More deflation in Japan

[drkitten]

Despite many threads on this subject, you still don't understand what is going on.

Just because he disagrees with you is not a sign that he doesn't understand what is going on.

In fact, the better he understands what's going on, the more strongly he will disagree with you.

 

[Puppycow]

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.

Normally money in the treasury has to be replenished by taxpayers. Any money that the treasury can get from another source, such as the central bank, is less money that the taxpayers have to contribute.

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.

You can think of inflation as a tax, but since you have to tax something, this seems like a good alternative to raising another tax such as income tax. It's not a question of shall we have taxes or not, it's a question of what shall we tax and what incentives do those taxes create.

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?

Yes, but if they just turn around and buy JGBs (ie, loan the money back to the government) at a slightly higher interest rate than they have to pay the central bank, they are effectively a middle-man profiting on the transaction but making no contribution. It would be better in that case for the central bank to directly buy the debt and cut out the middle man. That way all the benefits would go to taxpayers and citizens rather than some going to the bankers for nothing.

 

[Tippit]

Normally money in the treasury has to be replenished by taxpayers. Any money that the treasury can get from another source, such as the central bank, is less money that the taxpayers have to contribute.

But when the central bank conjures money into existence, it's the yen-holders that pay via a depreciated currency, and most yen-holders are also Japanese government taxpayers. So this is a charade.

You can think of inflation as a tax, but since you have to tax something, this seems like a good alternative to raising another tax such as income tax. It's not a question of shall we have taxes or not, it's a question of what shall we tax and what incentives do those taxes create.

Actually, I think it should be a question of limiting taxation, and I don't believe tax policy should be used to incentivize anything. Not only is the inflation tax regressive, as opposed to typically progressive income tax regimes (I can't speak for Japanese income tax), but it is also arbitrary in scope. There is no limit to the size of this tax, depending on how much money the central bank wants to counterfeit, or how much debt government wants to issue. The fact that most people don't understand how it works makes it a stealth tax, and it is disguised by economic growth, which ordinarilly would result in lower prices. Once again, there is no fundamental problem with falling prices - deflation. It is indicative of progress. The only problem arises when wages remain sticky due to government or unions, which disrupts the cost structure and can cause unemployment.

Yes, but if they just turn around and buy JGBs (ie, loan the money back to the government) at a slightly higher interest rate than they have to pay the central bank, they are effectively a middle-man profiting on the transaction but making no contribution. It would be better in that case for the central bank to directly buy the debt and cut out the middle man. That way all the benefits would go to taxpayers and citizens rather than some going to the bankers for nothing.

Or, it would be better if the government simply issued it's own credit-based money, out of the same sovereign right that it has to issue debt, and abolish the parasitical central bankers. Or if it used sound money. Or virtually any alternative to the status quo.

 

[Puppycow]

Whee!

The GDP deflator, a gauge of price trends, fell 1.7 percent from a year earlier, the fifth straight drop.

Gross domestic product grew an annualized 1.5 percent, faster than the 0.4 percent reported last month, after the first quarter’s 5 percent, the Cabinet Office said today in Tokyo. Unadjusted for changes in prices, GDP shrank 2.5 percent.

Funny how nominal GDP is falling even as real GDP is rising, albeit slowly. This is going to push the debt-to-gdp ratio up, as the debt is measured in nominal yen.

This BoJ seems to be comfortable with persistent deflation and a super-high debt-to-gdp ratio. The bond markets seem to be comfortable too.

 

[Puppycow]

Some action from the BoJ today:

Bank of Japan Cuts Rates to as Low as Zero Percent

TOKYO — In a surprise move, Japan’s central bank lowered its benchmark interest rate to a range of 0 percent to 0.1 percent Tuesday, a tiny change from its previous target of 0.1 percent but a symbolic slide into an age of zero interest rates.

The Bank of Japan also said it would set up a temporary 5 trillion yen, or $60 billion, fund to buy Japanese government bonds, commercial paper and other asset-backed securities amid concerns over weakening growth in the world’s third-largest economy.

With the interest rate cut, the central bank effectively reintroduces a zero-interest rate policy for the first time since July 2006. The decision underscores concerns that a strong yen and persistent deflation threaten the country’s fragile economic recovery.

Don't know if $60 billion is enough though. Seems to be on the conservative side. Stock market is up on the news though.

 

[Tippit]

Some action from the BoJ today:

Bank of Japan Cuts Rates to as Low as Zero Percent



Don't know if $60 billion is enough though. Seems to be on the conservative side. Stock market is up on the news though.

