treasuries, they have only a few choices as to what to do with the currency they earned in trade, if they spend it buying goods and services back to the eurozone, they put the euros back in the system and drive price down, if they “save it” … is it not the same “fraud” that they are said to be financing the ECB?
Reply
WARREN MOSLER Reply:
January 13th, 2011 at 1:49 pm
The govt of Japan has not been buying fx for quite a while. Instead the exporters have been selling their fx for yen as they export, which has driven up the value of the yen in the fx markets.
So now with Japan getting the political green light from the ECB to start buying euro, they are all over that trade!
Reply
Ralph Musgrave Reply:
January 14th, 2011 at 5:21 am
WM asks above “why would individual balance of payments matter?” (Jan 13th, 7.52) My answers:
1. The balance of payments of any area (US state or Euro country) cannot be in deficit or surplus for ever. A temporary deficit for an area flush with cash does not matter. But the Euro countries with the worst deficits tend to be the most heavily in debt.
2. A possible exception to the above is where some sugar daddy funds the deficit area on a permanent basis, e.g. Germany permanently funds PIG deficits. This just won’t happen. Ask German taxpayers.
3. A variation on the latter is to have the ECB create new money and distribute to PIGS. But that money is really the common property of EU citizens. Effectively that’s the same as responsible countries permanently subsidising PIGS.
4. Deficits tend to raise unemployment. This does not matter with US states because labour is mobile in the US. Contrast that with the catastrophically large number of Spanish unemployed who just aren’t getting jobs in German factories.
There is a long and thoughtful article by Krugman on this and closely related matters here: http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html?hp
Reply
WARREN MOSLER Reply:
January 14th, 2011 at 8:06 pm
respectfully don’t agree with each
one region can be in deficit for as long as the ‘outsiders’ desire to be in surplus. and that can be a very long time (look at japan)
if the region in deficit (trade deficit) issues its own currency it can remain in deficit for as long as outsiders want to net accumulate its financial assets
my variation of the latter is to have the ecb make distributions to its member nations on a per capita basis which is not a subsidy for anyone,
and doesn’t alter agg demand, just credit worthiness.
deficits raise unemployment when the currency issuing govt doesn’t adjust taxes (downward) to sustain full employment for any given size govt.
January 13th, 2011 at 2:07 pm
quite a move since I posted this! think I caused it?
;)
Reply
Ralph Musgrave Reply:
January 14th, 2011 at 3:41 am
When he who resides at the Centre of the Univese speaks, the world takes note. (Old Chinese proverb).
Reply
beowulf Reply:
January 14th, 2011 at 5:55 am
I prefer to think that you’re psychic. :o)
Reply