Japan Fights Deflation In Vain

Excerpts from Bloomberg:

BOJ May See More Pressure as Kan Battles Deflation (Update2
By Toru Fujioka and Mayumi Otsuma

Jan. 15 (Bloomberg) -- Japan’s central bank may see escalating political pressure to act against deflation as the government seeks to remove the threat of a recession relapse before a parliamentary election in July.

PW: This politically motivated "fix" is an attempt to avoid a double dip recession.  It is unlikely to work, but will add to Japan's already massive sovereign debt.

Finance Minister Naoto Kan, in his second week in office after replacing Hirohisa Fujii, said yesterday that “there are still various policy measures that could be taken” by the Bank of Japan. He also praised the BOJ’s Dec. 1 introduction of a 10 trillion yen ($109 billion) loan program that came days after he expected more “monetary support” from the bank. He was economy minister at the time.

“BOJ policy makers will feel more pressure to take action with Kan in the position,” said Hiromichi Shirakawa, a former central bank official who’s now chief economist at Credit Suisse Group AG in Tokyo. “Kan probably wants the central bank to give more stimulus to the economy as he’s much more political than Fujii and nervous about the government’s falling approval rating ahead of the upcoming election.”

Among the bank’s options: Expand the credit program, increase its monthly purchases of government bonds, or specify a timeframe for keeping the benchmark interest rate near zero, economists said. The spark for action may be another surge in the yen that could undermine the export-led recovery.

Sliding Popularity

The Democratic Party of Japan’s popularity has slid since it came to power for the first time four months ago promising to end 20 years of economic stagnation. Prime Minister Yukio Hatoyama’s approval rating was at 56 percent this month, compared with 75 percent when he took office, the Yomiuri newspaper said on Jan. 11, without giving a margin of error.

Kan said in his inaugural speech on Jan. 7 that he will work with the BOJ to keep the yen at an “appropriate” level, adding that he wants it to weaken “a bit more.” He said on Dec. 8 that the loan program “had considerable impact” in cheapening the currency and bolstering the stock market.

The yen traded at 90.95 per dollar at 4:05 p.m. in Tokyo, about 7 percent weaker than the 14-year high of 84.83 reached on Nov. 27. The Nikkei 225 Stock Average has rallied 21 percent since then, and rose 0.7 percent today.

“I want to make sure we communicate with each other thoroughly,” Kan said yesterday, referring to the central bank. “The government and Bank of Japan are cooperating very well.”

PW: This central planning of the economy means little or no central bank independence and ultimately poor fiscal and monetary decision making.  Public funds are spent for purely political purposes.  This will not help to rebuild Japan's economy.

‘Makes Sense’

Kazuo Momma, the bank’s chief economist, said today that while it “makes sense” for the two to work together, the BOJ decides policy independently. “Governments and central banks cooperate closely in any country, not just Japan.” The country is unlikely to fall back into a recession even as the pace of growth slows, he said at a business forum in Tokyo.

Governor Masaaki Shirakawa and his colleagues may consider further action should the yen resume its advance and approach 85, said Hideo Kumano, chief economist of Dai-Ichi Life Research Institute in Tokyo, who used to work at the central bank. He said the policy board’s most likely option is to increase the size of the credit program and extend the period of the loans beyond three months.

Alternatively, Kumano added, the bank might increase its monthly purchases of government bonds from the current 1.8 trillion yen if Hatoyama decides to sell more of the securities to fund any further stimulus spending.

Japan’s fiscal condition is deteriorating: The Finance Ministry forecasts bond sales will exceed taxes as the main source of funding in the year ending March. Still, government borrowing costs remain contained as deflation attracts bond investors. The yield on the 10-year note fell 1.5 basis points to 1.32 percent, the lowest this week.

Quantitative Easing

Morgan Stanley, Goldman Sachs Group Inc. and Pacific Investment Management Co. analysts also said this month the BOJ may step up its liquidity injections through purchases of government bonds to combat consumer-price declines.

PW: Sounds like a solvency problem, not a liquidity problem.  It is very hard to resolve deflation by simply printing money and purchasing government bonds.

Another choice may be specifying a period for keeping the key rate at 0.1 percent, said Credit Suisse’s Shirakawa, who isn’t related to the governor. “Influencing expectations of market participants is probably the least costly step for the central bank,” he said.

The bank edged toward such a pledge last month by saying it “does not tolerate a year-on-year rate of change in the consumer-price index equal to or below zero percent.” Its understanding of price stability is inflation of up to 2 percent.

 PW: Following the Keynesian economic path of make-believe can only lead to fiscal ruin.

Reflection for today:

12 There is a way that seems right to a man,
       but in the end it leads to death.
               Proverbs 14:12


  1. Think we are in bad shape? Consider a few of the problems of Japan in my quick list. Population decline with racism that doesn't exactly welcome immigrants. Almost no native energy resources. Korea has broken their monopoly on high value exports to the West. China has done the same thing with many other cheaper goods. Korea is closing the high-tech manufacturing gap. The Chinese will demand technology transfer for Japanese investment in China. Then they will steal everything they can. (Watch what happens to Boeing and Airbus in 10 years once the Chinese learn enough about how to build large jets from them.) Japan is subject to large earthquakes. It has cold winters that consume a lot of fuel. Most of the country is mountainous. They must import a lot of food. It is way to close to a one-party communist dictatorship with a population 7 times larger. A lot of its' safest investments are across the world's largest ocean in the USA. It wants its northern islands back that Stalin stole. The Government debt level is out of sight and increasing.
    To me, it could implode at any time, which probably means that they will do just fine.


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