More deflation in Japan

[kevsta]

Mods: Please add extra hard drive space.

uh huh. please do elaborate on my errors above and how it all works exactly.

 

[kevsta]

I dont know, doesnt really look like a weak bond market to me, when this was written at least. Published: Thursday, 7 Feb 2013

**when I say weak, I mean no interest from investors. it could detonate, but not through lack of interest from investors thus far

and all during deflation, yes?

CNBC - Japan bond yields sink to historic lows on prospect of rate cut to zero

* 5-year JGB yield hits record low of 0.135 pct

* Investors rush to buy bonds before interest rate cut to zero

* Yields far below banks' funding costs

* Some analysts see ominous parallel with JGB market crash in 2003

TOKYO, Feb 7 (Reuters) - The possibility that the Bank of Japan (BOJ) will take bolder action to ease monetary policy is driving Japanese bond yields to historic lows, with the five-year yield hitting a record low of 0.135 percent on Thursday.
Prime Minister Shinzo Abe has said he would choose a new BOJ leadership more keen to take bold measures to beat deflation when the terms of Governor Masaaki Shirakawa and his two deputies end on March 19.

The catalyst for hasty buying of short-term bonds, such as two-year and five-year notes, stem from worries the BOJ will crush interest rates literally to zero as it did during most of the time during 1999-2006, when the central bank tried to reflate the sagging economy with monetary easing.
Such fever-pitched demand for low-yielding bonds, beyond the cost of funding for key players such as banks, is an ominous sign of a bubble waiting to burst, especially at a time when investors are rotating from fixed income to riskier assets as the global economy steadily recovers, some analysts say.
"I think the five-year yield has gone way too low. Is there anyone who can make money at such low yields? No," said Hidenori Suezawa, chief strategist at SMBC Nikko Securities.

Outgoing BOJ chief Shirakawa has long resisted cutting interest rates to zero, preferring a looser target band of 0-0.1 percent, saying that having rates exactly at zero would kill money markets because there would be no incentives for trading.

 

[lomiller]

Again, government bonds only get purchased if the investor thinks Japan isn’t too far in debt to pay out on the bonds.

As far as I'm aware investors head towards bonds as things get deflationary, because it is +0.5% on top of the deflationary gain, from about as risk free source as you can get it.

What you don’t seem to realize is that this equates to a higher real interest rate and higher cost of capital which suppress economic growth and opportunity. So while you may be perfectly fine with lending to low risk borrowers at a high real rate of return, the number of low risk borrowers interested in borrowing at these inflated rates quickly dries up.

Meanwhile you also need to consider that if you can make nearly the same effective return without lending the money at all, why should you take any risk?

The entrenched dynastically wealthy did made out well during the great depression it was the investors the small business owners and their employees that suffered.

Witness the pile into Treasury bonds in 2008 / 2009 which caused such dollar strength, and the same in every scare, ever since.

The rise in the dollar after the US financial crisis was drive by the same force than drives all markets, supply and demand. The available supply of USD dropped (because everyone was hording cash) so it’s value went up.

 

[lomiller]

well its not all your wealth, is it? it is a metaphor for "real things"

I’m pointing out that wealth in any form can disappear or be destroyed if you subject it to some arbitrary scenario. Unlike your arbitrary scenario of a space alien warp drive exploding, the one I gave is something actually worth considering when you assess value.

your land is still there, your gold is still there

Doesn’t mean it’s worth anywhere near what it is now or that your neighbour allowed you to keep it.

in a year or two when you've all died off I'm sure some settlers might make good use of it all.

Or maybe it will just return to wilderness as much of Europe did after it was hit by the Black Death. Even if it was resettled since, what value did the pervious occupants receive?

 

[lomiller]

CNBC - Japan bond yields sink to historic lows on prospect of rate cut to zero

Which indicators investors think lending to the government of Japan is a very safe bet and that Japan is not “too deeply in debt”.

