This is peculiar.
This supports the yuan vs the yen,
supporting Japan’s exports to China.

Could be more evidence of China’s inflation concern?

Japan To Buy Chinese Govt Bonds Under Bilateral Pact

TOKYO (Nikkei) — Japan will likely purchase yuan-denominated bonds issued by the Chinese government under a proposed bilateral currency and financial agreement, The Nikkei learned Monday.

Japanese and Chinese officials are working out plans to have the pact signed when their leaders meet for a summit this coming Sunday. The agreement will be pillared on the purchase of Chinese government bonds using Japan’s foreign exchange fund special account, along with the joint establishment of a green investment fund.

Japan seeks to diversify its forex fund special account, which now focuses on dollar investments. It also aims to strengthen economic cooperation with China by supporting that nation’s efforts to turn the yuan into a more international currency.

The bond purchases may total up to 10 billion dollars’ worth, or roughly 780 billion yen, with buying carried out in stages through the special account.

The Chinese government counts Japanese government bonds among its foreign-currency reserves. Through cross-holding of bonds, Japan and China will be better poised to exchange information on financial developments in the bond market and elsewhere.

The Japanese government also plans to aid Chinese efforts to nurture an offshore market for yuan-denominated transactions.

The proposed joint fund for environmental investment would feature the participation of the Japan Bank for International Cooperation and private-sector companies from the Japanese side. Details of the fund’s size and investment percentages are to be fleshed out in the near future.

Thailand and Nigeria are among the countries that hold yuan-denominated government bonds through their central banks. Tokyo and Beijing believe that having a developed nation like Japan maintain a certain amount of yuan-denominated holdings may help lift the Chinese currency’s standing on the international stage.

China’s government bond offerings totaled 1.4 trillion yuan in 2009, up 55% on the year.

Such issuances have recently increased in Hong Kong. Overseas investors can acquire government bonds issued on the mainland, but regulations — including a ceiling on purchase amounts — remain strict. top

China Bond Purchases Could Help Ties: Finance Minister

Japan To Buy Chinese Govt Bonds Under Bilateral Pact

TOKYO (NQN) — Finance Minister Jun Azumi on Tuesday confirmed a report that Japan is considering buying Chinese government bonds, arguing that such purchases will offer the two countries significant advantages while strengthening bilateral economic ties.

At a news conference after a Cabinet meeting, Azumi said Japan should hold yuan-denominated bonds as a means of strengthening diplomatic relations.

Azumi said no official decisions have been made on the matter, and that Tokyo will discuss the issue at a future Japan-China summit. He also suggested that the two nations may be able to strike an agreement when Prime Minister Yoshihiko Noda visits China.

REUTERS POLL: 61 PCT OF JAPAN BIG FIRMS VERY WORRIED JAPAN MAY FACE EUROPE-LIKE DEBT CRISIS IN NEAR FUTURE

In case you thought those big firms understood the monetary system.

With the tools currently at their immediate disposal, including providing unlimited member bank liquidity,lowering the interbank rate, and buying euro national govt debt, the ECB has no chance of causing any monetary inflation, no matter how hard it might try. There just are no known channels, direct or indirect, in theory or practice, that connects those policies to the real economy. (Note that this is not to say that removing bank liquidity and national govt credit support wouldn’t be catastrophic. It’s a bit like engine oil. You need a gallon or two for the engine to run correctly, but further increasing the oil in the sump isn’t going to alter the engine’s performance.)

Lower rates sure doesn’t do the trick. Just look to Japan for going on two decades, the US going on 3 years, and the ECB’s low rate policies of recent years. There’s not a hint of monetary inflation/excess aggregate demand or inflationary currency weakness from low rates. If anything, seems to me the depressing effect on savers indicates low rates from the CB might even, ironically, promote deflation through the interest income channels, as the non govt sector is necessarily a net receiver of interest income when the govt is a net payer. (See Bernanke, Reinhart, and Sacks 2004 Fed paper on the fiscal effect of changes in interest rates.)

