More deflation in Japan

[NoZed Avenger]

and there you have a one word sentence summarizing why deflation is a bad thing.

No one else does, either. So the housing industry will collapse in a sustained deflation.

As will any of the other industries where people are able to put off purchases because they don't want to pay too much for their assets.

Eventually you'll be in a position where the only industries doing well are beer and toilet paper.

. . . And people can do without toilet paper in a pinch.

 

[Puppycow]

They could always do more. One approach is to announce a (positive) price inflation target and create money copiously until that gets achieved, but it isn't clear to them that this would help, since monetary policy first and foremost aims to maximise growth not set inflation. Proponents of this policy argue that it would, however, enable short term real interest rates to be lowered.

OK, I read that and Shirakawa's arguments do not make sense to me.

You want to maximize growth? Fine. You should still set a positive inflation target if that is your goal. Allowing deflation to persist and government debt to skyrocket with no prospect of ever being able to reduce it or even slow its growth won't help maximize growth. It's idiocy! Kan is right, Shirakawa is wrong.

 

[Francesca R]

I agree. The BoJ does have some kind of target for the CPI of 0%-2%. It has, essentially, been mostly failing to perform its function.

 

[Puppycow]

They've been doing that for some years, since the Bank of Japan's overnight interest rate is approximately nothing, and its balance sheet has been expanding (though not so fast recently) and the monetary base has also been expanding (though not so fast recently).

They've also periodically stepped up the amount of money creation but then reduced it again later.

OK, here's a conspiracy theory: It looks to me like the expansion of the balance sheet and monetary base increased in the run-up to the last election and has been decreased since DPJ took over. I also recall a major tussle between the LDP and DPJ last time that the position of BoJ governor was going to be filled, and LDP was unable to appoint its first choice. Could bad blood between the BoJ and the current government be affecting BoJ monetary policy?

 

[Puppycow]

More erosion of the tax base, but also a silver lining of sorts:

Tokyo Land Price Tumbles 11.3% On Year

TOKYO (Nikkei)--The average land price in Tokyo declined 11.3% on the year, as of Jan. 1, the biggest fall among all prefectures in Japan, according to data released by the National Tax Agency on Thursday.

The market for new condominiums in the Tokyo metropolitan area appears to be regaining momentum thanks to the steep drop in the land price, which is used to calculate inheritance and gift taxes.

 

[ServiceSoon]

and there you have a one word sentence summarizing why deflation is a bad thing.

No one else does, either. So the housing industry will collapse in a sustained deflation.

As will any of the other industries where people are able to put off purchases because they don't want to pay too much for their assets.

Eventually you'll be in a position where the only industries doing well are beer and toilet paper.

Controlled inflation (which is the goal of most financial institutions) causes the money sitting in the bank to be worth less than it was, which compels people to spend the money rather than save. It seems unfair to people like me who try to live a simple/safe/secure lives.

Explain to me why keeping the value of money static would/n't work?

 

[Puppycow]

Controlled inflation (which is the goal of most financial institutions) causes the money sitting in the bank to be worth less than it was, which compels people to spend the money rather than save. It seems unfair to people like me who try to live a simple/safe/secure lives.

Explain to me why keeping the value of money static would/n't work?

But if we're only talking about, say, inflation of 3%/year, you don't have to be in any big hurry to spend your money. And a savings account will pay some interest too. And you can protect the purchasing power of your money by investing it in a number of ways.

It's good for the economy for you to either spend your money or invest it and not hoard it in a safe for years, which is what many people would do if the value of money was static and even more would do if there was persistent deflation.

In Japan, deflation has persisted for more than a decade.

 

[drkitten]

Controlled inflation (which is the goal of most financial institutions) causes the money sitting in the bank to be worth less than it was, which compels people to spend the money rather than save. It seems unfair to people like me who try to live a simple/safe/secure lives.

No, for several reasons.

First, you can still save money; it just makes little sense to save it in your sock or buried in the hearth of your fireplace. You can usually get a return that approximates inflation by putting into a bank (with the added bonus in modern times of deposit insurance, so the return is essentially risk free) -- but at the same time you're making the money available as business loans to the larger economy.

Second, if it bothers you that much, a 3% haircut is not that big a loss if you really insist on being inappropriately and irrationally antisocial.

So it's hardly unfair.

But thirdly, it's hard to target inflation exactly -- if you aim at 2% and undershoot by a percent and a half, that's no big deal. If you aim at 0% and undershoot, that tips you over into deflation.

Explain to me why keeping the value of money static would/n't work?

