Wednesday, February 21, 2007

BoJ's Pennies in a Fountain

Everyone will offer you something today regarding the BoJs latest rate decision. Some will be dripping with sycophancy about BoJ independence, while others puerilely describe why zeropointtwo-fivepercent is a bold and decisive action by the obviously concerned public servants at one of the world's most important central bank. I will simply express to you my opinion that it is a most pathetic gesture...an insult to both right-minded central bankers and those concerned about the health of the international monetary system.

The analogy that immediately came to me was the carefree tossing of a penny into a fountain, after making a decidedly pleasant but juvenile wish. Call me unsentimental, but if one REALLY wants something badly and desperately, one should NOT rely upon a wish imbued upon a penny tossed into a fountain, or for that matter, the first star one saw last night. Rather, one should go and proactively try to make it happen. For a central banker in general, this means NOT sucking-up to the politicos, or whinging ninnies, irrespective of which side of the fence they are calling from. For the Bank of Japan more specifically, it means: if you really need near-zero rates of interest because the civilized world will disappear tomorrow and take the global financial system with it, then leave the bloody rate unchanged. IF, on the other hand, nearzeropercent rates of interest in a large somewhat open and important economy near the center of the international monetary system, are in fact long-run destabilizing and fostering asset-price bubbles and global imbalances that will be even more painful to wean-off of in the future (which this writer believes they are), then do not be zeropointtwofivebasispoint pansy, but be a man, and raise the rate.

Mr BoJ, you have done quite enough damage, thankyouverymuch, to the integrity of things monetary for the sake of your own parochial advantage. Now it is incumbent upon you to more seriously clean up the mess, and normalize your official lending rates, NOT over the course of the next four years, but soon.

12 comments:

Anonymous said...

How long before huffing and sighing from Brussels turns into action?

Why is Uncle Pauly (at Treasury) defending Japan Inc and BoJ from Democrats? Is he a political hack like Greenspan?

Can anybody catch Toyota?

Some questions running though my pea brain recently ...

-pi

"Cassandra" said...

Dear Pi,

Re: EU v Japan. In 2004 I forecast 2005; In 2005 I forecast 2006 in 2006, I forecast "anyday now..." That shows what I know! BUT, I think that for their abhorence of US policy, and Japanese / Chinese / GCC enabling, they (the EU) are fre-riding (for the moment) cause they are still selling all manner of Mercedes Villeroy Baccarat Wine etc. stateside while the US can pay, and dumping the proceeds to whoever's silly enough to bid. The real shock will come when when/if USD falls or rates spike and recession falls (along with their marginal sales, earnings and employment. THEN, they will take a whack at all things impacting their then-prevailing position.

Paulson? Well with his friends receiving annual checks of >$50mm in salary/bonus alone before other investment gains, the party is too big and fun to spoil. And in any event trying to sell austerity to Americans is a mugs game. The BoJ is complicitous in avoiding having to make any difficult decisions. And by the way, the same difficult exists in selling adjustment to industrial hollowing and having China as a neighbor & competitor exists in Japan).

Toyota? Honda? And with the global parts industry and rapidly increasing quality will help competitors too. When the Chinese and Indians start making @USD$5,000 cars, the choice in the mass market will indeed get harder since quality diffs will fall and margin squeeze upon Toyota might ensue. But -Toyota will survive and continue accession. US needs to hit bottom before getting hungry enough to cooperate and compete against confucian teamwork (and Asian shareholder disregard). Come recession, Despite their accession, their shareholders may suffer....

Best of luck....

Anonymous said...

In his latest rail against the BOJ, Cassandra continues to ignore the fact that central banks everywhere are domestic institutions, whereas international money/finance has gone global. Central banks are acutely aware of this, but as yet there is no consensus as to how the issue should be dealt with. For those who need an explanation of why the current arrangements persist, I recommend:
http://www.prudentbear.com/articles/show/350

As for the BOJ 0.25% interest rate hike: How DO you wean an addict off cheap credit?

"Cassandra" said...

Anon, thank you, yes, the fact has not escaped me and I agree entirely with the diagnosis, however, even if central bankers are all aware of the problem, but are limited, in point of fact by pparochial domestic politics for their market actions, they can still jawbone, regulate, over-supervise, cajole, even threaten, judiciously and wisely, as well as lecture lawmakers of the need to limits the woors of the over-spill by coordinating policy (e.g. tight fiscal & loose monetary ala Pimco) to limit the worst of the distortions & impacts, The BoJ has, on the other hand, gone out of its way to seemingly conspire with the MoF in some well-scripted form of Financial Kabuki to prolong ZIRP, nearZIRP, and, yes, massive direct market intervention, and anything and everything else that insures no one in their right mind would willingly and voluntarily hold YEN, insuring TeamJapan yields not a mercantilist inch on hard-fought trade gains of the past generation - at least until the time of their choosing.

There is no foolproof way to spank the speculators without unduly penalizing the working man - either directly or indirectly - whether through higher rates, or the revulsion that results from tigther fiscal policy. The least evil way to wean the parasites off of cheap credit, IS to due what one can fiscally to make up for what one cannot do monetarily. Even tighter fiscal policy will torpedo many a leveraged loan and blow spreads out, but that would be more manageable at low rates than high rates, and the low rate option would itself remove the carry and unsustainable foreign-fund flow incentives encouraged by BoJ and SNB..

dryfly said...