And if what’s called quantitative easing was inflationary, Japan would be hyperinflating by now, with the US not far behind. Nor is there any sign that the ECB’s buying of euro govt bonds has resulted in any kind of monetary inflation, as nothing but deflationary pressures continue to mount in that ongoing debt implosion. The reason there is no inflation from the ECB bond buying is because all it does is shift investor holdings from national govt debt to ECB balances, which changes nothing in the real economy.

Nor does bank liquidity provision have anything to do with monetary inflation, currency depreciation, or bank lending. As all monetary insiders know, bank lending is never reserve constrained. Constraints on banking come from regulation, including capital requirements and lending standards, and, of course credit worthy entities looking to borrow. With the ECB providing unlimited liquidity for the last several years, wouldn’t you think if there was going to be some kind of monetary problem it would have happened by now?

So the grand irony of the day is, that while there’s nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national govt solvency risk but not halt the deflationary monetary forces currently in place.

So where does monetary inflation come from? Fiscal policy. The Weimar inflation was caused by deficit spending on the order of something like 50% of GDP to buy the foreign currencies demanded for war reparations. It was no surprise that selling that many German marks for foreign currencies in the market place drove the mark down as it did. In fact, when that policy finally ended, so did the inflation. And there was nothing the central bank could do with interest rates or buying and selling securities or anything else to stop the inflation caused by the massive deficit spending, just like today there is nothing the ECB can do to reverse the deflationary forces in place from the austerity measures.

So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblance of national govt solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.

Post script:

The only way the ECB could inflate would be to buy dollars or other fx outright, which it doesn’t do even when it might want a weaker euro, as ideologically they want the euro to be the reserve currency, and not themselves build fx reserves that give the appearance of the euro being backed by fx.

Japan’s Hidden Jobless Hits 4.69mn, Worse Than After Lehman Shock

November 16 (Nikkei) —The number of Japanese that want to work but are not actively seeking employment has surpassed levels from after the global financial crisis erupted, according to government data released on Tuesday.

Some people have given up searching for work because they believe that the jobs they desire are not available. Known as hidden unemployment, such individuals are not reflected in official unemployment statistics, which cover those actively hunting for jobs by going to employment centers, for example.

The hidden jobless in Japan jumped by 190,000 from a year earlier to 4.69 million in the July-September quarter, excluding the three prefectures hit hardest by the March 11 disaster, the Internal Affairs Ministry said.

The figure is nearly 70% larger than the number of officially unemployed people. It is also higher than the 4.61 million in the July-September quarter of 2009, when the employment market deteriorated sharply after the financial crisis.

Of the hidden jobless, the number of women grew by 60,000 while men surged by 130,000. Asked why they are not seeking work, more people replied that there are no jobs that match their skills or their desired conditions such as pay and work hours. The strong yen and concerns over power shortages are seen as factors resulting in a dearth of openings for good jobs.

The number of unemployed people fell 430,000 on the year to 2.77 million for the July-September quarter, excluding the three disaster-hit prefectures. Of this figure, those that have been out of work for at least a year declined by 190,000 to 1.03 million, down for the second straight quarter. While this suggests that fewer people are without work over the long term, some may have exited the employment market by giving up on the job search.

>   
>   (email exchange)
>   
>   On Sat, Nov 12, 2011 at 2:19 PM, Stephanie wrote:
>   
>   John Carney loving on us again

Yes!

Paul Krugman Goes MMT on Italy

By John Carney

November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.

As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.

“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”

But today’s column is basically right out of MMT.

“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

Utter failure of policy.

The Fed was certain it knew what Japan had done wrong and wasn’t going to make THOSE mistakes.

So it

Cut rates much more aggressively.

Said it would do whatever it takes.

Figured out how to do its job as liquidity provider after only 6 months of alphabet soup programs.

Did heaps of Quantitative Easing.

Did the twist.

