More deflation in Japan

[Puppycow]

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

Do you have a job here that is affected by the local economy?
I wouldn't mind at all except that the company I work for is in dire straits.
We are in the translation business and most of our customers are Japanese companies in the export sector (internally focused companies having less need for translation services).

Otherwise, a strong yen is great.

 

[Francesca R]

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

Bingo. (I was very long of JPY versus a number of currencies for ages, and Oct 08 was very good to me . . . am actually a bit short now, finally)

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?

Supposedly a combination of repatriation by Japanese investors, expatriation (into JPY) by overseas ones who know this is what can happen, and mass unwinding of speculative "carry trades" by everyone who had them.

 

[Puppycow]

Deflation continues

It's interesting that the Japanese GDP grew 4.8% in real terms but fell by 0.3% in nominal terms. 4.8% is better than expected but remember that there were negative quarters of -2.9%, -6.5%, -11.5% and -12.2% before the most recent 2 quarters of moderate growth. So the rebound is still small compared to the previous drops.

I don't understand why the BoJ doesn't do some quant easing to get inflation back above zero. For some reason they don't see deflation as a problem.

Sustained price declines threaten to curtail a corporate- profit rebound that’s already been insufficient to spur a rally in Japan’s shares this quarter. The report prompted Deputy Prime Minister Naoto Kan to say the government may outline an emergency-spending package as soon as today, adding that “I’m concerned we’re entering into a deflationary situation.”

Emergency spending will increase the debt of course. Carl Weinberg says that this will hasten the arrival of a financial crisis.

Kan said yesterday that the government should work with the Bank of Japan to tackle the price slump. The central bank has kept interest rates near zero to help rekindle growth.

Consumer prices in the world’s second-largest economy have fallen for seven straight months, undermined by the deepest recession in the postwar era.
. . .
Without adjusting for prices, Japan’s economy shrank an annualized 0.3 percent last quarter, the sixth straight contraction. The Democratic Party of Japan has signaled that these nominal figures will play a greater role in its policymaking.

“There’s been a tendency to focus on the price-adjusted figures,” Keisuke Tsumura, one of the DPJ’s top economic officials, said in an interview this month. “We’re going to try to strike a better balance in our decision-making that doesn’t ignore the nominal figures,” which he said better reflect the economy as households experience it.

BOJ’s Outlook

The government’s heightened concern about deflation may put it at odds with the Bank of Japan. While the central bank last month forecast prices will keep falling through the year ending March 2012, Governor Masaaki Shirakawa has said deflation is unlikely to weigh on economic growth.

Deflation as far as the eye can see "is unlikely to weigh on economic growth"? Really?

 

[Francesca R]

So the rebound is still small compared to the previous drops.

Well it has rebounded two quarters ahead of the UK, at least . . .

I don't understand why the BoJ doesn't do some quant easing to get inflation back above zero. For some reason they don't see deflation as a problem.

Because it is a problem but uncontrolled inflation is potentially a worse problem. Deflation is bad for growth, and Japan's experience is testimony to this, but raising inflation expectations positive is not sufficient. Meanwhile Japan has had some (real) growth, and inflation has been mostly negative since the end of 1998.

 

[Tippit]

Deflation continues

It's interesting that the Japanese GDP grew 4.8% in real terms but fell by 0.3% in nominal terms. 4.8% is better than expected but remember that there were negative quarters of -2.9%, -6.5%, -11.5% and -12.2% before the most recent 2 quarters of moderate growth. So the rebound is still small compared to the previous drops.

Interesting perhaps to anyone who doesn't understand that economic growth is quite possible (and natural) given deflation, as defined by a generally declining price level. It's happened before and it will happen again. It happens whenever the money supply remains more or less static for a given period of time.

I don't understand why the BoJ doesn't do some quant easing to get inflation back above zero. For some reason they don't see deflation as a problem.

That's because it's not a problem. It only becomes problematic if the politically sensitive price of labor is not allowed to fall in concert with other prices, causing unemployment and potential economic contraction.

