In a research piece dated today, Richard Koo, Nomura's Macro observer commented on recent market concern over BoJs pussy-whipping by the MoF. To sum up his observations, he said the BoJ, while between a rock and a hard place" should have just done the deed whether the market was expecting or not. He also observed that the carry trade is errr out of hand, saying that it is sooo over the top that even Croation home buyers are funding at nearZIRP in YEN, and that people, important people, and very important people (e.g. Angela Merkel) are rather concerned by the fact that while the RmB is appreciating albeit slowly, the YEN, Germany's main competitor has been, and continues to move, in the opposite direction. Finally, he notes that the BoJ should purely and simply intervene in the FX and buy Japanese Yen for US Dollars, thankyouverymuch.
I say, "Bravo!", Mr Koo. A BGO (blinding glimpse of the obvious) as former RJR Chairman F. Ross Johnson was renown for saying. But nonetheless someone had to say it. OK so they won't be able to move a vast amount of trillion dollar baby, but they could effect a reasonable correction by nudging the soggy unit towards the general direction of fair value vs. the USD, and even perhaps the Euro. This would allow the BoJ to "resonate" with the pathetic domestic whinging and whining regarding blah blah deflation weakness not yet deflation blah blah, while satisfying the rest of the OECD that Japan really is not intent on fostering a parasitic set of international monetary policies. Mr Omi, you're next....
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7 comments:
But they've overbuilt their export sector so much that without the undervalued currency subsidy there will be "confusion in the market", as they so like to say. That would be especially so because a significant fraction of the Chinese trade surplus seems to be but a part of the Japanese surplus in disguise, as so much of the value of China's surplus is in imported components which it just cheaply assembles.
This all interestingly coincides with the reappearance this week of "news" items, placed certainly at the urging of certain intermediaries, on the foreign currency home mortgage in the Spanish press (replete with disclaimers and exhortations to consult an "expert" first). 2001 was the last time this beast showed up on the consumer radar and otherwise sensible folk suddenly found themselves contractually bound to be long the yen and the dollar in 2002.
Need we know more?
CB
http://ibexsalad.blogspot.com
What is "fair value" for a currency?
One measure of a currency's value, purchasing power parity (PPP), was estimated by the OECD as 128 for the yen in 2005; PPP of the Big Mac Index in 2005 was around 105 (I think). Given the huge assumptions made in both these estimates and the problems generated by cross-border price inelasticity, the current exchange rate of 120 doesn't seem so badly awry.
The carry trade is driven by interest rate arbitrage. Just as the critics say a 0.25% raise in Japanese interest rates is neither here nor there for the Japanese economy, neither is it here nor there for the carry trade; it wouldn't likely interrupt it.
The problem is not what the Bank of Japan does or doesn't do, the problem is free capital flows in a global market. Anyone for exchange controls?
The problem I have with PPP and relative interest rate models is that they may be used as justifications to ignore the realiites of the international monetary system as drawn-up and multilaterally agreed. I don't even have a problem with those who have gripes about it. BUT do not abuse the laws of economics or employ pathetic demagoguery to weasel parochial advanatge from other multilateral participants and partners (at least until we multialterally agree to replace it with something better). This means there IS a winners' curse, of sorts. It means, if you're running a huge surplus, you are obliged to either let your unit float, move your production of goods or services abroad, increase your purchases of foreign made goods (even better if bilaterally from the deficit country) or simply work less and smell the roses. THAT was the spirit of BW. That is still the expectation for the system to continue to function. Likewise there is an obligation for debtors to pare consumption in order to bring deficits into line, by using official means such income tax or VAT if kilter is sufficiently out of alignment. But how the Japanese and Chinese came to the conclusion that it is better to fund US consumption - which is obviously unsustainable - versus funding SDRs or developing world investment mutually insured by all OECD nations is really beyond my comprehension. I suppose it wasn't so much as planned as it just happened, though political, and financial authorities have in hindsight been left with their trousers down, and their errr ummm 'members' in their hand...
Cassandra--
Completely with you in spirit, but none of this even happens without the utopian addiction to consumer goods that characterizes the modern United States. And, given that seemingly perfect, self-sustaining and currently eternal system (entropy does not, by definition, exist in utopia), why would Japan and China do anything but follow the route of least resistance and silently provide the fuel that keeps the hallucination intact? It's political and economic policy รก la Barnum and Bailey... Give them what they want! - all certainly coinciding with the shifting of political power away from the northeastern U.S. to more innocent, insular and optimistic climes over the last thirty-odd years, by the way.
As for Japan and multilateralism, the record speaks for itself. And China and third world development? Their solution to that problem within their own borders has the been the economically forced recruitment of galley slaves from the provinces, all keeping the same ship on course.
As they say in these parts, "Es lo que hay".
CB
http://ibexsalad.blogspot.com
Charles observed
why would Japan and China do anything but follow the route of least resistance and silently provide the fuel that keeps the hallucination intact?
The answer is because the neo-liberals are eventually going to lose to rapid populists on the trade issue like Schumer.
It will be a tough handicap when protectionism first goes head-to-head with Wal-Mart's weekly circular, but I take it as a foregone conclusion that American baby-boomers will have opted overwhelmingly for the FDR/Bourque-White ticket by 2016. And yes, the obvious moral and economic insufficiencies of the nations that hold the world's money are beyond doubt. But do you think they even get it? The answer to that might even be a suggestion for an entry, being there 'n all...
(You're a lucky guy, seriously - even your tybo's broduce boetry.)
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