Category Archives: Japan

Bernanke Excerpts

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Karim writes:

Doesn’t seem like someone looking to tighten for a while….but things change and some probability of a hike for later this year or early next needs to be priced in…

Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve’s statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully.

FOMC participants also projected inflation to be at historically low levels for some time. Very low rates of inflation raise several concerns: First, very low inflation increases the risk that new adverse shocks could push the economy into deflation, that is, a situation involving ongoing declines in prices. Experience shows that deflation induced by economic slack can lead to extended periods of poor economic performance; indeed, even a significant perceived risk of deflation may lead firms to be more cautious about investment and hiring.

I agree that their belief that very low inflation poses the risk of deflation will keep the Bernanke Fed from hiking at least until their inflation forecast picks up, and especially with unemployment north of 8%.

And I don’t see reported inflation picking up without crude oil rising enough and remaining high long enough to drag up core inflation.

Nor do I see any move towards fiscal expansion. Quite the contrary, Congress and the President are in consolidation mode, including cutting Social Security and Medicare expenditures, one way or another.

Nor do I see a burst of domestic credit driven buying anywhere on the horizon.

So still looks to me that fear of being the next Greece continues to work to cause us to be the next Japan.

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LDP Plans for ‘X-Day’ Japan Bond Crash It Blames on Kan Spending

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So seems they see the fear mongering about the deficit work to get politicians elected in the US and are trying same in Japan.

This kind of near universal ignorance will only make things worse, of course.

The only hope is that somehow an understanding of actual monetary operations takes over but so far no signs of any inroads at the political level or in mainstream economics.

LDP Plans for ‘X-Day’ Japan Bond Crash It Blames on Kan Spending

By Sachiko Sakamaki and Takashi Hirokawa

December 22 (Bloomberg) — Japan’s opposition said Prime Minister Naoto Kan’s spending plans are increasing the risk that the nation’s 858 trillion yen ($10.2 trillion) government debt market, the world’s largest, will collapse.

“We’re approaching a danger zone where bond prices could plunge,” Yoshimasa Hayashi, the Liberal Democratic Party’s shadow finance minister said in a Dec. 20 interview at his office in Tokyo. “It’s very important to be implementing a fiscal rehabilitation plan by 2012,” when baby boomers born after the war will start receiving state pensions, he said.

Surging bond yields would force the government to devote more funds to service debt, undermining Kan’s stimulus efforts. He has pledged to balance the budget by 2020 and pared back the campaign promises that helped his party end the LDP’s half century of almost unbroken rule. Japan’s total debt burden jumped 85 percent during the LDP’s last 10 years in power.

The opposition is working on what it calls the “X-Day” project, to fend off a potential bond market rout, said Hayashi, 49, a former Economy Minister.

“There are many worrisome spending initiatives” in Kan’s budget proposals, such as raising childcare allowances and handouts for farmers, Hayashi said. The government has yet to explain how it will finance a planned 5 percent cut in corporate taxes, which will cost at least 1.5 trillion yen.

Kan aims to freeze annual budget spending at 71 trillion yen for the next three years and cap bond sales at 44 trillion yen in the 12 months starting April 1, the same as this year’s record level.

Risks to Economy

Bank of Japan Governor Masaaki Shirakawa yesterday warned about risks to the economy from rising bond yield. Benchmark 10- year yields rose more than 40 basis points in the past two months to as high as 1.279 percent. The 10-year, 1.2 percent Japanese government bond was recently trading at 1.145.

Japan’s Finance Ministry forecasts long-term debt in the year ending March 31, 2011, will reach 868 trillion yen, about 180 percent of gross domestic product. Household assets rose 0.3 percent in the third quarter to 1,442 trillion yen from a year earlier, according to the Bank of Japan.

The narrowing gap is especially alarming for Japan, where more than 90 percent of public debt is held by domestic investors.

Hayashi said the gap between the two will shrink as an aging population forces the government to spend more on social security and families use up more savings.

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risk off Friday

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Looks like a big ‘risk off’ day coming up.

The authorities are embodying uncertainty at a time when it’s ‘their move’

Where things go is not about market forces, but about what politicians and their appointees do next.

The competence of the G20 is looking much like that of the FOMC, and it’s not a pretty sight.