And now, realizing its done about all it can do, says monetary policy can’t do it all.

And still fails to recognize publicly the actual problem is the budget deficit is way too small.

And doesn’t directly inform Congress that

there is no such thing as a solvency problem,

the Fed controls government interest rates, and not the market,

there is no long term deficit problem with regards to finance,

the only thing we owe China is a bank statement,

Quantitative Easing and rate cuts remove interest income from the economy, which allows the deficit to be that much larger,

etc.

as we continue to go the way of Japan.

Karim writes:

Some improvement around the edges but the larger narrative is employment rising only at a rate fast enough to keep the unemployment rate stable (not higher or lower)

The world’s poster child for losing decades looks to stay a step ahead:

(Nikkei)–Prime Minister Yoshihiko Noda vowed Thursday to gradually raise the nation’s consumption tax to 10% by mid the 2010s during a summit meeting of the Group of 20 leading economies in Cannes, France.

The announcement at the summit has effectively made the tax hike an international pledge, and is expected to be included in an action program due out Friday.

Noda stressed the importance of rebuilding debt-ridden Japanese finances and told G-20 leaders that fiscal consolidation is a must “for Japan to be put back on a sound economic growth path, regardless of the debt crisis in the euro zone.”

He also spoke to reporters that a Diet dissolution should be carried out before implementing the tax hike. “If we go to the people in a general election (to seek a mandate on the consumption tax hike), we should do so after passing related bills but before implementing them,” he said.

As to Japan’s participation in the Trans-Pacific Partnership free trade pact, Noda told reporters he will accelerate efforts to iron out differences within the Democratic Party of Japan, which he leads. “We have to close ranks and shouldn’t be split,” he said.

Noda showed his flexibility in making concessions to a controversial redemption period of reconstruction bonds aimed at funding rebuilding efforts of the March 11 disaster, in hopes of enlisting support from the Liberal Democratic Party and New Komeito, the main opposition parties.

“Our policy chief said that we envisage a 15-year period (for the redemption of reconstruction bonds), but there’s room for concessions,” he said.

As discussed last week, the latest euro package just announced is unravelling quickly as markets again realize there is no actual substance, and no operational path with regards to carrying any of it out. So things will deteriorate as described until markets again force further ‘action.’

At the same time, the austerity continues to weaken the euro economies, with Q4 potentially going negative, driving deficits that much higher in the process.

The ‘answer’ remains the ECB writing the check, which they’ve sort of seemed to recognize, but they remain (errantly) concerned that reliance on the ECB is inherently inflationary, and thereby violates the ECB’s mandate for price stability. So it won’t happen until things again get bad enough to force it to happen.

The catastrophic risk remains a failure, when push comes to shove, to allow the ECB to write the check as they have been doing to allow it all to muddle through.

The range of outcomes couldn’t be wider. Write the check and not much happens, don’t write the check and there is unthinkable collapse.

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

Toss in West Texas crude prices heading to Brent levels of about $110/barrel as the strategic petroleum reserve release winds down over the next three weeks and the looks to me like the US consumer crawls back into his foxhole just in time for the holiday season.

Not to mention Japan now darning the torpedoes and buying dollars to take back a bit of the export market they lost by kowtowing to former tsy sec paulson’s demands to not be a ‘currency manipulator’ in the context of still weakening global demand in general.

The number one threat to world order remains a failure to sustain demand. The good news is sustaining aggregate demand is a simple matter once the monetary system is understood. The bad news is there seems to be no one of authority who doesn’t have it all backwards.

The modern day saga of the Trojan Horse continues.
as the euro debt crisis gives Japan the cover to do something
otherwise highly problematic.

Japan buying euro zone debt is a way to bolster the euro vs the yen
and thereby support Japan’s exporters.

Fujimura Says Japan May Boost Europe Bailout Bond Purchases

October 5 (Bloomberg) — Japan may increase its purchases of bonds to finance Europe’s debt crisis rescue fund, Chief Cabinet Secretary Osamu Fujimura said.