 

[The Don]

do bubbles not first inflate then deflate? we had a huge housing bubble that was not allowed to fully deflate and recognise full losses, and is still trying, was what I meant. apologies for incorrect terminology, wasn't aware it was critical.

Deflation is a specific term and refers to negative inflation across the economy which is what prompts the undesirable behaviour of people delaying expenditure and companies delaying investment because things will be cheaper tomorrow.

The collapse of a bubble is a different thing entirely.

 

[kevsta]

Deflation is a specific term and refers to negative inflation across the economy which is what prompts the undesirable behaviour of people delaying expenditure and companies delaying investment because things will be cheaper tomorrow.

The collapse of a bubble is a different thing entirely.

I know what deflation is, I just wasnt aware it had an exclusivity clause attached to the word.

Noun
1. The action or process of deflating or being deflated.

2. Reduction of the general level of prices in an economy.

but you are saying only 2 is acceptable, and usage

"my tyre/bubble/broken banking system, is deflating"

is incorrect.

 

[The Don]

really, I could counter why, are simple mathematic calculations of how much things actually cost, then and now, ie how much the same things went up, then taken and run through different arbitrary spending pattern models to give "weightings" and different figures in every country?

how about a standard basic index that is the same everywhere in the world, just the price of a basket of the same things, as a reference point at least?

otherwise presumably you can at least see the silliness of trying to compare inflation between countries when everybody does it differently.

If the same basic index is use in all countries it will give a skewed view as to what is happening in a particular country.

Take the housing market. In the UK the vast majority of people are owner occupiers so an inflation measure which takes into account housing costs must be heavily weighted towards mortgage costs. In other countries where it is more usual to rent, the same measure would be weighted more towards rental costs.

Looking at food, if we were looking at measuring the change in costs of staple carbohydrates, in large parts of Africa this would be weighted towards the cost of mealie meal, in India it would be rice and flour and in Sweden it would be potatoes. All of these could be equally weighted but in Sweden mealie meal is a specialist ingredient which can vary in price widely and yet have little or no impact on the budget of Swedish families. Likewise, the change in price of risotto rice will have little impact on the family budget of a family in SOWETO.

We would have to exclude alcohol, beef, pork, shellfish (and a huge range of other products) from the measure altogether because these are prohibited in some countries (or regions in countries).

Don't even get me started on how almost everyone in Hong Kong couldn't give a stuff about how much a lawnmower costs

So yes. There could be a global standard measure using global weightings but it would be nonsensical for the individual countries and useless for comparison.

 

[The Don]

I know what deflation is, I just wasnt aware it had an exclusivity clause attached to the word.



but you are saying only 2 is acceptable, and usage

is incorrect.

In the context of a discussion about deflation in the Japanese economy it's only acceptable to talk about the second definition.

Edited to add.....

Quote from the OP

Japan's core consumer prices dropped 2.4% in August year-on-year, the fourth successive month of record falls.
. . .
The Bank of Japan has already forecast deflation to last until the year to March 2011 and is expected to extend its deflation forecast by another year in its next set of forecasts due out in late October.

 

[kevsta]

I’m pointing out that wealth in any form can disappear or be destroyed if you subject it to some arbitrary scenario. Unlike your arbitrary scenario of a space alien warp drive exploding, the one I gave is something actually worth considering when you assess value.

there arent that many scenarios apart from global destruction where actual wealth of the planet will be destroyed. the planet could cleanse it self of us and still the wealth would be here.

just our current way of denominating it would be gone.

Doesn’t mean it’s worth anywhere near what it is now or that your neighbour allowed you to keep it.

it doesnt matter, you have a very "me" centric view of wealth, it cares not who it belongs to.

Or maybe it will just return to wilderness as much of Europe did after it was hit by the Black Death. Even if it was resettled since, what value did the pervious occupants receive?

none, but it doesn't mean the wealth went away.

farms, mines, resources, all still there for the using. this is the point I am making, stop confusing "money" with the actual wealth.

real wealth survives over longer timescales, the numbers you denominate it in, not so much. they are mere claim on it that is valid in this day, and might not be one day.

