{"id":37376,"date":"2013-04-07T23:03:28","date_gmt":"2013-04-08T03:03:28","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37376"},"modified":"2013-04-07T23:03:28","modified_gmt":"2013-04-08T03:03:28","slug":"japans-bold-move-of-nothing","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/04\/07\/japans-bold-move-of-nothing\/","title":{"rendered":"Japan\u2019s Bold Move of Nothing"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

Stop the presses! Japan<\/strong> will make a bold attempt to stop falling prices. Making the yen worthless at a 2%-per-year clip is the promised land, according to the new Bank of Japan<\/strong> (BOJ) governor Haruhiko Kuroda.<\/p>\n

\u2018This is monetary easing in an entirely new dimension,\u2019<\/em> Mr. Kuroda said following the bank\u2019s decision. The Nikkei 225 finished 2.2% higher for the day, at 12,634, on Kuroda\u2019s big idea.<\/p>\n

The big idea \u2014 the \u2018entirely new dimension\u2019<\/em> \u2014 is for the BOJ to \u2018aggressively buy longer-term bonds and double its holdings of government bonds in two years.\u2019<\/em> In other words, double the amount of money in circulation.<\/p>\n

Whoa, now that\u2019s some secret sauce. How come nobody thought that up before?<\/p>\n

A Long List of Government Intervention<\/h2>\n<\/p>\n

Hiroko Tabuchi, writing for The New York Times<\/em>, calls this strategy a \u2018dramatic turn in Japanese monetary policy.\u2019<\/em> Up until now, the BOJ has engaged in only a \u2018halfhearted battle to end deflation \u2014 the damaging fall in prices, profits and wages that has weighed on its economic growth.\u2019<\/em><\/p>\n

Halfhearted? Not hardly. Back in 1989, the Nikkei hit an all-time high of 38,916. The average stock was trading at a price-earnings ratio of 80. The capitalized value of the Tokyo Stock Exchange was over 40% of the entire world\u2019s combined stock market value. Japanese real estate accounted for half the value of all land on Earth.<\/p>\n

When that doozy of a bubble popped, the supposedly halfhearted BOJ transformed the world\u2019s healthiest OECD country in 1990 into a country with a public debt of 240% of GDP. Bill Bonner quips, \u2018The Japanese tried to cure an alcoholic with heroin. Now they\u2019re addicted to it.\u2019<\/em><\/p>\n

Japan\u2019s monetary policy aggressively lowered rates to 0.5% between 1991\u20131995 and has operated a zero interest rate policy virtually ever since.<\/p>\n

The Japanese government<\/strong> didn\u2019t just leave matters to the monetary authorities. Between 1992\u20131995, it tried six stimulus plans totalling 65.5 trillion yen and even cut tax rates in 1994. It tried cutting taxes again in 1998, but government spending was never cut.<\/p>\n

In 1998, another stimulus package of 16.7 trillion yen was rolled out, nearly half of which was for public works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year, an 18 trillion yen stimulus was tried, and in October 2000, another stimulus of 11 trillion yen was announced.<\/p>\n

During the 1990s, Japan tried 10 fiscal stimulus packages totalling more than 100 trillion yen, and each failed to cure the recession.<\/p>\n

In spring 2001, the BOJ switched to a policy of quantitative easing \u2014 targeting the growth of the money supply, instead of nominal interest rates \u2014 in order to engineer a rebound in demand growth.<\/p>\n

The BOJ\u2019s quantitative easing and large increase in liquidity stopped the fall in land prices by 2003. Japan\u2019s central bank held interest rates at zero until early 2007, when it boosted its discount rate back to 0.5% in two steps by midyear. But the BOJ quickly reverted back to its zero interest rate policy.<\/p>\n

In December 2009, Reuters reported, \u2018The Bank of Japan reinforced its commitment to maintain very low interest rates on Friday and set the scene for a further easing of monetary policy to fight deflation. The bank said that it would not tolerate zero inflation or falling prices.\u2019<\/em><\/p>\n

In a paper for the International Monetary Fund entitled Bank of Japan\u2019s Monetary Easing Measures: Are They Powerful and Comprehensive?<\/em>, W. Raphael Lam wrote that the BOJ had \u2018expanded its tool kit through a series of monetary easing measures since early 2009.\u2019 <\/em><\/p>\n

The BOJ instituted new asset purchase programs allowing the central bank<\/a> to purchase corporate bonds, commercial paper, exchange-traded funds (ETFs), and real estate investment trusts (REITs).<\/p>\n

According to Lam\u2019s work, the BOJ bought 134.8 trillion yen worth of government and corporate paper between December 2008 and August 2011. Lam described the impact of these purchases as \u2018broad-based and comprehensive\u2019<\/em>, but it failed to impact \u2018inflation expectations\u2019<\/em>.<\/p>\n