Fujimura told reporters today in Tokyo the government “would like to consider” buying more bonds from the European Financial Stability Facility to help stabilize the region. Japan bought more than 20 percent of the fund’s initial five-year, 5 billion euro ($6.6 billion) bonds in January, and purchased another 1.1 billion euros of 10-year EFSF bonds issued in June.

“Europe’s fiscal problem is also very important for Japan in terms of restoring market confidence, and the Europeans are grappling with this,” Fujimura said.

This spending does add net financial yen denominated assets to the private sector:

Japan DPJ Policy Chief Maehara: Government, DPJ Agree On Third Extra Budget

By Kosaku Narioka

September 27 (Dow Jones) — The Japanese government and the ruling Democratic Party of Japan agreed on the third extra budget, totaling about Y12 trillion, for the fiscal year ending March 2012, the DPJ policy chief Seiji Maehara said Tuesday.

Under the plan, non-tax revenue amounts to Y7 trillion, he said. The government is going to sell all Japan Tobacco Inc. (2914.TO) shares it owns to generate part of the revenue, he said.
The government is planning to issue reconstruction bonds and is going pay them off in 10 years or longer, he said.

Noda, who was finance minister in the previous Cabinet, said he is ready to intervene in foreign exchange markets if necessary and promised that tax increases to fund the rebuilding of the disaster-stricken areas will not take place before cutting more wasteful spending of taxpayers’ money.

But he said it would be inevitable to raise some kinds of core taxes if the government still finds that there is a shortage of funds for the reconstruction work after all its efforts.

Bet they’re sorry now for all that deficit spending, two decades of 0 rates, and untold QE ‘money printing’- inflation is finally ripping!

Not

July CPI Shows 1st Increase In 2.5 Years

May 25 (Dow Jones) — Japan’s core consumer price index rose 0.1% in July from a year earlier for the first time in two and a half years, despite a revision to the data’s base year giving a downward bias to the index, government data showed Friday.

The outcome was higher than the median forecast for a 0.1% drop in a poll of economists surveyed by Dow Jones and the Nikkei. The index declined 0.2% from a year earlier in June.

Core CPI for the Tokyo metropolitan area–an early indicator of price trends for the rest of Japan–fell 0.2% on year in August, compared with a forecast 0.1% fall. In July, it declined 0.1%.

The results came after the government changed the data’s base year to 2010 from 2005, which was expected to produce a lower-than-usual figure.

Continuing the policy that got it to where it is:

Japan To Cut Policy Spending By 10% Under FY12 Budget

August 23 (Kyodo) — Finance Minister Yoshihiko Noda instructed other Cabinet members Tuesday to cut policy spending by 10 percent in the fiscal 2012 budget from the current year, aiming to secure funds that would help cover burgeoning welfare costs in Japan and reflect the policy priority of a new prime minister.

The government decided to delay by a month the deadline for its offices to submit their request for the state budget, in a move to concentrate more on reconstruction work following the March earthquake and tsunami.

Noda also ordered government spending of no more than 71 trillion yen ($924.5 billion), excluding costs to service existing debt, in the year starting next April and capping the issuance of new bonds at 44 trillion yen, both at the same level as the fiscal 2011 budget.

But spending and debt issuance necessary for quake-relief efforts will be managed separately from the capping rules, as the government intends to issue reconstruction bonds that would be serviced with proceeds from provisional tax hikes, although there remains opposition to the idea even within the ruling coalition.

The envisaged 10 percent policy spending cut would lead the government to secure 1.2 trillion yen.

Combined with some tax revenue hikes, the government will secure 1.7 trillion yen to cover an annual increase of nearly 1.2 trillion yen in social security costs, which have been growing amid the aging population, and 600 billion yen which would reflect the policy priority of a new prime minister succeeding the incumbent, Naoto Kan, who is certain to step down within this month.

