More deflation in Japan

[Tippit]

Has anyone ever shown this to be true, from a consumer standpoint? I don't rush out to buy milk because I'm worried about the dollar inflating 2-4%/year and I'm certainly not going to wait six months to buy it because it might be cheaper. Deflation doesn't compare to the changing prices of technology due to new innovations. What kinds of purchases are delayed?

You're right, it's hogwash. This has been discussed in depth in other threads. What actually happens is the cost of capital returns to a sustainable and realistic level absent central bank manipulation. Money is tighter than with perpetually subsidized low interest rates, but the economy is also more stable and less subject to the Kondratieff (business) cycle, and wild speculation in stocks and real estate, along with the subsequent recessions is avoided.

The biggest problem with deflation is the tendency for labor to want to protect its wages even in the context of generally falling prices. There is a psychological impact to having wages reduced which is independent of the fact that the prices of the things typically bought may become relatively cheaper. This tendency has historically resulted in layoffs which has affected real output negatively, and this has served to create the idea of deflation as a "bogeyman" that must be avoided at all costs via the inflation tax.

I assume Japan's CPI index like the US's includes a housing component, right? Couldn't the continued decline of real estate values account for the whole "deflation" they are seeing?

I don't know the specifics of how Japan concocts its price indices, but if its like others then it doesn't include asset prices, but rents instead. As the recent housing bubble showed us, there was a large disparity between rental inflation and real estate asset inflation, and so this may not be effective in obtaining the big picture about deflation.

 

[Francesca R]

A default is when the borrower fails to meet the terms of a debt obligation. Since the central bank is the lender, if it forgave sovereign debt this couldn't be construed as a default, as the obligation was with the government.

But if you saw a news headline that said "Bank of Japan 'forgives' Ministry of Finance from redeeming JGBs" I guarantee that the market reaction would be the same as in a default. Because the obvious conclusion from this news would be "Japanese government is bankrupt"

The outwright repudiation of sovereign debt is historically very rare, and with good reason.

Correct. However it is a priced risk that can be observed (to some extent) in the spreads of CDSs. (So, for example, US government 5 year bond CDS is +0.205%, Japan is +0.452%, Greece is +1.22%)

Why would a nation repudiate its debt and therefore destroy its credit rating, when it could simply debase its own currency and accomplish virtually the same thing in a more surreptitious manner?

Usually if the government has had to borrow in foreign currency. In that situation, issuing more of its own currency doesn't help, after it or the market has finished emptying its central bannk of FX reserves.

I would be very surprised if any modern nation did such a thing, especially Japan. Can you even provide any historical examples of this?

Modern Japan hasn't done it. As I alluded to above, modern Russia, Argentina and Ecuador have. You didn't know this?

 

[Tippit]

No that would go into its reserves. The Bank pays a dividend to its shareholder--which is the government--which is capped at 5% of book value (which is pretty low, like JPY100m). The shareholder does not get to participate in management. The MOF or the Prime Minister appoints the governor, same as how it happens elsewhere.

I can't speak of the BoJ, but the Fed is quasi-private. In fact, the Federal reserve has private shareholders with restricted stock, but the government is not considered a shareholder in a strict sense. Yet, the Fed still remits the net proceeds of its income to the US Treasury, which presumably goes back into the US economy.

I think that's wrong. Do you have a cite?

I do not know how the Bank of Japan operates, specifically, but here is a cite from the Fed:

Federal Reserve Banks generate their own income, primarily from interest earned on government securities that are acquired in the course of Federal Reserve monetary policy actions. A secondary source of income is derived from the provision of priced services to depository institutions, as required by the Monetary Control Act of 1980. Federal Reserve Banks are not, however, operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses.​

http://www.federalreserve.gov/pubs/frseries/frseri3.htm

As I understand this is the central bank model for the entire world, originating with the Bank of England in 1694.

 

[Francesca R]

I can't speak of the BoJ

OK let's forget about your post 18 then.

As I understand this is the central bank model for the entire world, originating with the Bank of England in 1694.

The Bank of England has historically not bought government bonds until this year. Since a ring-fenced fund was established to do this, I doubt that the coupon receipts are being handed back to the Treasury.

The original purpose of the Bank as designed by King William III was to finance war with France. Many anti-Fed people doubtless retort "Plus ça change . . ."

 

[oggiesnr]

AS I understand it here is also a cultural issue in Japan to do with a very high level of savings. The growth of previous decades was based on international trade rather than internal consumption. As trade has stalled then the Japanese have become even more reuctant to spend.

Bad reccessions are eventually caused by lack of velocity of money in the system (sorry if I got the technical term wrong) and this is what seems to be happening in Japan.

Steve (waiting to be shot down in flames again)

 

[ServiceSoon]

I'm just glad to see Tippit and Francesca playing nice.

After doing a little wiking I see that Japan has taken part in a few crisis in the last 20 years.

Also, other countries which defaulted on their national debt was around 150-200% of GDP. Japan is around 170%. In some of these instances the national governments didn't have to officially announce the default, panic set in and started a chain of evens even modern monetary policy couldn't control.

These are strange times.

 

[Puppycow]

AS I understand it here is also a cultural issue in Japan to do with a very high level of savings. The growth of previous decades was based on international trade rather than internal consumption. As trade has stalled then the Japanese have become even more reuctant to spend.

Bad reccessions are eventually caused by lack of velocity of money in the system (sorry if I got the technical term wrong) and this is what seems to be happening in Japan.