Because the Wise Men aren't that good. If anyone says that they can control the money supply with surgical precision, they mean "to within an inch or two, and then they pour hot tar where your arm used to be."

 

[Tippit]

First, you can still save money; it just makes little sense to save it in your sock or buried in the hearth of your fireplace. You can usually get a return that approximates inflation by putting into a bank (with the added bonus in modern times of deposit insurance, so the return is essentially risk free) -- but at the same time you're making the money available as business loans to the larger economy.

As usual, drkitten is hopelessly ignorant, or more likely just lying. First of all, there is no free lunch. "Risk free" means the risk of bank failure is merely socialized. This is the essence of "too big to fail", the very biggest banks and their depositors are bailed out at the expense of everyone else. This has the effect not only of encouraging reckless behavior on the part of the banks in question, but a consolidation of the banking industry. Second, the cost of monetary inflation doesn't magically go away simply because banks pay a return on deposits - real rates are often negative, and even when they aren't the cost of inflation is bourne by borrowers via their labor, and by people who live on a cash basis, paycheck to paycheck.

Second, if it bothers you that much, a 3% haircut is not that big a loss if you really insist on being inappropriately and irrationally antisocial.

Yes. If you expect to actually keep your hard-earned purchasing power, you're antisocial. Meanwhile politicians and bankers use the inflation tax to eat lobster and crab on offshore yachts. Keep in mind that drkitten doesn't even acknowledge that inflation is a tax, in spite of Ben Bernanke's admission. If he can't convince you that it isn't a tax, then he'll just claim you're "antisocial" if you protest this immense, hidden tax.

Even worse, the punitive effects of monetary inflation are disguised by the productive nature of the economy, and the power of compounding interest in reverse - compound inflation. In an economy where output is growing, more goods are produced for any given period. If the money supply were static, and velocity mostly constant as it usually is, this would result in lower prices as your unit of currency buys more. So instead of a rise of 3% in the general price level, you might have a fall of 3%. Instead of experiencing lower prices, you instead pay higher prices. So in reality, you've lost 6% of relative purchasing power, not just 3%. Additionally, compound inflation has resulted in a cumulative inflation rate of 1929% since the inception of the Federal Reserve in 1913. Things cost twenty times more now than they did in 1913.

But thirdly, it's hard to target inflation exactly -- if you aim at 2% and undershoot by a percent and a half, that's no big deal. If you aim at 0% and undershoot, that tips you over into deflation.

Mild deflation isn't problematic in the least, as long as wages are allowed to fall in concert with producer and consumer prices. There is no deflationary spiral in such a circumstance, just as there isn't an inflationary spiral given 2-3% inflation. Instead it results in sustainable growth.

We don't need banker gnomes running an institution of legal counterfeiting, under the auspices of targeting price levels. It's just a ruse, and the world will be a much happier place once we awaken to this reality.

 

[Puppycow]

Japan's economy continues to be lousy

Tokyo, Japan (FT.com) -- The strength of Japan's economic recovery came under question on Monday as second-quarter growth figures came in sharply below economists' expectations.

Growth in the country's gross domestic product slowed to an annualized, seasonally adjusted pace of 0.4 per cent in the three months ended June 30. That was far below the revised 4.4 per cent pace posted in the first quarter and economists' predictions of 2.3 per cent for the latest period.

The figures also appear meager against those posted for the quarter by the world's other giant economies. The US reported annualized growth of 2.4 per cent while Germany generated a robust 9.1 per cent, its fastest pace since reunification, on the back of surging exports amid a weaker euro. China may have overtaken Japan to become the world's second largest economy after posting year-on-year growth of 10.3 per cent in the quarter. Beijing published revised data on Monday raising its GDP for the first quarter.

Meanwhile the yen is at a 15-year high, and the BoJ isn't willing to do anything about it.

Last week the central bank kept its economic assessment unchanged and did not announce any further easing measures.

As you can see, deflation has persisted for about 15 years now. It's the new normal.

 

[Puppycow]

Bank of Japan to hold emergency policy meeting

But will they take any meaningful action? Or more futility?

Japanese Prime Minister Naoto Kan on Friday made his strongest comments so far on the yen's recent spike. He told reporters that Japan would take "decisive action" when necessary against excessive foreign exchange volatility. He is meeting with Bank of Japan Gov. Masaaki Shirakawa this week. Kan's staff is working on new stimulus measures, and an outline will be decided Tuesday.

Expectations have been growing that Japan's monetary authorities will do something to stem the yen's rise, particularly after new government data last week showed that the country's export growth lost momentum in July. Japanese leaders held an emergency meeting but emerged with few hints of an immediate response.