The instruction came before the Cabinet approves in mid-September the guidelines for submission of budget requests by ministries and agencies, a process that has been delayed this year due to the March 11 disaster.

The government offices normally file their requests with the Finance Ministry at the end of August and the government formulates a national budget in December for a new fiscal year starting April 1.

The Cabinet decided Tuesday on a government ordinance to postpone the deadline for submission, effective Friday.

The delay comes as the government focuses on reconstruction work, which has required it to make separate budgetary arrangements. Japan has already implemented two extra budgets for fiscal 2011 and is considering a third that could be bigger than the previous two.

Their multi year budget surplus and subsequent crash was about 10 years ahead of ours.

Glad we learned from their mistakes…

Click here for larger graph

Gnomes need MMT too, even thought they would undoubtedly try to punch holes in it…

Yes, currency intervention works. It’s what I call ‘off budget deficit spending’ and there are no nominal limits.

But seems they haven’t yet figured out that a tax cut and/or spending increase would do the trick all the better re: the currency, domestic demand, and employment.

Swiss Producer & Import Prices Drop Further In July

August 15 (RTTNews) — Switzerland’s producer and import prices decreased at a faster pace in July, data released by the statistical office showed Monday.

The producer and import price index dropped 0.6 percent year-on-year in July, faster than the 0.4 percent decrease recorded in June.

The producer price index decreased 0.8 percent annually during the month, while the import price index fell by 0.1 percent.

On a monthly basis, the producer and import price index decreased 0.7 percent during the month. There was a 0.4 percent monthly decline in producer prices, and a 1.1 percent decrease in import prices during the month.

Swiss Government, SNB in ‘Intense’ Talks, SonntagsZeitung Says

By Simone Meier and Matthias Wabl

August 15 (Bloomberg) — The Swiss government and the central bank are in “intense” talks about a possible franc target to stem currency gains, SonntagsZeitung newspaper reported, citing unidentified people close to the situation.

The plans are “ready” and the Swiss National Bank may set such a target in “coming days,” the newspaper reported yesterday. The discussions are focused on the government’s role and an “appropriate plan” may be adopted on Aug. 17, it said. Walter Meier, a spokesman for the SNB, declined to comment.

SNB policy makers, led by Philipp Hildebrand, have been seeking ways to deter investors from piling into the franc and stop the currency’s ascent to near parity with the euro. While the central bank boosted liquidity in money markets and cut borrowing costs to zero, lawmakers from the People’s Party to the Christian Democrats have signaled their support for tougher measures to protect the economy and avert job losses.

“The SNB is ‘leaning against the hurricane’ in a major way,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange Ltd. in London, said in an e-mailed note today. While the central bank is probably “still looking for a better entry point to initiate a new round” of currency purchases, it “will have a very difficult time limiting the extent of the franc strength.”

The franc traded at 1.1404 versus the euro at 9:45 a.m. in Zurich, down 2.9 percent from Aug. 12. It reached a record of 1.0075 on Aug. 9. Against the dollar, the currency was at 79.74 centimes, down 2.5 percent.

October Vote

Lawmakers, facing elections in October, have become increasingly concerned that the franc’s strength will erode exports and hinder growth. Consumers became more pessimistic about the economic outlook and job prospects in July and investor confidence slumped. The government held an extraordinary meeting on the franc on Aug. 8 and forecast growth to weaken over the coming months.

Goldman Sachs Group Inc. said in an e-mailed note on Aug. 5 that cut its Swiss economic-growth forecasts for this year and next to 1.9 percent from 2.1 percent and to 0.6 percent from 2 percent, respectively.

Christophe Darbellay, head of the Christian Democrats, said in a telephone interview on Aug. 12 that the party supports the SNB and called for “extraordinary measures.” People’s Party Vice President Christoph Blocher, who previously objected to currency purchases, said policy makers need to use all tools to fight a “war.”

