BOJ Meeting

Abe, Japan’s seventh prime minister since 2007, has called for unlimited monetary easing and a doubled central bank inflation target to help revive the world’s third-biggest economy. The Bank of Japan (8301) heeded that call, saying today after a policy meeting that it will raise the price goal to 2 percent and move to open-ended asset purchases starting in January 2014

The Abe administration’s determination to end deflation through coordinated action with the central bank has helped push the yen about 4.3 percent lower against the dollar since the government took office Dec. 26. The currency has weakened from the postwar record of 75.35 reached in October 2011 to as low as 90.25 yesterday

Japan’s Chain Of Events: Stagnation -> Monetization -> Devaluation -> Stabilization -> Retaliation -> Hyperinflation

As the world’s equity markets prepare to rally on the back of yet more central bank printing as Japan’s Shinzo Abe takes the helm with a 2% inflation target, to be announced momentarily, and a central bank entirely in his pocket, The Telegraph’s Ambrose Evans-Pritchard suggests a rather concerning analog for the last time a Japanese minister attempted to salvage his deflation/depression strewn nation: the 1930s ‘brilliant rescue’ by Korekiyo Takahashi, who removed Japan from the Gold Standard, ran huge ‘Keynesian’ budget deficits intentionally, and compelled the Bank of Japan to monetize his debt until the economy was back on its feet managed to devalue the JPY by 60% (40% on a trade-weighted basis).

Initially this led to exports rising dramatically and brief optical stability, but the repercussion is the unintended consequence (retaliation) that the world missed then and is missing now. Though the economy appeared to stabilize, the responses of other major exporting nations, implicitly losing in the game of world trade, caused Japan’s policies to backfire, slowed growth and left a nation needing to chase its currency still lower – eventually leading to hyperinflation in Japan… and Takahashi’s assassination.

And with no Martians to export to, why should we expect any difference this time? and how much easier (and quicker) are trade flows altered in the current world?

Via The Telegraph:

Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.

What happened last time the a Japanese minister tried to desperately devalue his nation to growth?

This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who “brilliantly rescued” his country from the Great Depression. Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran “Keynesian” budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office. He compelled the Bank of Japan to monetize debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity. He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan’s textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow — and there lies the rub, you might say. Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation. 

but the initial stability and growth could have unintended consequences as:

 Needless to say, printing money has its perils too. The risk is that Japan could escape gentle but stable deflation — the Devil it knows — only to see a panic flight from bonds that overwhelms the Bank of Japan. As Governor Masaaki Shirakawa told the Diet through gritted teeth, “long-term yields could rise, and that would be a problem for public finances.”

Japan’s unilateral move may also be perceived badly by the rest of the G-20…

Mr Abe’s frustration is understandable. Japan is cursed with a safen-haven currency that strengthens in times of trouble when least wanted, the cross that  creditor states must bear. Japan did uphold the G20 deal in March 2009 to refrain from “competitive devaluations”, when others did not. But should Japan now buy foreign bonds on a mass scale to suppress the yen, there will be trouble. Tokyo will be blamed as the aggressor in the outbreak of currency wars. Others will retaliate.

And just as we have warned (and Kyle Bass has painstakingly described):

“Banks hold JGBs worth 900pc of their Tier 1 capital. Their portfolios would be decimated if long rates punched above 2pc. Japan might then face a banking disaster as well. These are the hard choices that Mr Abe has to make. “

And as Evans-Pritchard concludes correctly:

Huge issues are at play here. The world’s trade system is fragile. The wasting disease behind the Long Slump is a record high savings rate of 24pc of global GDP, and too little demand to go around. Everybody wants a weaker a currency. They can’t all have it.

Japan’s great experiment cuts both ways for the rest of us: the reflation blitz helps lift the global economy out of the doldrums: but yen manipulation snatches market share, incites protectionism, and takes us into the brave new world of “actively managed exchange rates”, as Sir Mervyn King put it last month.

To summarize:

·         Stagnation

·         Monetization

·         Devaluation

·         Stabilization

·         Retaliation

·         Hyperinflation

The Debt Crisis - National Balance Sheets - Economist

Jan 16th 2013, 16:08 by Buttonwood, The Economist

MORGAN STANLEY has an interesting (but, alas, privately distributed) research note on the debt crisis arguing that most developed governments are effectively insolvent. It draws up a stylised balance sheet for a government: its assets are the ability to tax (the discounted value of future tax revenues), plus real assets (buildings, equipment), equity stakes and cash. On the liabilities side, there are the market debts (bonds and bills) and the net present value of future "primary" expenditure (items such as pensions and health care). Now, one could surely push tax revenues up a bit in some countries (where they are lower than average) and bring down spending on the health and pensions items. But Morgan Stanley reckons the shortfalls are so large (between 800% and 1,000% of GDP in the US and UK) that the situation is hopeless.

In effect, the public sector must impose a burden on the private sector but the only question is how. Greece has already had to opt for outright default. Those countries that can borrow in their own currencies will opt for financial repression—keeping interest rates negative in real terms. When financial repression was practised after the second world war, there were foreign exchange controls, outright caps on interest rates, restrictions on the ability to buy gold and much besides. At the moment, real interest rates are negative; in part, this is down to central bank purchases of government bonds but it is also the result of investors' desire for safe-haven assets. The paradox is that central banks (and governments) would like risk appetites to return to normal, but not if this means a sharp rise in government bond yields.

As Morgan Stanley points out, financial repression was associated with quite benign outcomes after the second world war. The economy steadily grew its way out of the debt. But the big difference with today is that although post-1945 governments were burdened by war debts, the private sector was relatively unlevered; now both sectors carry high debt. This makes it much more difficult to grow your way out of the crisis. As Japan shows, you can hold rates near zero for ages without prompting companies or consumers to borrow.

The implications for investors, says the bank are that

With fixed income yields at record lows due to financial repression, we prefer equities over bonds. However, with yields likely to stay low for a long time because of repression, we wouldn’t make a major move out of bonds, as significant losses are unlikely.