We can do nothing but ‘wait and see.’

For example, will they or won’t the fund the euro members?
The mixed message is both no, and they will do what it takes to ensure solvency.
And taxpayers don’t want to pay for it, whatever that means.

And the same time the US authorities are being exposed as, to be kind, being on the sidelines.

President Obama has both nothing of substance to add to the debate, either in the euro zone or domestically.

The Fed itself said QE does nothing but modestly lower rates (Bernanke speech, Carpenter paper) which hopefully boosts asset prices which hopefully adds to aggregate demand. Hasn’t worked in Japan, (even with the net exports we also aspire to) but hopefully here. And skeptical markets that fear the Fed is engaged in ‘irresponsible money printing’ are coming around to the reality.

The sustainability commission has reported and recommended ways to reduce the deficit and ensure unemployment rises and our standard of living falls.

The theme continues- by fearing we are the next Greece, we are turning ourselves into the next Japan. Including burdening ourselves with an export driven economy.

So on an otherwise quiet post holiday Friday I look for a risk off rush to the sidelines, and a continuation of illiquidity in general.

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QE still driving portfolio shifting

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When Japan First Did QE, Stocks Shot Up And Then Quickly Cratered Massively

Pragmatic Capitalist

November 4 — There appears to be some confusion over the response of equity markets to quantitative easing. Of course, the Fed is hoping that they can ignite a “wealth effect” by driving stocks higher. But as we saw in Japan this failed to materialize. In fact, anyone buying in front of the QE announcement in Japan ultimately got crushed in the ensuing few months and years. When the BOJ initially announced the program in March 2001 the equity market rallied ~16%.

But the euphoria over the program didn’t last long. In fact, within 6 weeks of the announcement the Nikkei began to crater almost 30% over the course of several months. In the ensuing two years the Japanese stock market fell a staggering 43%! It wasn’t until the global economic recovery in 2003 that Japanese equities finally bottomed and went on a tear. Ultimately, the BOJ ended the program in March 2006 and deemed it a failure.

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Japan looking to weaken yen with fiscal stimulus!!!???

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The only place with ‘stimulus’ proposals???

And, they recognize that ‘stimulus’ fights the weak yen???
Maybe been reading my blog???
This could be a game changer for Japan?
Stimulus the new ‘currency war’ weapon of choice?

Cabinet OKs Extra Budget To Cover Y5tln Stimulus


TOKYO (Kyodo)–The Cabinet approved Tuesday a draft supplementary budget for fiscal 2010 to partly finance an additional stimulus package worth some 5 trillion yen that aims to fight the impact of the recent strength of the yen and kick-start the deflation-plagued economy.
 

The budget plan, which will be submitted to the Diet on Friday for deliberations, includes expenditure of 4,429.2 billion yen. Prime Minister Naoto Kan, who has championed the restoration of the country’s fiscal health, the worst among major industrialized nations, has refused to issue any new government bonds for the extra budget.
 

The government instead plans to finance the budget with surpluses carried over from the fiscal 2009 budget, funds available due to lower-than-expected interest payments on its debt as well as greater-than-projected tax revenues for fiscal 2010. It would be the first time in 11 years for Japan not to issue any new debt for the creation of an extra budget to finance a stimulus package.
 

”We drafted the budget after listening to opposition parties. I think there is enough possibility that they will agree with us,” Finance Minister Yoshihiko Noda told reporters after the Cabinet meeting.
 

Kan has been forced into careful maneuvering in the Diet after the ruling alliance lost a majority in the House of Councillors in an election in the summer.
 

The latest stimulus is the second in a series following a 918 billion yen package approved last month, and highlights Kan’s strong resolve to prevent the Japanese economy from falling into a recession amid high unemployment, falling prices, weakening exports and sliding industrial output.
 

The yen has risen to its highest level against the U.S. dollar in more than 15 years despite the government intervening in the market last month for the first time in over six years. The strength of the Japanese currency has negatively affected the country’s export-oriented economy.
 

The new stimulus package, revealed earlier this month, focuses on boosting domestic demand while improving the business environment. The extra budget would cover 3,070.6 billion yen in spending to revitalize regional economies, develop infrastructure and offer financial support to small and medium-sized companies.
 