Why wouldn't the stock market be up? If the Japanese government is counterfeiting money and buying government bonds, it will drive yields lower. Lower bond yields typically also mean lower stock earnings yields, the reciprocal of which is the price to earnings ratio - the market goes higher.

When the banksters/politicians receive the new money, they don't buy twice as much food or twice as much energy, they just use it to buy financial assets and obtain a bigger share of economic growth. What's good for the stock market isn't good for the average yen holder.

 

[The Central Scrutinizer]

Why wouldn't the stock market be up? If the Japanese government is counterfeiting money and buying government bonds, it will drive yields lower. Lower bond yields typically also mean lower stock earnings yields, the reciprocal of which is the price to earnings ratio - the market goes higher.

When the banksters/politicians receive the new money, they don't buy twice as much food or twice as much energy, they just use it to buy financial assets and obtain a bigger share of economic growth. What's good for the stock market isn't good for the average yen holder.

Tippit is back! It's playtime!

 

[Puppycow]

If the Japanese government is counterfeiting money

Hey, you know what? I looked up what it's technically called and it's not "counterfeiting money," it's called seigniorage.

Anyway, the stack market is up again today, but the yen doesn't seem to be doing much. It's stuck on 83, close to a record high.

 

[Tippit]

Hey, you know what? I looked up what it's technically called and it's not "counterfeiting money," it's called seigniorage.

Yes, it's seigniorage, a form of taxation. The reason I use the word counterfeiting, is because from the perspective of the yen holder, it doesn't matter whether the Japanese government does it, or someone making perfect replicas of yen in their basement - they lose the same.

Anyway, the stack market is up again today, but the yen doesn't seem to be doing much. It's stuck on 83, close to a record high.

The value of the yen depends as much on demand as it does supply. If the yen doesn't budge much after 5 trillion yen worth of "seigniorage" recently, then it is evidence of an economy robust enough to at least produce enough goods and services to offset this. This doesn't change the fact that prices would have been cheaper without the debasement. Does this not make sense to you?

You're also quoting the Yen in terms of the USD, which is being debased at a far more rapid rate, with similar effects on stock and bond markets.

 

[The Central Scrutinizer]

Yes, it's seigniorage, a form of taxation. The reason I use the word counterfeiting, is because from the perspective of the yen holder, it doesn't matter whether the Japanese government does it, or someone making perfect replicas of yen in their basement - they lose the same.

In case you're wondering why you are laughed at on this forum, it's pretty much because of stupidity like this.

 

[daenku32]

This stuff will continue to happen until global wages are the same everyone. That's what globalization does. It makes it the same everyone. Difference in the price of a bushel of wheat is measured only by the distance it has traveled, not by the local median wage of the people harvesting it.

The problem is that this doesn't eliminate problem of unequal distribution of income and wealth. Once the world that fully globalized, you'll end up with super rich (incomes in the millions of $$s) and the super poor (incomes in the hundreds). And it won't matter where you live.

 

[Puppycow]

The Great Deflation
New York Times article on the deflation in Japan and its effects.

The Bank of Japan, which is not mentioned, for whatever reason just doesn't get it.

 

[Puppycow]

Will it never end?

Japan’s consumer prices fell for a 21st month in November, a sign sustained deflation may prompt the central bank to revise its price projections.

Or rather, will they never end it? It's not like they don't have the means to do so. They just seem to be ideologically opposed to it.

But while the BoJ sits on its hands, government debt continues to balloon.

Prime Minister Naoto Kan plans to cap new bond sales at 44.3 trillion yen ($534 billion) in fiscal 2011 to finance a record budget for the year starting April 1, according to a proposal approved by the Cabinet on Dec. 24.

And the yen is at 82.7 to the dollar. Sustained deflation will cause it to rise further if nothing is done.

 

[ServiceSoon]

....Or rather, will they never end it? It's not like they don't have the means to do so. They just seem to be ideologically opposed to it....

I don't understand how you can say this. They've tried flooding the market with cheap money and increasing government spending. Which is partly how the west was "saved" from the most recent crash. What else is there to do?

 

[Puppycow]

I don't understand how you can say this. They've tried flooding the market with cheap money and increasing government spending. Which is partly how the west was "saved" from the most recent crash. What else is there to do?

More like sprinkling the market with cheap money. It hasn't been enough. There is some amount of money that could be created that would end deflation.

Compare the amount of QE they are doing to the amount the Fed is doing. The Fed is doing $600 billion, but the Japanese are only doing about $60 billion. The Japanese economy is roughly 1/3 the size of the US economy but they are only doing 1/10 the amount of QE. They should be doing about $200 billion or more.