Secret Meeting

While the SNB is formally independent, the government may comment on a target to make such a step “as efficient as possible,” the newspaper said. The SNB may introduce an initial lower limit of slightly above 1.10 versus the euro before gradually increasing it, SonntagsZeitung reported, citing insiders.

Swiss Economy Minister Johann Schneider-Ammann led a secret meeting in Bern on Aug. 2 with leaders including Swatch Group AG Chief Executive Officer Nick Hayek and Credit Suisse Group AG Chairman Urs Rohner to discuss the franc, Neue Zuercher Zeitung am Sonntag reported yesterday, without saying where it got the information. The participants all agreed to support the SNB weakening the currency, it said.

Andre Simonazzi, a government spokesman, confirmed that the franc will be on the agenda when the Cabinet meets on Aug. 17 in Bern. The government is in close contact with the SNB and Hildebrand also attended the extraordinary session last week, he said. He wouldn’t comment on possible measures.

‘Several Hundred Billions’

SNB policy makers have been reluctant to start purchasing foreign currencies to weaken the franc after intervention attempts in the 15 months through mid-June 2010 sparked a record loss of $21 billion last year.

Lukas Gaehwiler, head of UBS AG’s Swiss operations, told SonntagsZeitung in an interview that the SNB has “better chances of success” with interventions, given the current exchange rate. Policy makers would have to be ready to spend “several hundred billions of francs or more,” he said.

“The SNB is wary of currency interventions given that they were not very successful the last time,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. Still, “with the franc moving closer to parity, a lot of measures are becoming more realistic.”

Swiss Franc Slides Amid Speculation of Target-Setting; Yen Falls

By Keith Jenkins and Kristine Aquino

August 15 (Bloomberg) — The Swiss franc fell against the euro and headed for its biggest three-day decline since the European currency’s 1999 debut on speculation Switzerland will take further action to counter recent gains.

The franc slid for a fourth day versus the dollar after the SonntagsZeitung newspaper said the Swiss government and the central bank are in “intense” talks over setting a target for their currency. The yen dropped the most in a week against the euro after Japan’s Finance Minister Yoshihiko Noda indicated he’s ready to intervene in foreign-exchange markets again.

“The market is rightly nervous about what’s likely to come from the Swiss authorities as they have a track record of going down more unconventional policy steps,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If the steps will be enough to reverse the Swiss franc’s strengthening trend remains to be seen, but at these levels of overvaluation, which are very extreme, the risk-reward is more favorable in their way.”

The franc tumbled 1.6 percent to 1.12642 per euro at 7:12 a.m. in New York, from 1.10857 on Aug. 12, after rallying to a record 1.00749 on Aug. 9. The Swiss currency has slid 8.7 percent over the past three days, the most in 12 years. The franc declined 1.3 percent to 78.81 centimes per dollar after advancing to a record 70.71 centimes on Aug. 9.

Yen Versus Euro

The yen declined 0.4 percent to 109.78 per euro and depreciated 0.1 percent to 76.79 per dollar after climbing to 76.31 on Aug. 1, approaching its post-World War II record of 76.25 set on March 17. The 17-nation euro increased 0.3 percent to $1.4279.

The franc has soared 12 percent in the past three months and the yen added 3.5 percent, according to Bloomberg Correlation-Weighted Indexes. The currencies have gained as debt crises in Europe and the U.S. boosted demand for safety.

The Swiss National Bank may set a target for the currency in “coming days,” SonntagsZeitung reported. Talks are focusing on the role of the government and an “appropriate plan” may be adopted Aug. 17, the newspaper said.

SNB policy makers, led by Philipp Hildebrand, have been seeking ways to stop the franc’s ascent to almost parity with the euro. While the central bank boosted liquidity in money markets and cut borrowing costs to zero, lawmakers have signaled their support for tougher measures to protect the economy.

‘Shock-and-Awe’

“The market is paying much more respect towards the idea that there’s some sort of shock-and-awe tactic being put together in Switzerland,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “It’s this fear of the unknown that has sparked a significant move” in the franc.