Im pretty confident when the next peoples arrived to pick up the reins they wouldn't have been very interested in the previous civilization's "Bonds" blowing about in the wind.

 

[Puppycow]

but life is a zero sum gain? your win is always somebody else's loss, inflation or deflation doesn't change that. everybody can never win can they, whether their money gets more or less valuable is just different challenges.

Absolutely not. If this were true then we would all still be just as poor and miserable as our cavemen ancestors.

 

[Puppycow]

Latest news indicates that it may take some time for the new policy to work. The effects are not yet evident in prices:

BOJ Keeps Monetary-Expansion Plan as Deflation Deepens: Economy

The Bank of Japan maintained its unprecedented plan to boost money supply at a policy meeting today, matching economists’ forecasts, hours after a report highlighted deflation’s grip on the economy.

Consumer prices fell the most in two years, a government release showed, underscoring the challenge facing Governor Haruhiko Kuroda as he aims to meet a 2 percent inflation target. The BOJ reiterated its commitment to enlarge the monetary base, a gauge of money that includes physical currency in circulation plus assets that financial institutions hold at the BOJ, by 60 trillion yen ($607 billion) to 70 trillion yen a year.

“We can expect more easing later this year if prices refuse to edge up,” said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc (RBS) in Tokyo and a former BOJ official. “It’s imperative for the BOJ to clearly communicate its objectives to maintain expectations that prices will rise.”
. . .
Consumer prices excluding fresh food slid 0.5 percent in March from a year earlier, the statistics bureau said today. The median estimate of 25 economists surveyed by Bloomberg News was for a 0.4 percent decline. Overall prices dropped 0.9 percent.

 

[kevsta]

Absolutely not. If this were true then we would all still be just as poor and miserable as our cavemen ancestors.

in a business context, which is what we were referring to, for every awarded contract that one firm gets, there are multiple disappointed quoters.

CBs messing with the monetary base doesn't change that.

 

[The Don]

in a business context, which is what we were referring to, for every awarded contract that one firm gets, there are multiple disappointed quoters.

CBs messing with the monetary base doesn't change that.

There are usually more than one contract in the economy as a whole. In an inflationary environment the total value of those contracts is increasing, in a deflationary environment the total value of those contracts is decreasing.

Businesses are unwilling to invest in a decreasing market even to get an increased share of a decreasing market because eventually even if they secure the entire market, their business will continue shrinking.

 

[The Don]

Latest news indicates that it may take some time for the new policy to work. The effects are not yet evident in prices:

Has deflation been so endemic in the Japanese economy over the last two decades that public and business behaviour has become ingrained so that they will still tend not to spend, preferring to save and so the QE won't have a measurable effect ?

 

[Puppycow]

Has deflation been so endemic in the Japanese economy over the last two decades that public and business behaviour has become ingrained so that they will still tend not to spend, preferring to save and so the QE won't have a measurable effect ?

I don't know. What the BoJ is doing isn't a secret to the Japanese people.

I don't think the problem is that the public saves too much though. The savings rate has steadily declined over the years. See here and here for the long-term trend. This may be due to demographics as more Japanese are retired and drawing on their savings.

As far as businesses go, at least in my business, there has been a tendency among customers to demand lower rates. I think that our prices have been cut as much as they can be. The question is what will happen going forward. Abe has used his bully pulpit to ask corporations to raise wages, and a few have, but others are taking a wait-and-see approach. My own base salary was only raised about 1.6% this year. On net, almost all of that increase is gone due to higher premiums for social insurance. I'll have to see if my bonus is any higher than last year to really know if I'm getting any raise at all, or even possible a pay cut if my bonus is smaller. I don't expect it to be smaller although in past years it has been smaller in years when the company has struggled to break even. This past year ended March was a profitable one though, and we have about 50 more employees at the beginning of this April compared to last April (300 up from 250).