Steve (waiting to be shot down in flames again)

Yes, I think that's about right. Although the Japanese I know aren't misers or anything like that. They just tend to already have everything they need and don't live extravagently.

That's displacement and obsolescence (and "Moore's law"). As you indicate it is entirely different from general price declines.

Although it does have the effect in me at least of adding incentive to delay purchases. I tend to take a wait and see approach with electronic toys like the iPod. I waited till the third generation to get one and got better deal by waiting. I never run out and get something new on the first day it's available.

 

[drkitten]

Has anyone ever shown this to be true, from a consumer standpoint?

Yes, it has. Most people call it "waiting for the sales" and it's a well-known consumer behavior.

Some sample citations include this, this, and this.

I don't rush out to buy milk because I'm worried about the dollar inflating 2-4%/year and I'm certainly not going to wait six months to buy it because it might be cheaper.

Of course not. That's because you need the milk now (and because the value of the milk goes down much more quickly than the value of the dollar does). On the other hand, the idea of a "January white sale" is practically a cultural icon, and many households do wait for January to purchase towels.

 

[Emperor_Gestahl]

Federal Reserve Banks are not, however, operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses.​

I've never seen a number quoted for the Fed's returned profits.. Not that I've looked but it seems like it should have at least been newsworthy at some point ever. Anyone have a link to data on what they've passed back to the Treasury over the years?

 

[GreyICE]

Japan prices continue record fall



More deflation through 2012?

How will it end? Why can't the central bank make it end by just printing more money? I don't understand why it's difficult to end deflation? Can't they even kill two birds with one stone: Give the money to the government to pay down the national debt and kill deflation with the same policy?

Of course. Japan's deflation was always the result of production capacity outstripping spending. The enormous bubble managed to prop it up, but Krugman correctly predicted if it collapsed, it was back to deflation for Japan.

Surprise, they're deflating.

P.S. what is delayed is investment into new capital. Why build a factory today, when you can build a bigger one in 6 months? Other purchases are similarly delayed.

 

[Francesca R]

I've never seen a number quoted for the Fed's returned profits.. Not that I've looked but it seems like it should have at least been newsworthy at some point ever. Anyone have a link to data on what they've passed back to the Treasury over the years?

It's not going to be on your nightly news but it ain't secret.

http://www.federalreserve.gov/newsevents/press/other/20090109a.htm

http://www.federalreserve.gov/newsevents/press/other/20080110a.htm

http://www.federalreserve.gov/newsevents/press/other/20070109b.htm

http://www.federalreserve.gov/newsevents/press/other/20060110a.htm

http://www.federalreserve.gov/boarddocs/press/other/2005/200501072/default.htm

etc . . .

 

[Ryokan]

How is it good for you in Norway?

Because I buy a lot of Japanese stuff?

 

[shuize]

Well, if "deflation" means that the yen will continue to hover around 90 to the dollar, I say bring it on!

 

[Captain.Sassy]

I think the yen's appreciation against just about every currency in the last couple of years more than offsets the domestic deflation.

How do cheaper imports offset deflation?

 

[Francesca R]

The poster remarked that deflation (in Japan) would increase exports from Japan ("higher consumption abroad"), presumably because the exports get cheaper. The problem with this is that the yen has appreciated substantially against most currencies, so in fact those exports have become more expensive when translated into non-yen currency.

 

[oggiesnr]

The poster remarked that deflation (in Japan) would increase exports from Japan ("higher consumption abroad"), presumably because the exports get cheaper. The problem with this is that the yen has appreciated substantially against most currencies, so in fact those exports have become more expensive when translated into non-yen currency.

Silly question but I don't know the answer. Given the state of the Japanese economy why has the currency appreciated? Simple logic would surely suggest the opposite?

Steve

 

[GreyICE]

Silly question but I don't know the answer. Given the state of the Japanese economy why has the currency appreciated? Simple logic would surely suggest the opposite?

Steve

Deflation means that a correspondingly smaller amount of the currency buys the same basket of consumer goods in the country from year to year.

100 yen basket becomes 95, becomes 90...

Basic definition of deflation.

 

[Francesca R]

Silly question but I don't know the answer. Given the state of the Japanese economy why has the currency appreciated?

See post 17

Simple logic would surely suggest the opposite?

Exchange rates often don't follow logic (although someone can easily rationalise anything after the fact). IMO the best long term determinant of FX is cumulative relative PPI inflation, which has justified a stronger yen over time, but that's not exactly a reliable forecast. The other thing that sometimes matters is if a country (like Japan) is a large net saver and has huge external investments (net foreign assets), then its currency might depreciate in the good (risk-seeking) times and suddenly strengthen in panics. Both of these "reasons" would tend to result in the yen being negatively correlated with growth.

 

[Francesca R]

Because I buy a lot of Japanese stuff?

Check the NOKJPY rate over the last two years.

 

[Puppycow]

Check the NOKJPY rate over the last two years.

Looks like it fell off a cliff in 3Q of last year.

IMO the best long term determinant of FX is cumulative relative PPI inflation, which has justified a stronger yen over time, but that's not exactly a reliable forecast. The other thing that sometimes matters is if a country (like Japan) is a large net saver and has huge external investments (net foreign assets), then its currency might depreciate in the good (risk-seeking) times and suddenly strengthen in panics. Both of these "reasons" would tend to result in the yen being negatively correlated with growth.

I don't know enough to comment about PPI inflation, but it looks like the second thing you said might explain the recent strength of the yen (recent meaning since the second half of 2008). Japanese investors rushing to sell their overseas assets?