Gains have left the franc 41 percent too strong against the euro, according to an index developed by the Organization for Economic Cooperation and Development in Paris that uses relative costs of goods and services. It’s also the most overvalued currency against the dollar, at 49 percent.

The yen has risen beyond the level that prompted Japan to sell the currency on Aug. 4, its first intervention in foreign-exchange markets since March. A stronger yen reduces the value of overseas income at Japanese companies when converted into their home currency.

“An unstable situation is continuing,” Noda said yesterday during a television talk show on the public broadcaster NHK. “As foreign-exchange market matters are my prerogative, I will continue to closely watch the markets and take bold action if it becomes necessary.”

Japan’s Economy

Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third quarter of contraction, government data showed today. The median forecast of economists surveyed by Bloomberg News was for a 2.5 percent drop.

The euro rose for a third day versus the dollar on speculation a meeting tomorrow between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Paris may result in action to contain the region’s debt crisis.

The two leaders “will come out with something,” said Alex Sinton, senior dealer at ANZ National Bank Ltd. in Auckland. “It may even be long-term viable. I suspect there’ll be a range broken this week.” Investors will be looking to sell the euro on rallies toward $1.44, Sinton said.

Foreign-exchange traders reduced bets against the dollar by the most on record as demand for Treasuries soared amid global growth concerns. Aggregate bets the greenback will weaken against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the franc and the Mexican peso plunged by 154,105 contracts to 153,216 in the week ended Aug. 9, the biggest drop ever in Commodity Futures Trading Commission data compiled by Bloomberg beginning in November 2003.

Pound Outlook

Traders are betting on pound weakness even as the euro-area debt crisis deepens because of slumping consumer sentiment and a growth rate that may trail behind Germany’s by more than two percentage points in 2011, analysts in Bloomberg surveys said. Analysts cut forecasts for sterling versus the euro by 5.7 percent this year, the most of 17 developed-nation pairs tracked by Bloomberg.

The pound declined 0.2 percent to 87.66 pence versus the euro today and appreciated 0.2 percent to $1.6306.

From Goldman:

Published August 8, 2011

* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.

This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.

And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.

The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.

So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.

And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.

Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.

So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.

And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.

But until then, we keep working to become the next Japan.

Well worth reading:

S&P decision is irrelevant

It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

Monkey see, monkey do…

Noda: Need To Curb Spending From Sept If Bond Bill Not Enacted

July 4 (Dow Jones) — Japan’s finance minister Tuesday urged opposition parties to quickly approve a key bond issuance bill, saying the government would have to curb spending as early as September with the economy still struggling to recover from the March 11 disaster.

Finance Minister Yoshihiko Noda’s plea comes as the opposition continues to block the passage of a bill that would enable the government to issue new debt to fund roughly 40% of the spending in the annual budget for the current fiscal year, started April.

“If the deficit-financing bond issuance bill isn’t passed, we would start having trouble smoothly implementing the budget in September or later, and would have to make an agonizing decision to curb spending,” Noda said at a news conference after a regular Cabinet meeting.

Broad-based slowdown in Eurozone manufacturing as growth hits 18-month low

(Markit) The final Markit Eurozone Manufacturing PMI fell to a one-and-a-half year low of 52.0 in June, down from 54.6 in May and unchanged from the earlier flash estimate. Incoming new orders fell for the first time since July 2009. Weakening domestic markets – especially at the periphery – was a major factor underlying lower order book inflows. June saw new export orders increase at the slowest pace since September 2009, led down by a decrease at intermediate goods producers. Production continued to rise at a robust pace in the investment goods sector in June, but lower output was seen at consumer and intermediate goods producers. Meanwhile, new order inflows stagnated at consumer and investment goods companies, and dropped at the steepest rate in over two years at intermediate goods producers.

This is not good. The hope is it reverses with lower crude and recovery in Japan.

Risks include China weakening, US austerity, and further austerity induced weakening in Europe.