Thursday, April 13, 2006

BoJ's Blind Date

In an epiphany of sorts, it occured to me that there are many similarities between the BoJ's treatment of their unit of exchange, "the Yen", and an attractive girl who's got cold feet after having been cajoled into accepting a blind date. You may think this an absurd comparison, but I hope you'll hear me out, since I rarely comment on things outside my realm of knowledge such as currencies, or understanding the psychology of the opposite sex.

ZIRP (Zero Interest Rate Policy) remains my pet peeve, for there remains few if any benign reasons why Japanese authorities should be destroying the prodigious savings of their average citizens (savings held primarily in Yen, and in Postal Savings, life insurance, or other "investments" with pedstrian nominal returns). Yet ZIRP persists, far beyond it's sell-by date, coincidental to serially gargantuan fiscal gaps equivalent to 7% of GDP. Together, they are ostensibly intended to grease the wheels of commerce, goose GDP growth, thereby elevating Japan from the clutches of perniciously evil deflation. All while the BoJ's balance sheet has ballooned to inter-galactic proportions while the MoF continuous to engineer ways to borrow and spend the people's hard-earned nest-eggs. They repeat the mantra that it's to insure that Japan has truly emerged from "deflation", doesn't backslide, and thus is solidly on the road to recovery. But does this remotely, in any way, describe their real motivations?? For domestic demand has long-since recovered. Retail sales are increasing handsomely. Companies have restructured and most are now-sporting ROE's greatly in excess of their risk-adjusted cost of capital. Banks, too, have repaired their balance sheets and repaid their emergency government loans. Exports are robust, across most important sectors, and not just to their Asian factories transplanted to take advantage of lower wage costs, but to buyers across asia - especially China - who are now purchasing high-tech and high-value added machinery and electronic device inputs. Unemployment has dropped and the ratio of vacancies to job seekers has consistently increased. So why do Japanese authorities continue to persist with ZIRP and 7%-of-GDP fiscal deficits??!?

Cut to the Watson household. Attractive Jennifer is getting ready for her blind-date. She looks out her second-floor bedroom window and sees her as yet unknown suitor pull up. He's arrived early. She gets a peek, sees he's obese, slovenly, and un-hygienic pig and she thinks to herself: "Oh god, no! This is horrible! I'll never survive! What should I do? I don't want to hurt his feeling, but...." She proceeds to make herself as ugly and unattractive as possible. Faux-chicken-pox spots. Make-up bags under her eyes. Highlight the coldsore on her lip, messes up hair, snot running out of her nose, and proceeds downstairs, opens the door (coughing and sneezing in plain sight) to try and bail-out uncallously.

This is precisely what the BoJ and the MoF are conspiring to accomplish with the Yen: abuse the Yen; uglify it to the point that no sane international investor would desire of holding this paper given the contempt, overt neglect and punishment heaped upon it by it's alledged guardians - the govenment and central bank. And they've gone one step better - one that's more even cynical than their laughable protests to preserve their archaic and abominable whaling practices - they are GIVING it away to any and all comers at zero cost!!. And they are doing this in the full knowledge that those who borrow it will immediately sell it on the open FX market to assist in stealthily (ha! ha! ha!) counteract the large and persistent international trade surpluses racked up by their exporters. This is, to be sure, a pure and simple policy of neo-mercantilism. And as a result, they have been able to maintain market-share and trade advanatge advantage for such time that they have succeeded in building-out multi-teated, global manufacturing networks. They have followed other OECD nations in their industrial hollowing - but have done so at their own measured pace, without the substantial domestic labour dislocations, or loss of markets or market share, and consequently the drop in labour's real wages and thus their share of GDP. Not discounting the foresight of their corporate managers, their engineering and manufacturing prowess and teamwork, it is likely that this "truc de chef" would not have been possible without this concerted disfigurement of their currency.

What's been the cost? Internationally, the imbalances they have caused have rife, particularly in the USA. Japan has succeeded to a greater extent than would otherwise have been the case, in a beggar-thy-neighbor-like pilfering of higher-end manufacturing jobs from other OECD nations. They have been a keen co-spirator to the multiple speculative asset bubbles around the world (not to mention indvertently financing numerous Greenwich, CT estates) since the late-90's, which wouldn't have been possible (or certainly would have been more restrained without ZIRP) if they let US rates (and thus US consumption) find equilibrium without their meddling. And this has in turn helped China which has helped Japan, in many ways, though most roads in the daisy chain of ultimate cause & effect still return to the USA, resulting from it's higher-than-financable consumption caused by the combo of unsustainably high-deficits and artifically abnormally low-rates.

And then there is the Kawagishi family, and many others like them. Although they don't know it yet, their retirement savings have already been spent by the government in pursuit of the so-called "national interest". Their covert appropriation has helped prevent pain to, and the decline of, the Japanese middle class, and to support the powerful corporate business interests near to the center of Japanese power. Asset inflation has hit Japan, as is service-price inflation. They think they have USD1 trillion of US assets (in the form of US govt paper), but they will never be able to spend this or achieve the purchasing power that is currently marked-to-market by their holdings.

Make no mistake: this is not Japan-bashing of the traditional sort. There is lots of culpability to go around, but Japan must accept her larger-than-average share. You see, the global monetary system is cooperative by design. There are boundaries, and the nation-states in this game are called upon the respect the boundaries and take corrective policy action when they veer off-course. Cynical neo-mercantilism of the Asian variety practiced over the past two deacdes, is akin to an aggressive driver quite literally forcing other more-respectful drivers off the road. While trade indeed generates benefits, selfishness of a participant in pursuit of, or in order to preserve, national advanatge at the expense of other participants can and does have deleterious impacts upon the functioning of the system itself, and potentially upon the trade from which in a healthy system, everyone might benefit.

The hour is getting late for the system. Responsible actions need to be taken to preserve its integrity, even at the risk of domestic discomfiture in certain nations. But the price is worthy given the value the system itself delivers to many of the world's people. To the US, this means efforts towards, lower consumption & energy intensity, higher savings, lower fiscal and trade imabalances. To Japan, this means NO MORE ZIRP!!, lower fiscal deficits, continued domestic market liberalization, and a dramatically higher currency (even if higher domestic unemployment were the cost). The alternative scenarios, protectionism, economic nationalism, possible military conflict resulting therefrom, in a modernity, shoulb be grim motivators of the need to act.

1 comment:

Anonymous said...

I find your assessment of the current ZIRP in Japan quite intriguing. The analogy to a blind date of the sort you describe is perhaps eccentric, yet includes elements of truth. As a new "Japan-watcher", I would like to pose a few questions?

1) These policies are what put Japan on the map internationally; what are the options?
2) Is Japan capable or does it have the appetite to implement radical change?
3) If the old-guards in Japanese power circles are not willing to push for changes, who then is capable of doing so?