April 04, 2013
The BoJ’s Kuroda Acts
The dollar and euro made their largest percentage gains against the yen since late 2008 on Thursday after the Bank of Japan surprised the markets with an ambitious plan to fight deflation in a radical overhaul of policy.
Figure 1 depicts the extent of the move for the USDJPY rate, more than 3%; the corresponding move in the EURJPY rate was around 4%.
Figure 1: Japanese yen per US dollar. Source: Reuters.
From IDEAglobal today (not online):
The Bank of Japan (BOJ), under the leadership of Kuroda, introduced a new phase of monetary easing called Quantitative and Qualitative Monetary Easing. Under this, the bank will aim to achieve a 2% inflation target within 2 years. Most surprisingly, the BOJ decided to target the monetary base for its money market operations instead of the uncollateralized call money rate. The central bank expects that this new step would lead to an annual increase of about JPY 60-70tn in the monetary base, thereby reaching JPY 270tn at end-2014. Kuroda is apparently betting that an aggressive expansion of base money can boost Japan’s stagnant economy and help the country end its prolonged deflation.
... The BOJ also astonished the markets by saying that all maturities of JGBs including 40 yr would be eligible for its bond-buying programme. Market players were previously nervous that the current governor would not get enough support for his policies. But, interestingly, the radical step of changing the target for money market operations was made by a unanimous vote, suggesting that Kuroda will find it easier to push through even bolder steps in the future.
For those of us who have advocated more energetic policies in advanced economies, including Japan, to spur growth these events represent a welcome move away from policy paralysis. For a discussion of the impact on trade flows and hence output, see this post; I’ll update these estimates with more extensive econometric analysis in a post in the near future.
Posted by Menzie Chinn at April 4, 2013 03:27 PMdigg this | reddit
Take a look at how much of Japan's "exports" are associated with Japanese firms' US auto production. Profits in US$'s are reinvested in US, Mexican, and Canadian Japanese auto firms' production and financing domestic dealer fleets.
Japan will hereafter run a trade deficit because of Fukushima and energy imports.
Moreover, global economic integration and GDP PPP and trade and capital flow parity between the three major trading blocs means that major fiat digital debt-money currencies will trend over the long run towards par with one another.
Also, the Yen is not so much being devalued as it is being "revalued" from being "overvalued".
Therefore, "competitive devaluations" are effectively no longer possible and thus unlikely to have the effects assumed.
So, don't be surprised if the Yen bottoms around 95-100 to the US$ around which it will trend (+/-) hereafter.
Posted by: Bruce Carman at April 4, 2013 09:15 PM
The announcement of Japan's $1.4tn debasement of the yen it a dramatic contrast to the agreement this past weekend between Australia and China to "enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation." By debasing the yen the Japanese are presenting China with the gift of monetary dominance in Asia - as the US is doing with the dollar worldwide.
Here is ZeroHedge's Tyler Durden's take on the China-Australia deal.
Posted by: Ricardo at April 5, 2013 05:17 AM
Prone to be the base of an inaccurate conclusion when hasty, but worth certainly to be examined tediously on a longer period, the official statistics on Japan trade are showing an enlarging deficit on the fiscal years March 2012, March 2013. http://www.customs.go.jp/toukei/shinbun/trade-st_e/2013/201303be.xml The IMF website on balance of payments are extended until the date of 2012 Q3 On a trend, the surpluses are dimming and may well have turned negative. Balance of Payments Statistics (BOPS) IMF http://elibrary-data.imf.org/FindDataReports.aspx?d=33061&e=170784 Japan was distinguishing itself from the core of the indebted countries by posting surpluses in the balance of payments, it may be the case of no more. Not a large elasticity between the export and the yen exchange rate. A very significant triangular industrial relationship with China may raise the issue of who will gain the most in a yen depreciation. To be noted as well the divergences between W. Thorbecke conclusion (P19) and the deterioration of Japan BOP occurring much later 2011 2012. Willem Thorbecke « has recently estimated elasticities for Japanese exports. He finds that for a sample starting in 1990, the elasticity ranges between 0.44 to 0.61 (midpoint about 0.5) »
Inflation:Pension funds, banks and financial institutions are holding 90 % the public debts. Hedging against an intended inflation of 2% may require counter parties?
Public expenses versus tax revenues: Is the tax base commensurate to the public expenses?
Outside source of funding via repatriation of foreign reserves, Japan is the largest holder of US public debts after China (TIC report)
This stimulus may be a temporary expedient.
Posted by: ppcm at April 5, 2013 06:37 AM
This will have social repercussion in Japan. The people have been saddened with an increment of debt year, after year, with higher energy, housing, and transport prices. Not to say stagnant/minimal raise in wages. What is keeping the society strong, especially in terms of domestic consumption is the fact that prices of everything else have been almost constant for the past 20 years.
All in all deflation has been good to the japanese economy. It's a first world nation with sufficient infrastructure capacities. It's like an EU problem where these nations have been building new infrastructures for the past decade. Any more spent on them will be a wastage owing to under utilization.
The wealth inequality is continuously increasing. This is the crux of the issue, in many other nations too. If you want the people to spend, you must give them sufficient income to do so. You can't generate an inflation, as it'll be a burden to a larger segment of society, particularly the retirees, when they are plenty in Japan. Their savings will be devastated.
I'm appalled that economists, particularly the pro-Keynesian/Monetarist, have lost the sense of compassion/empathy to the underprivileged. There are many more tools that the government can do. Roosevelt was a great President because his new Deal Keynesian policies attempt to correct the injustice and redistribute government resources to the majority rather than the few. Herbert Hoover implemented many Keynesian policies too but he failed because it was concentrated to the top. It's the same Keynesian/Monetarist policies with different priorities and produce different outcome. Yet, economists often blamed Hoover for promoting austerity in time of a recession. It's a tale of two cities.
Posted by: Stanley at April 6, 2013 07:14 PM
Japan is toast. What will the excuse be when this stimulus fails?
Posted by: Anonymous at April 8, 2013 12:41 PM
Menzie: There is two label for exchange rate USD/JPY. At the bottom, you have Yen?$. I guess all your readers knew you menat Y/$. I turned this into an exercise for my international economics course to see if they can catch the error. Of course I hid the caption of the chart.
Posted by: Asif Dowla at April 12, 2013 07:43 PM