Analysts have said the central bank will most likely decide to boost liquidity by expanding a short-term low-interest loan program for financial institutions.

Personally I think they should be buying more government bonds. This "short-term low-interest loan program for financial institutions" seems completely irrelevant and futile.

 

[shuize]

And I'm still waiting for the housing prices to fall.

While they have come down a little, with the yen at 15-year highs, whenever I convert the price back into dollars I start to lose interest. Especially when I start to think of the 3 or 4 rental properties I could get in the U.S. for the price of one decent house here.

 

[ThermionicScott]

So I've got a dumb question for the bunch -- are the Japanese people suffering a lot as a result of this deflation? Sure, the desired amount of economic growth isn't happening, but the unemployment rate is something like 5% and most of the people seem to have enough savings to be cushioned in case things get worse.

(I welcome corrections if I have any of my facts wrong. )

- Scott

 

[Puppycow]

So I've got a dumb question for the bunch -- are the Japanese people suffering a lot as a result of this deflation? Sure, the desired amount of economic growth isn't happening, but the unemployment rate is something like 5% and most of the people seem to have enough savings to be cushioned in case things get worse.

(I welcome corrections if I have any of my facts wrong. )

- Scott

Well, it certainly could be worse. I live in the Tokyo/Yokohama area and the poor economy hasn't hit so hard here. The fact that they saved so much money is important.

The main problem is for export-oriented companies. And the stock market is down about 75% from its historical high.

But, then, the Japanese a known for suffering quietly and stoically without making a big fuss about it.

 

[Belz...]

Well, it certainly could be worse. I live in the Tokyo/Yokohama area and the poor economy hasn't hit so hard here. The fact that they saved so much money is important.

The main problem is for export-oriented companies. And the stock market is down about 75% from its historical high.

But, then, the Japanese a known for suffering quietly and stoically without making a big fuss about it.

Well, I just bought 350$ worth of CD albums from Japan two weeks ago. That should help.

 

[Puppycow]

Once again, the BoJ disappoints.

Japan’s Central Bank Disappoints The Markets

 

[ServiceSoon]

Once again, the BoJ disappoints.

Japan’s Central Bank Disappoints The Markets

I only skimmed the article, but isn't this exactly what the US did, loan money to banks? Why is this a disappointment?

 

[Puppycow]

I only skimmed the article, but isn't this exactly what the US did, loan money to banks? Why is this a disappointment?

I'd rather they bought government bonds instead. Because would be like giving it to taxpayers (reducing the debt owed by taxpayers) while giving it to the banks is just a giveaway to bankers and doesn't really help anyone else. They'll just turn around and buy JGBs with it and pocket the difference. Taxpayer's liabilities will not be reduced.

 

[Tippit]

I'd rather they bought government bonds instead. Because would be like giving it to taxpayers (reducing the debt owed by taxpayers) while giving it to the banks is just a giveaway to bankers and doesn't really help anyone else. They'll just turn around and buy JGBs with it and pocket the difference. Taxpayer's liabilities will not be reduced.

Despite many threads on this subject, you still don't understand what is going on. First of all, if the central bank monetizes pre-existing government debt, the debt isn't retired, it merely changes hands and winds up on the BoJ's balance sheet. Taxes are collected and used to pay interest on this debt. Assuming the BoJ operates like the US Federal Reserve, this interest is remitted less the BoJ's operating expenses back to the Japanese Treasury. The taxpayer burden remains the same, except the interest goes to the Bank of Japan and the Treasury instead of a private bond holder. Second, the BoJ's act of creating fiat money to purchase the bonds is itself a tax on all the holders of yen. It creates ficticious or phony demand for a bond such that the private seller would otherwise have to accept a lower price for in the market. Third, debt monetization is usually employed to soak up the supply of excess government debt that isn't consumed by the market. In other words, it typically enables more debt and more taxpayer liabilities as a result of the inflation tax. If the Japanese economy is experiencing price deflation, then this is simply reflected as an opportunity cost - Japanese consumers buy less with each yen than they could have otherwise. The tax remains, it is merely disguised by the incredibly productive Japanese economy.

 

[ServiceSoon]

I'd rather they bought government bonds instead. Because would be like giving it to taxpayers (reducing the debt owed by taxpayers) while giving it to the banks is just a giveaway to bankers and doesn't really help anyone else. They'll just turn around and buy JGBs with it and pocket the difference. Taxpayer's liabilities will not be reduced.

The article implies that it is a loan to the banks. Loans are paid back with interest. Those revenue derived from the interest could be used to reduce the tax burden of civilians. Yes?