Archive for January 22, 2013

EYE-BALL’s Guru on – The Turmoil is beginning – Japan’s Economic Stimulus to tip the scales –

January 22, 2013 Comments off
Latest GURU Posts:

– 20th Jan – Wayne Swan Tips his hat at New Yorker’s

– 10th Jan – The ANZ Whitehaven Hoax –

– 5th Jan 2013 – Financial ‘Ghosts’ from the Past – Hawke and Keating v Gillard and Swan –

– 29th Dec – The Great Big Financial Swindle – Part II – The ‘Budget Surplus’ Backflip – Swan tells his own Porkies …

– 22nd Dec – The Great Big Financial Swindle – Part 1 – The ‘Budget Surplus’ Backflip – Swan serves up Senator Wong

– 14th Dec – The Walls are crumbling – Government admits High A$ policy is hurting –

– 4th Dec – Retailers and bureaucrats don’t understand – high A$ value responsible for off-shore purchases –

– 19th Nov – Government Expenditures Part I – Department of Prime Minister and Cabinet – DPMC – STAFFING –

– 3rd Nov – Shareholders – Holding back the world – scared money – scared boss’s –

To see more GURU posts: – click here …

– The Turmoil is beginning –
– Japan’s Economic Stimulus to tip the scales –
| Author: EYE-BALL Guru | 22nd Jan 2013 |

The seeds to more global turmoil are currently being sown by our neighbours to our north.   Two of Australia’s largest export markets are playing brinkmanship in war terms over the Senkaku/Diaoyu islands, in addition, Japan have announced a stimulus package that sends a message that Japans decades long currency appreciation is about to end.

Japan have been an economic basket case since the early 90’s in the aftermath of the 87′ crash and its fallout.  See Yen (¥) currency, and Nikkei Charts below: [click on chart to enlarge in a new window – both charts linked from ‘Trading Economics‘ website.]

Japanese ¥ v US$ since 1976: 

Japanese Nikkei Index 1996: 

Both these charts tell interesting stories – but first read below a brilliant synopsis published by the UK’s ‘Telegraph’ on what the sabre rattling, and the proposed Japanese stimulus might really mean for the rest of the world. 

Revolutionary Japan is suddenly the centre of world affairs

| Author: Ambrose Evans-Pritchard, International business editor | Date: Jan 20, 2013.| Link to On-Line Story. |

Photo Caption: On the fiscal side, Mr Abe will launch combined national and local stimulus worth 20 trillion yen (£140bn) or 4.4pc of GDP. No matter that the budget deficit is already 10pc of GDP, or that total financing needs are a record 60pc of GDP this year. Photo: Bloomberg News

So Japan may not slide into genteel oblivion after all. To the surprise of the Japanese people, their country is smack in the middle of two riveting dramas that threaten to upturn the global strategic landscape in short order.

Newspapers may soon have to re-open their Tokyo bureaux, shut down long ago when the investment bubble burst and one Lost Decade stretched into another. We all watch with disbelief as China and Japan rattle sabres over the Senkaku/Diaoyu islands, so like the seemingly minor events that drew Europe’s alliance systems into conflict from 1911 onwards.

Both graduated to fighter jets last week: Japan sending in F-15s; China deploying J-10s, and mobilising the East China Sea fleet for live ammo drills. China’s purpose is clear. It is testing the US security umbrella, and Washington’s willingness to risk conflict to back Asian allies.

There is a minority in Beijing who think America is a busted flush, a mistake made repeatedly by different powers over the last hundred years.

The possibility that the world’s three largest economies could come to blows — as feared by US defense secretary Leon Panetta — is a sobering thought.

Against this, Japan’s economic policy revolution seems tame. Yet forces are being unleashed that could have powerful effects through the world’s asset markets and trading system.

Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus. This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who “brilliantly rescued” his country from the Great Depression.

Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran “Keynesian” budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office. He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity.

He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan’s textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow — and there lies the rub, you might say.

Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation. Few dispute that Japan escaped from slump and pioneered the world’s most successful policy mix — in strictly economic terms — from 1932 to 1936.

The trick was to act with overpowering force and combine all forms of stimulus, each leavening the other. Monetarists say Japan’s great mistake over the last 20 years has been to launch one spending spree after another without monetary backing, like sending infantry over the top deprived of artillery support. The result has been to push net public debt to 145pc of GDP this year (gross debt is 245pc) without reaching “escape velocity”.

The Bank of Japan sat of on its hands for a decade. Only later did it buy bonds, but in dribs and drabs, on short maturities, from the banking system instead of the broader public, and all in a half-hearted spirit. Mr Abe has lost patience. This time the Bank of Japan (BoJ) will do what it is told, the first of the big central banks to be stripped of its independence, and probably not the last.

As Milton Friedman said — quoting Clemenceau — “monetary policy is far too important to be left to central bankers”. Mr Abe said the next governor to take office in April must be a soulmate “with the will and ability to pull the nation out of deflation”.

Leaks suggest that the BoJ will set an inflation target of 2pc this week, to be achieved by unlimited bond purchases. The liquidity effects of this by the world’s top external creditor could be large enough to leak into everything from New Zealand bonds, Brazilian equities, and Chelsea property, a sort of `carry trade’ on steroids.

On the fiscal side, Mr Abe will launch combined national and local stimulus worth 20 trillion yen (£140bn) or 4.4pc of GDP. No matter that the budget deficit is already 10pc of GDP, or that total financing needs are a record 60pc of GDP this year.