Since the central bank can create money for free, there really is no theoretical upper limit to how much they can create. But too much would cause hyperinflation and they don't want to do that. However, too little is not ending deflation. They just need to find the Goldilocks amount to create moderate inflation.

 

[drkitten]

More like sprinkling the market with cheap money. It hasn't been enough. There is some amount of money that could be created that would end deflation.

Actually, there isn't. Inflation/deflation isn't just a function of the amount of money, but of the speed of circulation, as well. If people are just sitting on money,... well, they can "just sit on" arbitrarily large amounts of it. If the BoJ gave a hundred zillion yen to the major banks, which then just sat on it and neither lent nor invested it (which is not a bad move in deflationary times), then the effect on inflation of that money creation would be zero.

The problem with what the BoJ and Japanese government have been doing isn't just in the amount, but in the obvious half-heartedness and temporariness of the measures they've been taking, which are exactly the sort of features that make people not want to invest windfalls they get from money creation. For that matter, it's the same (lack of) stimulative effect we saw with the last round of Bush tax cuts, which didn't actually stimulate anything, because people correctly recognized them as a one-off windfall and most people used them to pay off existing debt, or to put into savings (that weren't being lent out, this being during the credit crunch) instead of to spend on consumer goods and stimulate the economy.

And we'll probably see the same thing with the next round of one-off cuts; in fact (although I can't find the article now), that's exactly what CNN is recommending people do with their expected windfalls....

 

[Puppycow]

Actually, there isn't. Inflation/deflation isn't just a function of the amount of money, but of the speed of circulation, as well. If people are just sitting on money,... well, they can "just sit on" arbitrarily large amounts of it. If the BoJ gave a hundred zillion yen to the major banks, which then just sat on it and neither lent nor invested it (which is not a bad move in deflationary times), then the effect on inflation of that money creation would be zero.

The problem with what the BoJ and Japanese government have been doing isn't just in the amount, but in the obvious half-heartedness and temporariness of the measures they've been taking, which are exactly the sort of features that make people not want to invest windfalls they get from money creation. For that matter, it's the same (lack of) stimulative effect we saw with the last round of Bush tax cuts, which didn't actually stimulate anything, because people correctly recognized them as a one-off windfall and most people used them to pay off existing debt, or to put into savings (that weren't being lent out, this being during the credit crunch) instead of to spend on consumer goods and stimulate the economy.

And we'll probably see the same thing with the next round of one-off cuts; in fact (although I can't find the article now), that's exactly what CNN is recommending people do with their expected windfalls....

Ah, yes. I know this but I didn't go into detail about what to do with the money. Simply creating it is not enough. You have to get it out into the economy too. The best way I can think of would be to simply give it to the government rather than to banks. The government would find a way to spend it. At least this would help with the budget deficit, which is getting too big for comfort.

 

[Puppycow]

Japan has its credit rating cut. Doesn't seem to have any immediate dramatic effect, but it could have a long-term effect. I still believe that the BoJ is not doing enough to end deflation. They should take positive steps to end deflation sooner rather than wait and see if it will end by itself, someday, somehow, despite the demographic trends.

 

[Francesca R]

Hey, I helped build that (at least until sometime in 2009)

So, how's that short yen position working out?

Not great, slightly down. The short yen is mostly versus several Asian currencies, which could be proxied with the Singapore dollar. The chart shows the cumulative performance of the yen inclusive of its relative forward price (red line) where 100 is the effective level I went from flat to short, so a passive trade would be under by a couple of percent. In fact I have increased/reduced it several times but always short.

 

[Puppycow]

Not great, slightly down. The short yen is mostly versus several Asian currencies, which could be proxied with the Singapore dollar. The chart shows the cumulative performance of the yen inclusive of its relative forward price (red line) where 100 is the effective level I went from flat to short, so a passive trade would be under by a couple of percent. In fact I have increased/reduced it several times but always short.

[qimg]http://www.internationalskeptics.com/forums/imagehosting/127465006a5da894b1.jpg[/qimg]

I had kind of forgotten about this thread. Still not much positive inflation here, but I guess that flat is better than deflation. 2% positive inflation would be good for Japan IMHO.

Does the movement of the yen appear to make any rational sense to you, even in hindsight, or does it just appear to be a random walk? I also think it should lose value in a rational world, but it always confounds my expectations. At least so far it has, but perhaps that will change sometime soon. Japan no longer has a perennial trade surplus. The GDP growth is anemic to negative. I think it's time for the yen to weaken.

The USD has actually been not so bad against other currencies recently from what I hear. I think it may be poised for a turnaround, or already actually in a turnaround.