The 1,123.9 billion yen portion would go to upgrading medical and social welfare services. The government is also earmarking 336.9 billion yen to accelerate economic growth through such measures as securing overseas energy and mineral resources, as well as 319.9 billion yen to help young people find jobs by giving incentives to employers.

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Japan- Govt Seeking Y340bn For Extra Budget

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The only nation going in this direction?

Probably too early to short the yen, but keep an eye on it…

Govt Seeking Y340bn For Extra Budget

TOKYO (Nikkei)–The government is looking to secure 336.9 billion yen in a supplementary budget for fiscal 2010 to implement its new growth strategy, The Nikkei learned Monday.

The draft budget, to be approved at a cabinet meeting Tuesday, aims to ensure a stable supply of rare earths and to fund the eco-point program for housing, among other priorities.

About 319.9 billion yen is expected to be spent on job creation, including 51.1 billion yen for employment and training of new graduates and other young people.

(The Nikkei Oct. 25 evening edition)

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China sells off Japanese debt

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Interesting and unusual headline.

China doesn’t care about exports to Japan and may be ‘helping them’ by selling some of its yen reserves?

They may know Japan is going to get serious about keeping the yen weaker with direct intervention so China is front running them?

China sells off Japanese debt

By Michiyo Nakamoto

October 8 (FT) — China sold a record Y2,000bn ($24.3bn) in short-term Japanese bills in August, suggesting that their hefty buying earlier this year was not aimed at diversification into the yen as some had speculated. Chinese investors had bought a net Y2,300bn in Japanese bills and bonds between January and July. Chinese investors were slight net buyers of medium- to long-term Japanese bonds in August, to the tune of Y10.3bn. Coupled with their record net selling of short-term bills, Chinese investors’ total net buying of Japanese bills and bonds so far in 2010 fell to Y297.6bn. That is still slightly above the annual record for Chinese net buying of Japanese debt, of Y255.7bn, recorded in 2005.

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CNBC’s Kudlow Comments

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He sort of gets some of it.

There are many debates among economists about how to resurrect the subpar, so-called recovery and generate some serious new job creation. But there is also widespread agreement that nations cannot tax their way into prosperity,

Right.

devalue their way into prosperity,

Depends on how you define prosperity. Japan sort of did it this way. Not ideal, due to suboptimal real terms of trade, etc., but that’s they way they set up their system. And as soon as they stop devaluing their currency (buying dollars) they have problems. Europe is in the same bind.

spend their way into prosperity,

This is wrong. The output must be sold, either to the public sector or the private sector. That’s a political choice- public goods or private goods.

or pursue trade-limiting protectionism as a path to prosperity.

This can also work, but as above, is suboptimal in general. And, it is vital when it comes to strategic materials and intellectual knowledge. For example, military needs are best sourced domestically to assure a supply in times of war, etc.

All of this is weakness.

I’d say in general yes, all of his argument displays a weakness of understanding.

:)

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Japan Recap- Prime Minister Says Huge Public Debt Unsustainable

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More modest signs of improvement in Japan, with employment and spending improving.

Unfortunately, the Prime Minister seems be about to make the same mistake of past Prime Ministers and take action to reduce the govt’s deficit.

In contrast, China seems to have recognized govt spending spending (and lending by state owned banks that is in fact thinly disguised govt spending) is not operationally dependent on revenue, and that there is no solvency issue nor external constraints on local currency expenditure. China seems to understand the risks are inflation, making adjustments as they see that political threat arise.

See comments below.

Aug Job-To-Applicant Ratio: 0.54% vs 0.54% (expect) / 0.53% (last)

Aug Jobless Rate: 5.1% vs 5.1% (expect) / 5.2% (last)

Aug Household Spending (YoY): 1.7% vs 1.4% (expect) / 1.1% (last)

Sep Tokyo CPI (YoY): -0.6% vs -0.9% (expect) / -1.0% (last)

Sep Tokyo CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Sep Tokyo CPI Ex-Fresh Food & Energy (YoY): -1.3% vs -1.4% (expect) / -1.4% (last)

Aug National CPI (YoY): -0.9% vs -0.9% (expect) / -0.9% (last)

Aug National CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Aug National CPI Ex-Fresh Food & Energy (YoY): -1.5% vs -1.5% (expect) / -1.5% (last)

Japan Prime Minister Says Huge Public Debt Unsustainable

October (Reuters) — Japan’s prime minister warned on Friday that the country’s fiscal situation was unsustainable given its huge public debt, and called for multiparty tax reform talks as he struggles with a fragile economy and a divided parliament.