Emergency spending will increase the debt of course. Carl Weinberg says that this will hasten the arrival of a financial crisis.


Deflation as far as the eye can see "is unlikely to weigh on economic growth"? Really?

Stability in the general price level is irrelevant to economic growth. What's relevant is the stability of final demand (domestic nominal spending).

 

[shuize]

Do you have a job here that is affected by the local economy?
I wouldn't mind at all except that the company I work for is in dire straits.
We are in the translation business and most of our customers are Japanese companies in the export sector (internally focused companies having less need for translation services).

Otherwise, a strong yen is great.

I missed this post.

Not really. My job is more affected by demographics. Fewer students is a bigger concern than the skyrocketing yen.

Speaking of which: Yen/Dollar 87.2 as I type.

 

[shuize]

Speaking of which: Yen/Dollar 87.2 as I type.

I spoke too soon. The yen is apparently not finished making the dollar its bitch.

Yen/Dollar 86.05 as I type.

Two years ago it was in the 120 range.

 

[Puppycow]

I spoke too soon. The yen is apparently not finished making the dollar its bitch.

Yen/Dollar 86.05 as I type.

Two years ago it was in the 120 range.

Well, I sort of laughed it off, but there is a prediction that the yen will rise to 50/$.

And not just some guy with a blog, Sumitomo Mitsui Banking Corp.’s chief strategist.

 

[shuize]

Well, I sort of laughed it off, but there is a prediction that the yen will rise to 50/$.

And not just some guy with a blog, Sumitomo Mitsui Banking Corp.’s chief strategist.

While I'd be laughing all the way to the bank, I can hardly imagine how bad that would screw Japan if it were to happen.

 

[Tippit]

While I'd be laughing all the way to the bank, I can hardly imagine how bad that would screw Japan if it were to happen.

Why would that "screw" Japan? Yen holders would be able to exchange their paper for other currencies at favorable rates, and then exchange those for real goods and services. The only people it would screw are Japan's numerous exporters whose costs are denominated in Yen, and even then they could just shift to domestic distribution - which means the Japanese get to consume more of what they produce.

 

[drkitten]

Why would that "screw" Japan? Yen holders would be able to exchange their paper for other currencies at favorable rates, and then exchange those for real goods and services.

Because, naturally, the only goods and services that people want are the ones produced overseas that you can pay for in other currencies.

I always order my pizza from central Europe, because it's the only place you can get the pepperoni just right. Similarly, I have my laundry done in Cairo, and rather than buying T-shirts at the local clothing store, I buy them directly from Nicaragua where I can get Cardinals Superbowl Championship T-shirts cheaply.

 

[Tippit]

Because, naturally, the only goods and services that people want are the ones produced overseas that you can pay for in other currencies.

I always order my pizza from central Europe, because it's the only place you can get the pepperoni just right. Similarly, I have my laundry done in Cairo, and rather than buying T-shirts at the local clothing store, I buy them directly from Nicaragua where I can get Cardinals Superbowl Championship T-shirts cheaply.

That's nice, but as usual the sarcasm doesn't make any sense. If the Yen is strong, it means Yen denominated costs are onerous, but when the Japanese simply consume what they otherwise would have exported, their top line will be denominated in Yen as well. In addition Japanese exporters are a narrow subset of Yen holders, so even if their costs do suffer Yen holders on the whole enjoy more purchasing power both at home, and abroad. So tell me why a strong Yen is bad for the Japanese again?

 

[drkitten]

That's nice, but as usual the sarcasm doesn't make any sense. If the Yen is strong, it means Yen denominated costs are onerous, but when the Japanese simply consume what they otherwise would have exported, their top line will be denominated in Yen as well.

The problem is that the Japanese cannot "simply consume what they otherwise would have exported," because their import needs are for basic necessities like food, clothing, and fuel -- while their exports are things like cell phones and stereos, which I'm fairly confident can neither be eaten nor worn.

