The Double Down in Japan « Market Montage

If you have not been following the events in Asia of late there is some fascinating stuff happening in the Pacific.  After a decades long reign in power, the Liberal Democracti Party finally lost an election a while back.  But most other countries seem to have elections at random times rather than a set 2, 4 or 6 year cycles, and an election was held in December which brought the LDP back and it's PM Shinzo Abe.  This guy appears to be a mix of Paul Krugman and Janet Yellen in terms of views on fiscal and monetary policy.  In Ben Bernanke's now infamous "helicopter drop" thesis, the idea has been that Japan has never quite done enough to get it out of its decades long deflationary spiral, following an epic bust of both the stock and property markets.   Hence you see much more aggressive action here in the U.S. the past 4 years than anything Japan has done.  However, that *might* be changing.  Not only is Abe pushng through fiscal stimulus (a large one passed last week) but he is threatening the independence of the Bank of Japan if they don't meet his demands, namely push their inflation target up to 2% and agree to unlimited bond buying policies.  It's quite a high stakes drama.  Made difficult by the job policies in the country (difficult to cut workers en masse so companies contain costs via wage depression)  In the meantime the yen has been crushed as the "race to the bottom" of global currencies has turned into Japan's "favor", and all things equal when your currency is smashed all things priced in your currency must rise – i.e. their stock market.

This piece from Reuters is a few weeks old but an interesting read on the drama we're seeing.  Certainly with the world's largest accumulation of debt it certainly is an interesting "double down" policy.

  • Within a day of Shinzo Abe's Liberal Democratic Party sweeping to power in elections this month, elite bureaucrats in Japan's central bank rushed to ready what amounted to a surrender offer.  Abe had run his campaign with a relentless focus on economic policy and had called on the Bank of Japan (BOJ) to take drastic steps to end the nation's long bout of deflation, or else face a radical makeover at the hands of parliament. The vote had become an unexpected referendum on the BOJ itself, and the bank had lost.
  • In the early afternoon of December 18, two days after the vote, BOJ Governor Masaaki Shirakawa was to pay a courtesy call on Abe. But even before then, a post-election plan had taken shape: the BOJ would consider the kind of ambitious 2 percent inflation target that Abe had insisted was needed to pull Japan out of nearly two decades of deflation and diminished expectations. It was an about-face for Shirakawa who, since taking his post in 2008, had argued that by focusing too narrowly on consumer prices, the BOJ could miss signs of an asset price bubble like the one Japan experienced in the late 1980s.
  • But increasingly his own senior officials and members of the BOJ's policy-setting board were ready to take risks and test unorthodox and unproven measures that Shirakawa had long resisted, such as an unlimited debt-fuelled monetary expansion, officials familiar with their thinking say. "The LDP's win was just too big, and it won an election calling for a 2 percent inflation target. If that's the will of the people, the BOJ must respect that," said a source familiar with the central bank's thinking. "Otherwise, the BOJ could lose everything, including its independence."
  • The central bank is now on track to pump 120 trillion yen ($1.4 trillion) into the economy even though skeptics argue that this tide of money cannot break Japan's real economic logjam: falling wages.  Instead, the skeptics say, the risk is that investors would end up concluding that Japan needed the central bank to cover its debts – a recipe for a selloff of government bonds, which already amount to twice the size of gross domestic product.
  • But after Abe's landslide election victory – and years of limited money-printing having failed to revive growth - senior BOJ officials wanted it understood they were ready to join the experiment in what media and investors called "Abenomics", a potentially high-octane mix of fiscal and monetary stimulus. They felt he now held the trump card in any future standoff with the BOJ over monetary policy – a mandate to amend the BOJ Law in a way that would give the government power to impose a binding target on the central bank, or fire its governor.
  • (After the December election) The central bank announced its third shot of monetary stimulus in four months by adding another 10 trillion yen to its asset-buying program – essentially committing to create more money to buy government debt.  It marked the fifth time this year that the central bank had expanded asset purchases – its most active year in terms of monetary expansion in a decade.  More significantly, the BOJ also made a direct concession to Abe and pledged to review its existing inflation target of 1 percent at its next scheduled meeting in January.  The BOJ was retreating from the cautious stance of its classically trained boss, Shirakawa, and essentially turning a blind eye to the potential, long-term drawbacks of excessive money printing that he had long warned about.
  • Among the actions now under consideration at the BOJ is an open-ended commitment to buy government bonds or an expansion in the type of assets it purchases, the officials said.
  • Abe has said he will choose a successor to Shirakawa whose views are closer to his own. He has not made up his mind yet on his favored candidate but aides say he may prefer someone with negotiation and management skills, rather than an academic, to oversee the BOJ as it pushes into unknown territory.
  • With the LDP's coalition partner, the New Komeito, Abe has enough votes in the lower house to overrule the upper house on key votes, including a potential revision of the 1998 BOJ Law that gave the 130-year-old bank its long-awaited independence.  Under this law, the central bank is guaranteed independence to guide monetary policy without political interference and is mandated to pursue price stability. Abe has discussed a law revision to impose a price target on the central bank and add a requirement to maximize job growth to its mandate.  Abe is already using threats of a BOJ Law revision to nudge the central bank into meeting his demands.
  • Some officials share Shirakawa's doubts over whether further monetary easing will work. Two key metrics – the BOJ's holdings of government debt and the balance of deposits parked with the central bank – are already at record highs, yet the BOJ's pump-priming measures have failed to put an end to deflation. Nationwide core consumer prices slid 0.1 percent in November from a year earlier after flat growth in October, which followed five straight month of declines.
  • Another concern for the cautionary wing of the BOJ centers on the unusual structure of Japan's economy. Japan's jobless rate – at 4 percent – is half that of the United States. But wages remain on the decline, down 1.1 percent in November from a year earlier to mark the third straight month of falls.  Unable to fire workers in mass layoffs because of rigid labour rules, Japanese firms are unwilling to raise salaries. Without a rise in wages, the only practical way overall prices could go up would be through higher commodity and fuel costs which would curb consumption, not boost it, the BOJ has argued.

 

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