The IMF advises Japan not to push its luck, warning that the country has reached the point where even a “relatively small” rise in borrowing costs could set off havoc. “Europe’s recent experience offers a cautionary tale. Once market confidence is lost, regaining it becomes very difficult,” it said.

Mr Abe cares not a wit about such opinions, but he is taking a huge gamble. Japan is losing its safety buffers one by one. The trade surplus has evaporated, and will not recover soon after post – Fukushima closure of the nuclear industry. The savings rate has fallen to 2pc from 15pc in 1990.

The work force is shrinking every year. The state pension fund has become a net seller of government bonds as the aging effect reaches a critical point.

Japan’s banks have become the buyers or last resort instead, pushing their holdings to 85pc of GDP. The result is to starve small firms of credit.

Adam Posen, a former UK rate-setter and a Japan expert, says fiscal stimulus ceased to be any help a decade ago and is now counter-productive. The risk is not that Japan’s debt trajectory will fly out of control. The damage is slow and insidious.” When a large country with its own currency reaches its fiscal limit, growth ends not with a bang but a whimper of declining vitality,” he said.

Mr Posen advises Japan to rely on monetary policy alone to right the ship. I broadly agree, though this time the kindling wood of fiscal spending may be what is needed to ignite damp money.

If Mr Abe means what he says, this is not just more of the same. Needless to say, printing money has its perils too. The risk is that Japan could escape gentle but stable deflation — the Devil it knows — only to see a panic flight from bonds that overwhelms the Bank of Japan.

As Governor Masaaki Shirakawa told the Diet through gritted teeth, “long-term yields could rise, and that would be a problem for public finances.”

Banks hold JGBs worth 900pc of their Tier 1 capital. Their portfolios would be decimated if long rates punched above 2pc. Japan might then face a banking disaster as well.

These are the hard choices that Mr Abe has to make. Nor can he continue to weaken the yen without irking Washington and jeopardising the alliance on which he depends. His rhetoric alone has already triggered a 12pc fall in the yen against the dollar, and a 20pc fall against the euro. He seems to be eyeing a dollar rate near Y100.

Mr Abe’s frustration is understandable. Japan is cursed with a safen-haven currency that strengthens in times of trouble when least wanted, the cross that creditor states must bear. Japan did uphold the G20 deal in March 2009 to refrain from “competitive devaluations”, when others did not. But should Japan now buy foreign bonds on a mass scale to suppress the yen, there will be trouble. Tokyo will be blamed as the aggressor in the outbreak of currency wars.

Others will retaliate. Huge issues are at play here. The world’s trade system is fragile.

The wasting disease behind the Long Slump is a record high savings rate of 24pc of global GDP, and too little demand to go around. Everybody wants a weaker currency. They can’t all have it.

Japan’s great experiment cuts both ways for the rest of us: the reflation blitz helps lift the global economy out of the doldrums: but yen manipulation snatches market share, incites protectionism, and takes us into the brave new world of “actively managed exchange rates”, as Sir Mervyn King put it last month.

We will find out soon enough which is the more powerful effect.

The story above was re-branded in today’s edition of the SMH – link to that story here

Japan has spent a long time dealing with its deflation and its growing Debt/GDP ratio, its current position is where Australia is headed and how soon it happens depends on how quickly things escalate to our north.

When a nation like Japan draws a line – then the world had better take notice.   If the sabre rattling with China escalates and the US does become involved – how quickly things will change for everybody.  This involves our two largest export Nations, and our only real military ally – all involved in a tryst that would see our interests quickly shunted out and into the crapper – just as easy and natural as it is for a baby to fill its nappy.

Does anyone now question the strategic deployment of US armed forces to Darwin only a matter of months ago?

Do you think Gillard had, or has any idea what was really behind the deployment – the US wants dumb Leaders representing its allies … and we’ve had that for some time now …

The Chart Summary:

The Nikkei Index fell from its lofty highs of 37,000+ as shown by the chart – what it does not tell you is the decades long  financial disaster when Banks were allowed to sit on their losses arising from that equities crash and this is where the stagnation, and then deflation became a problem.

Rather then allow Banks and the like to fail because they became too greedy – just as they have done since the GFC … Japanese taxpayers through Leadership were forced to pay for the cost to prop up the economy through stimulus debt … all sound familiar.

20 years this has gone on for and our Leaders as with European and Nth American leaders are telling and trying to sell a story that does not end up the same way.

The ¥ has been a currency that has seen its US$ value appreciate from ¥300+ to the US$, to below ¥80 in a 35 year trend.   Since the Japanese PM has talked tough – it has caused a selling of the ¥ on global markets, and a sharp spike in the value of the Nikkei Index as reported above.

This is not good for Australia – some of that outflow of capital will find their way here and force our currency even higher.   What will Swan and his lab-rats at the Treasury, and the Glen Stevens led RBA do in response?

We live in times where all of Nth Africa is a powder keg, add Syria, Lebanon  Israel  Iran, Afghanistan, Pakistan,  and it can be seen that the possible seeds of a much larger and escalated War have already been sown …

Have America gone off to early in their claim that killing Bin-Laden will end the War on Terrorism and make the world safer?  Has Obama got a real handle on what is happened as America begins its slide from the top perch … are they going to slide willingly or will they try to hold No 1 position …

 Look around everybody – most are asleep at the wheel and oblivious to what is happening around them … this year is building to be so much and this Nation is at the face of an abyss that nobody really wants or is prepared to talk about …

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The EYE-BALL Guru …

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