But don't let reality get in the way of an oversimplified ideological rant. After all, you've never actually touched on reality in any of your other economic posts.

 

[Tippit]

The problem is that the Japanese cannot "simply consume what they otherwise would have exported," because their import needs are for basic necessities like food, clothing, and fuel -- while their exports are things like cell phones and stereos, which I'm fairly confident can neither be eaten nor worn.

But don't let reality get in the way of an oversimplified ideological rant. After all, you've never actually touched on reality in any of your other economic posts.

And given that the strong yen means real import costs are cheaper, and Japanese consumers have more purchasing power to buy things like food and energy, how does the strong Yen hurt most Japanese again? I'm willing to concede exporters are hurt by rising real costs, and that Japan depends on its tech exports to a large degree. The point, however, is that the inflationary argument against a rising yen due simply to higher real export costs is bogus, because it's also offset by higher purchasing power of people who own Yen, and Yen denominated financial assets.

 

[shuize]

And given that the strong yen means real import costs are cheaper, and Japanese consumers have more purchasing power to buy things like food and energy, how does the strong Yen hurt most Japanese again? I'm willing to concede exporters are hurt by rising real costs, and that Japan depends on its tech exports to a large degree. The point, however, is that the inflationary argument against a rising yen due simply to higher real export costs is bogus, because it's also offset by higher purchasing power of people who own Yen, and Yen denominated financial assets.

My point about a strong yen hurting Japan was indeed related to the large degree Japan depends on exports, particularly exports to the United States. Not to mention the huge amount of dollar reserves their banks are holding.

Personally, as I send a lot of my savings back to the U.S., 50 yen to the dollar would represent a 150% salary increase in a little over three years. Although, I recognize not everyone here shares my enthusiasm over such a scenario.

 

[Francesca R]

And given that the strong yen means real import costs are cheaper, and Japanese consumers have more purchasing power to buy things like food and energy, how does the strong Yen hurt most Japanese again? I'm willing to concede exporters are hurt by rising real costs, and that Japan depends on its tech exports to a large degree. The point, however, is that the inflationary argument against a rising yen due simply to higher real export costs is bogus, because it's also offset by higher purchasing power of people who own Yen, and Yen denominated financial assets.

Japan is a net exporter (check its balance of payments ever since the 1960s) so your "win" of cheaper imports is necessarily more than offset by exports being more expensive to foreigners. Moreover Japan earns large net foreign investment income, which to some extent compensates for low domestic returns on capital, (check again) and that would also shrink in value.

Unless Japan were to lower interest rates, or increase its monetary base (both of which have been tried already), the effect of a real FX rate appreciation is a tightening of monetary conditions. The country earns less foreign exchange. Domestic currency is effectively burned.

Surprising that someone who often claims to know about how monetary phenomena operate doesn't get this. Or maybe not.

 

[Tippit]

Japan is a net exporter (check its balance of payments ever since the 1960s) so your "win" of cheaper imports is necessarily more than offset by exports being more expensive to foreigners. Moreover Japan earns large net foreign investment income, which to some extent compensates for low domestic returns on capital, (check again) and that would also shrink in value.

Yes, I already conceded the export situation, the imports only serve to partially offset. It seems to me that if the Yen can buy more abroad, then it can also buy more foreign assets, which implies the net foreign investment would not shrink. As far as low domestic returns on capital, as the Yen appreciates the savings rate will increase.

Unless Japan were to lower interest rates, or increase its monetary base (both of which have been tried already), the effect of a real FX rate appreciation is a tightening of monetary conditions. The country earns less foreign exchange. Domestic currency is effectively burned.

Surprising that someone who often claims to know about how monetary phenomena operate doesn't get this. Or maybe not.

The problem is again your narrow view of exclusively foreign exchange. Since the Japanese do not import everything, the domestic purchasing power gains of Japanese citizens serves to help offset the rising real costs of exports. You do agree that people with money can buy more when the general price level is declining, right?

