Thursday, May 23, 2013

Zero Hedge — Richard Koo Warns Of "Beginning Of The End" For Japanese Economy


More on inflation targeting.

Seems that no one realizes that the central bank can control the yield curve by announcing price rather than quantity.

Zero Hedge
Richard Koo Warns Of "Beginning Of The End" For Japanese Economy
Submitted by Tyler Durden


12 comments:

Ignacio said...

You are right, but I believe we are in an other case of herd mentality and headless chicken market.

Market participants believe what they believe, and until they stop believing that because facts (real inflation rate) point in other direction, chaos will ensue. When it does, all will calm down and return to normal parameters. Sure BoJ and Japanese government are not helping by not reducing uncertainty ie. price setting.

Maybe we underestimate the 'known unknown' of 'stupidity all over the place', give it some time and the current chaos will settle, or at least let's hope that.

Unknown said...

How about the utter irresponsibility of Richard Koo in spreading panic? He knows damned well this isn't "the end" for Japan, yet he goes out and feeds the lunatic/austrian/right-libertarian fringe a healthy dose of red meat. They're all over the interwebz posting about how this vindicates their paranoia.

Matt Franko said...

Good points as usual Ignacio and Ben...

"the extreme volatility in Japanese stocks and bonds is occurring at a time when the BOJ was buying large quantities of government bonds.

Until the recent events there was an expectation in the JGB market that bond prices would not fall substantially even if the Bank’s aggressive easing program depressed the yen and lifted inflation expectations as long as the BOJ remained a major buyer. It is now clear that even large-scale BOJ purchases of JGBs cannot stop yields from rising."

This is probably just like here in the US where the personnel at the FRBNY want to "get a good deal" for the taxpayers so they keep lowering their offers for the bonds hence the prices go down...

As far as equities over there, I'd guess that the Japan govt is cutting yoy increased in Yen NFA injection and this has led to this pretty substantial sell off...

So their policy is probably to "balance the budget" by cutting spending and devaluing the Yen to increase exports, ie cut the budget and increase the external surplus...

So this is right on cue:

http://www.bloomberg.com/news/2013-01-29/japan-s-government-proposes-first-spending-cut-in-seven-years.html

If the govt cuts the budget, asset values adjust to the new rate of lower NFA flow... including equities...

This asset price adjustment is exacerbated if there is a meaningful increase in net liabilities in the non-govt leading up to the fiscal cuts...

None of this is surprising...

rsp,

Tom Hickey said...

The BoJ is trying to create inflationary expectations, so dropping bond prices, which raise yields, are part of the operation. Falling bond prices will also discourage demand for saving in yen-denominated bonds.

Nick Rowe said...

Tom: "The BoJ is trying to create inflationary expectations, so dropping bond prices, which raise yields, are part of the operation."

BINGO!

Ralph Musgrave said...

Tom, It’s not 100% clear that the BoJ’s policy will work the way you suggest. If the Japanese private sector has its heart set on a particular level of net financial assets, the fact that the value of those assets decline in value because if inflation won’t result in “dropping bond prices”. Rather, the Japanese private sector will just save even more and INCREASE its demand for bonds which could RAISE their value.

A much better solution is the standard MMT one: raise the value of the private sectors net financial assets. I.e. just run a bigger deficit: up to the point where the size of the deficit starts to seriously boost inflation.

MMT: right again!!

Unknown said...

Tom,

I can be argued rising yields are the only direct method the BoJ has for increasing inflation/expectations of inflation. It would mean more highly liquid net financial assets flowing into the private sector, would it not?

Ignacio said...

Rising "inflation expectations" for 0.01% of the population (dumb economists) does not create demand (demand is what boosts inflation). Monetarists do not know how real world households and business act, always with their voodoo economics bullshit. Trying (and failing) manipulating bond prices is not going to drive private sector to increase consumption (and inflation), neither is going soaring stock markets. Why do they have the causality backwards?


The problems of an ageing population can't be solved by creating 'inflation expectations'. You need to create demand where there is not (and there still won't be). The best Japan can aim for with their current demography is an stable steady-state economy, and the job of the government right now is to supply DEMAND where is not. This means increasing public spending in sensible projects (energy independence, efficient transportation & housing); not just to provide NFA (is not the problem of Japan), but to provide demand for the excess capacity they have while wealth trickles from old population to younger people.

Manipulating financial assets and saving instruments (bonds are money with maturity and interests) will only change the structure of the portfolio of the private sector. Increasing interest rate channel may have a limited impact in demand though, but again, this is completely oblivious to the first determining factor of any economy: DEMOGRAPHICS (and wealth distribution amongst the population).

Macro economists go back to the basics, you are clueless (and useless).

Matt Franko said...

"Rising "inflation expectations" for 0.01% of the population (dumb economists) does not create demand.."

OK, this gets my vote for "Comment of the Week"... ;)

rsp

Dan Kervick said...

So far this seems like behavioral fluff - a slight surge in consumer spending driven by stocks, a small increase in exports driven by a falling yen. Business investment didn't improve, because they know better than to bet on a temporary surge in consumer optimism based on an election honeymoon.

Originally, there was talk that Abe was going to step up the Japanese government's own consumption and investment expenditures. But his budget actually reduced government spending.

I think all he is trying to do is reduce the government deficit via inflation, plus encourage a frothy recovery through a financial sector bubble, and that he's operating within the same failed paradigm of the 90's and early 2000's. The new Abe is the same as the old Abe.

Nothing in this world is really going to improve until the neoliberal generation is dead or outnumbered. Could be be as long as 30 years.

Unknown said...

Dan,
problem is, by that time the neolibs and monetarists will have given so much free money and wealth to the 0.01% that they will simply own everything.

Wufiavelli said...

If Japan wants to increase demand they might start with cutting back their insane work days. For a country that makes so much shit they sure as hell do not have the time to consume any of it.