Gvt Risks Credibility By Ignoring Yen

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Buying $ is off balance sheet deficit spending and the easiest avenue politically.

If anything I am surprised they let it go this far. Their history of their economic model has been
to buy $ to support exports rather than cutting taxes to support domestic private sector demand.

On Thu, Nov 26, 2009 at 6:02 PM, Sean wrote:

This is the thinking that is going to really hurt Japan. The govt
fixation on freezing spending and relying on the BOJ to end deflation.
The yen is surging and according to the steelmakes lobby and automakes
“suffocating” them. The banks are bankrupts with the Nikkei below 7000
which means it will get there as everyone tries to reduce cross held
shares and hedge. In the past the govt bought prefrerred shares and BOJ
bought equities to ease the cross held share issue. The Nikkei
recovered and the banks survived. There doesn’t seem to be any
understanding of the problems or willingness to increase the deficit to
address what problems they do see.

OPINION: Government Risks Credibility By Ignoring Yen

TOKYO (Nikkei)–As the yen climbs higher, the real danger lies in
Japanese policymakers’ utter lack of readiness.

The U.S. Federal Reserve Board has signaled a continuation of its
near-zero interest rate policy, which is fostering a booming dollar
carry trade. Gold prices are breaking records almost daily. And the
yen’s ascent to a 14-year high in Tokyo trading Thursday is another
manifestation of the dollar-selling tide.

Why is the yen attracting buying when Japan’s economy is stuck in low
gear and its stock market is performing worst among its peers? There are
a few reasons. Some Japanese short-term interest rates now exceed U.S.
rates. Moreover, unchecked deflation has given Japan loftier real
interest rates than the U.S., a fact that investment funds have been
exploiting, says Nomura Holdings Inc. President Kenichi Watanabe.

Interest-rate-driven yen-buying has nothing to do with Japan’s
fundamentals. An appreciation of the yen above and beyond the strength
of the economy threatens to cripple domestic firms just starting to
recover. Such concerns are encouraging selling of Japanese stocks even
as U.S. and European shares regain strength.

The bigger problem is Japanese authorities’ indifference to this risk.
Leave aside Finance Minister Hirohisa Fujii, who has backed away from
statements early on in his tenure that suggested an opposition to
currency market interventions. Even if he did flash the intervention
card, the market would see right through his bluff.

Deputy Prime Minister Naoto Kan, who also holds the economic policy
portfolio, has owned up to Japan’s deflation but has yet to prescribe a
remedy for it.
The government’s only accomplishment has been to freeze
2.9 trillion yen in spending in the fiscal 2009 supplementary budget.
a budget-vetting frenzy, it has failed to chart a course for
macroeconomic policy.

Beating deflation requires monetary policy. The Bank of Japan has
decided to end its purchases of corporate bonds and commercial paper.
That gives the impression it is hurrying toward the exit from loose
monetary policy.

Meanwhile, companies are holding down wages, cutting jobs and relocating
not only production but R&D overseas.

A runaway yen hollowed out Japanese manufacturing in the 1990s. Now,
policymakers who refuse to face the facts are beckoning on another
hollowing that might kill the economy.

The dollar’s decline is a global phenomenon, and the yen’s appreciation
is its flip side. Nevertheless, Japan’s economy is sustaining the
heaviest damage of all. If it continues to ignore the situation, the
government will risk losing the trust of the financial markets.
–Translated from commentary by senior Nikkei staff writer Yoichi Takita
(The Nikkei Nov. 27 morning edition)