Since you don't understand why deflation isn't always some bogeyman to be feared, then you're unlikely to distinguish between good deflation, which is the result of more goods and services driving prices down, and bad deflation, which is the result of a sharp contraction in the supply of money, usually in response to enormous amounts of prior debt and monetary inflation.

In it's simplest terms, a strong Yen means the Japanese get more for their money. The fact that some exporters with high-Yen costs suffer is offset by the fact that the average Japanese can buy more with their Yen, both at home and abroad.

 

[shuize]

In it's simplest terms, a strong Yen means the Japanese get more for their money. The fact that some exporters with high-Yen costs suffer is offset by the fact that the average Japanese can buy more with their Yen, both at home and abroad.

I don't claim to be an expert, but if a strong yen kneecaps the Japanese export-dependent economy, the fact that the yen buys more foreign goods doesn't help all those whose jobs are tied to exports, does it?

In simpler terms, what does a strong yen do for the unemployed?

 

[Tippit]

I don't claim to be an expert, but if a strong yen kneecaps the Japanese export-dependent economy, the fact that the yen buys more foreign goods doesn't help all those whose jobs are tied to exports, does it?

In simpler terms, what does a strong yen do for the unemployed?

The real question is whether the Japanese deflation is the result of growth in economic output, or a reduction of the supply of money. According to ABC News it's the former. Note that real GDP rose 4.8% over Jul-Sep. Also note that 60% of the Japanese economy is consumer spending, this hardly seems like an export-dependent economy. I would be curious to see what japanese exports are as a percent of their GDP, and I wouldn't be surprised if they rank behind a number of European countries. Japan just has successful, high profile exports like cars and technology which make them seem dependent.

The fact that stronger currency hampers exporters doesn't mean they're going to be thrown out of business, or that there will be widespread unemployment. In any case, if the central bank resorted to the inflation tax in order to "weaken" the Yen, it would merely represent a direct subsidy of exporters (besides the usual direct beneficiaries of the monetary excess) by the rest of the Yen-holding public. Why do deflation scare-mongering central bankers claim to weigh the interest of exporters over domestic and international currency holders?

 

[Francesca R]

Yes, I already conceded the export situation, the imports only serve to partially offset.

Then you concede that the effect from merchandise trade is contractionary

It seems to me that if the Yen can buy more abroad, then it can also buy more foreign assets, which implies the net foreign investment would not shrink.

It seems you make an elementary stock versus flow error. The effect on the income from the existing stock of net foreign assets is overwhelmingly dominant in a scenario where the yen suddenly appreciates a lot. You might as well say that after an earthquake, construction firms will be able to jack up their prices and therefore boost spending.

As far as low domestic returns on capital, as the Yen appreciates the savings rate will increase.

This is a nonsense prescription for Japan and indicates you have no idea what its saving rate actually is.

The problem is again your narrow view of exclusively foreign exchange. Since the Japanese do not import everything, the domestic purchasing power gains of Japanese citizens serves to help offset the rising real costs of exports. You do agree that people with money can buy more when the general price level is declining, right?

Yes but the net effect is contraction, as you have conceded.

Since you don't understand why deflation isn't always some bogeyman to be feared, then you're unlikely to distinguish between good deflation, which is the result of more goods and services driving prices down, and bad deflation, which is the result of a sharp contraction in the supply of money, usually in response to enormous amounts of prior debt and monetary inflation.

A sudden and massive FX appreciation is analagous to a sharp contraction in the supply of money, as I have explained already. So that's "bad" in your own book. A gradual nominal JPY appreciation caused by relative deflation in Japan versus its trading partners is fine, and is what has been happening since the 1980s.

In it's simplest terms, a strong Yen means the Japanese get more for their money. The fact that some exporters with high-Yen costs suffer is offset by the fact that the average Japanese can buy more with their Yen, both at home and abroad.

While you identify the pro- and con- forces operating, you are confused about their comparative impact.