US needs to hit bottom before getting hungry enough to cooperate and compete against confucian teamwork (and Asian shareholder disregard). Come recession, Despite their accession, their shareholders may suffer....

I sell parts to a transplant now (among others)... they are my favorite customer. They drive you crazy during the design & bid process but once a deal is struck it is a lock... unless you ship late or poor quality.

Not so at domestics - they talk quality & delivery but in the end they really want price downs each and every year.

Great blog Cassandra...

Anonymous said...

But the Japanese economy really does not seem to be recovering. For years, every slight blip up has been trumpeted in the press as heralding a recovery, but every time, a month or two later it has fizzled.

I suspect that Japan has become so dependent on ZIRP or near-ZIRP and mercantilist exchange rate manipulation thereby that any attempt at withdrawal might be fatal.

dryfly mentions the difference in concern about price between US automakers and transplants -- might not one of the reasons for the less concern about price among transplants be the fact that currency manipulation gives them a large profit cushion?

jm ("anonymous" only 'cuz Blogger won't let me use "jm")

Anonymous said...

Sounds like wage rises in Japan have been as stingy as US, which makes for despondent workers already. True/False?

Am puzzled by one thing - why would Japanese banks and lenders lend to carry traders for only 2.5 pc or so? Just to get some extra margin? Seems gvt could fix that easily without raising rates much. Or is that part of the deal to keep the currency low?

Anonymous said...

"As for the BOJ 0.25% interest rate hike: How DO you wean an addict off cheap credit?"

Cassandra, the cheap credit addict I was referring to above was the non-export sector of the domestic economy.
Having clarified this point, is your reply any different?

Cassandra said...

Anonymous,
The often-amusing and always-erudite Jonathon Allum at KBC wrote an extended piece describing precising this phenomena, the cornerstone of his skepticism about the market's ultimate destination value over the nearer-term. I think this indeed explains consumptive reticence. But things are no worse in Japan thanh anywhere else in OECD being mercilessly hollowed. In fact, I'd argue they are better off. But they don;t have the resources and efficient agricultural sectors of US & EU. So Japan HAS fared better (and not just because zombies are kept afloat or ZIRP) in the manuf sectors vis-a-vis hollowing, but as a demographically challenged island like Switzerland, so they shoud.

BUT, that is no excuse for poor policy whose predatory cost to the ROW is greater than the domestic benefit to Japan. So in short, OK, no consumption growth, big deal. IF they are worried, old, whhatever discretionary reasons make them save, lower rates it would seem after 7 years of ZIRP won't make them spend. So whats new? Japanese stocks are going up because of global asset price inflation, and foreign HFs and official investment bodies recognize that Japanese stocks are the lesser odf the evils for a store of value, AND than it is possible to borrow at ZIRP and near ZIRP and buy assets WITHOUT the explicit currency risk of the carry trade. Of coursre, when the ROW gets fed up and the YEN finally vaults to 105, Japanese stocks in YEN terms will suffer. For dollar investors, it will, like its been over the past 9 months a wash (but not befoire the adept have pocket 10 or 15% from the current rise in stocks that will be in excess of the weak YEN.

JM-
I don't believe they are so dependent upon ZIRP for anything. I believe it is the political path of least resistence AND simply an extension of TeamJapan's excellent(*) playing of the BWII game for neo-mercantilist advantage. However, like a chess game where an eager opponent makes a swift, bold, but longer-term, perhaps unwise move to one's quarry, TeamJapan has yet to craft an exit route to extract them, something in the end they may well regret...

Cassandra said...

Re: weaning domestic non-export sector of ZIRP

"You cannot make an omlette without breaking some eggs" goes the old saw. Gosh there are lots of ways to do it, but generally speaking Japanese companies are horribly over-capitalised realtive to history, realtive to ZIRP, and certainly relative to the US. Now admittedly there are some balance-sheet abominations and some Altman-atrocities, but these are the minority, and, I would add, there is a price for everything. Yes, some will be hurt (banks holding loans, institutions holding equity, workers holding jobs), but it has to be done at some point. The unwillingness to face up to problems and elngate the adjustment process in favor of NOT re-shuffling the deck of privilege caused reasonable lost output and wealth during the 90s, and failure to clean-house Schumpeter-style, will only continue the folly. Credit should be priced, debt-for-equity encouraged where required, M&A encouraged even if smelly foreigners are the predators (real trade buyers I mean - not Steel Partners). But Steel may have a role to play in encouraging the sale of less-than-profitable divisions to real trade buyers, which in aggregate will be in the public interest, though not without some concentrated parochial pain.

Anonymous said...

In other words, where is Larry the Liquidator when you need him? I heard Larry was coming in May, right after the Cherry Blossom Festival.

I went long some more Japanese equity this week, and plan to make that 15% you're talking about. When I got that, I'm going short Yen, and making another 15%. I hope ten trillion people do the same. Payback, you know. OldVet

Anonymous said...

how can the bank of japan drastically rasie the interest rate when there's almost zero inflation?