For more than two decades, the Japanese central bank and government have emptied the Keynesian tool chest looking for anything that would slay the deflation dragon. <\/p>\n

Reading the hysterics of the financial press and Japanese central bankers, one would think prices are plunging. Or that borrowers cannot repay loans and the economy is not just at a standstill, but in a tailspin. Tokyo must be one big soup line.<\/p>\n

This graphic does not exactly portray a deflationary death spiral. Consumer prices have gone nowhere, give or take, for the past two decades. What\u2019s so bad about that?<\/p>\n

What About Japan\u2019s GDP?<\/h2>\n<\/p>\n

Japan\u2019s GDP doesn\u2019t look all that desperate either. Except, of course, that GDP is loaded with government \u2018investments\u2019 that wouldn\u2019t survive in a competitive market.<\/p>\n

The argument about Japan\u2019s government debt has always been that it is internally financed. However, the government\u2019s ability to finance spending is increasingly constrained by a falling Japanese household savings rate. Japanese private savings has declined from 15\u201325% in the 1980s and 1990s to under 3%.<\/p>\n

That is the rub. Trillions of yen in government debt have been created, and the government is unable to inflate any of it away with its mad printing. More money doesn\u2019t not equal more economic growth.<\/p>\n

So far, Japan government bond bears have gone broke reading the same tea leaves we are. However, government funding will become much more difficult with the declining savings rate and aging Japanese starting to cash in their bonds. <\/p>\n

Insurance companies and pension funds are also selling their holdings and buying fewer bonds in order to fund the increase in payouts to people eligible for retirement benefits. Institutional investors and retail investors are also increasingly investing <\/a>in other assets, desperately seeking yield.<\/p>\n

For the moment, Japan has a large portfolio of foreign assets of $4 trillion that will provide some breathing room. However, even if net income from foreign assets (interest payments, profits, and dividends) stays constant, Japan\u2019s overall current account may move into deficit as soon as 2015, according to Satyajit Das, writing for EconoMonitor<\/em>.<\/p>\n

These foreign assets will eventually dry up, and Japan will have to go hat in hand to foreign creditors. As it is, Japan spends 25\u201330% of its tax revenues on interest payments. \u2018At borrowing costs of 2.50\u20133.50% per annum, two-three times current rates,\u2019<\/em> Das writes, \u2018Japan\u2019s interest payments will be an unsustainable proportion of tax receipts.\u2019<\/em><\/p>\n

Additionally, Japanese government bonds clog Japanese bank balance sheets. When rates go up, it will be devastating for these banks. An increase in JGB yields would result in immediate mark-to-market large losses on existing holdings and slice critical bank equity positions.<\/p>\n

The new guy at the BOJ<\/strong> may claim that he\u2019s doing new things. But he brings to mind Bill Bonner and Addison Wiggin\u2019s gruesome observation in Financial Reckoning Day Fallout. \u2018It\u2019s a little like a guy who\u2019s getting good at suicide \u2014 if he\u2019s so good at it, you\u2019d think he\u2019d be dead already.\u2019<\/em><\/p>\n

Japan\u2019s new financial emperor still has no clothes.<\/p>\n

Douglas French
\nContributing Writer, Money Morning<\/em><\/strong> <\/p>\n

Join Money Morning on Google+<\/u><\/a><\/strong><\/p>\n

From the Archives…<\/strong><\/em><\/p>\n

Only Lunatics Need Apply for This Stock Market Rally<\/a>
\n5-04-2013 \u2013 Kris Sayce <\/p>\n

The Run-on Effect of Aussie Housing on the Australian Stock Market<\/a>
\n4-04-2013 \u2013 Murray Dawes <\/p>\n

Good News in China\u2019s Economy? Put This Date in Your Diary…<\/a>
\n3-04-2013 \u2013 Dr Alex Cowie <\/p>\n

\u2018Gold Only Rises During the Bad Times\u2019 and other Fairy Tales<\/a>
\n2-04-2013 \u2013 Dr Alex Cowie <\/p>\n

On Gold \u2014 Billionaire Investor Eric Sprott Says : \u2018I\u2019m in Alex Cowie\u2019s Camp\u2019<\/a>
\n1-04-2013 \u2013 Dr. Alex Cowie <\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Stop the presses! Japan will make a bold attempt to stop falling prices. Making the yen worthless at a 2%-per-year clip is the promised land, according to the new Bank of Japan (BOJ) governor Haruhiko Kuroda. \u2018This is monetary easing in an entirely new dimension,\u2019 Mr. Kuroda said following the bank\u2019s decision. The … <\/p>\n

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In August 2008, the Japanese government unveiled an 11.5 trillion yen stimulus. The package, which included 1.8 trillion yen in new spending and nearly 10 trillion yen in government loans and credit guarantees, was in response to news that the Japanese economy<\/a> the previous month suffered its biggest contraction in seven years and inflation had topped 2% for the first time in a decade.<\/p>\n