With perhaps the world’s largest public debt, severe prior downgrades by the ratings agencies, perhaps the strongest currency in the world, mild deflation, and yet ten year JGB’s hovering around 1%, you’d think the historical evidence alone would convince them there is no solvency or funding or ‘sustainability’ issue. But clearly it doesn’t. And while those in monetary operations at the BOJ understand there is no sustainability issue, it is not their place to mention it (much like the US).

Naoto Kan also repeated his resolve to curb a rise in the yen that threatens to derail Japan’s export-led economic recovery, urged the central bank to do more to fight deflation, and expressed hope that opposition parties would join in talks on a extra budget he wants to enact soon.

This seems to indicate he’s pushing for a higher deficit? Or will there be a new tax to ‘pay for it?’ And the only way to weaken the yen vs the dollar is to buy dollars, which is what I call off balance sheet deficit spending. It ‘works’ and there are no operational limits to the amount of fx a CB can buy. But it’s a poor second choice to a domestic tax cut or spending increase.

Japan’s core consumer prices marked their 18th straight month of annual declines in August, as deflation grips an economy struggling with a rising yen, slowing exports and a surprise decline in output. But the jobless rate fell and the availability of jobs improved slightly, data showed on Friday.

Yes, the deficit did go up in the financial crisis slowdown and got large enough to support growth. The question is whether they allow that to continue.

Kan, who took office in June as Japan’s fifth leader in three years, faces a tough time wooing the opposition support that is vital to enact laws since his Democratic Party of Japan (DPJ) and a tiny partner lack a majority in parliament’s upper house.

The government faces the delicate task of reining in debt while keeping the economy going. Japan has built up a huge public debt burden, now nearly twice the size of its $5 trillion economy, during two decades of economic stagnation.

It might help if the media stopped calling it a burden, as it’s clearly not a burden in any sense. particularly with a 0 rate policy (not that it matters for solvency).

“If the current fiscal situation is left alone, it will be unsustainable at some point,” Kan said in a speech at the start of an extra session of parliament.

I doubt he could define ‘unsustainable’ but no one asks as the errant sustainability assumption is pervasive.

He also vowed to achieve Tokyo’s goal of bringing the primary budget balance, which excludes revenue from bond sales and debt-servicing costs, into the black within a decade.

Extra Budget

Kan, whose past calls for debating a hike in the 5 percent sales tax had contributed to a July upper house election defeat, said Japan needs a social welfare system that citizens could trust even if that meants added financial burden on the public.

Multiparty debate on tax reform including the sales tax is thus indispensable, Kan said, reiterating that he would seek a mandate from voters before deciding on the sale tax rise.

The government is crafting an extra budget for the fiscal year to March 31 to stimulate the economy by supporting job seekers and families with children, but has sent mixed signals about the size of the package and how it will fund it.

It does look like they plan on ‘funding it’

Some in the cabinet, such as the economics minister, have said new debt issuance should not be ruled out, but the finance minister is firmly against the idea.

National Strategy Minister Koichiro Gemba has said Japan could fund measures worth around 4.6 trillion yen ($55 billion) by tapping reserves, thereby avoiding new bond issuance.

Functionally this would be the same as deficit spending.

“The biggest task for this parliamentary session is enacting a supplementary budget to finance economic steps. I sincerely hope for constructive debate among ruling and opposition parties,” Kan said in the speech.

Efforts to gain such opposition support will be complicated by a bitter feud with China.

Kan is under fire for appearing to cave in to Beijing’s demands to free a Chinese fishing boat captain detained last month after his trawler collided with Japanese patrol boats near disputed islands in the East China Sea.

The prime minister on Friday reiterated that good ties with China, in the process of replacing Japan as the world’s second-biggest economy, were vital but also expressed concern about Beijing’s military buildup and aggressive maritime activities.

China still has bitter memories of the last war with Japan.

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