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Japan Has Economic Choices, Two of Them are Poison

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49 comments on Japan Has Economic Choices, Two of Them are Poison

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Japanese yen chart courtesy of trading economics 

Bank of Japan Blows Record $81 Billion Defending It’s No Rate Hike Pledge

Yesterday I reported Bank of Japan Blows Record $81 Billion Defending It’s No Rate Hike Pledge

Bank of Japan deploys over 10.94 trillion Yen in an attempt to hold its 10-year interest rate peg to 0.25 percent. 

Firepower?

Store of Value?

I think either the peg blows or the Yen blows.

Japan’s Choices 

1. Japan can defend its interest rate line by printing more money but at expense of the yen 

2. Japan can defend the yen by hiking rates or by selling its reserves until reserves run out Japan has a nasty choice 

I received this email reply to the above Tweet from Michael Pettis.

“Looks right. I’d add that by weakening the yen, Japan seems always to support their exporters at the expense of their consumers, which may be why domestic demand is always so weak and growth so sluggish.“

The smart thing for Japan would be to hike rates and let the Yen strengthen. 

Instead, if they stay on the same path, the yen might blow up.

All of Japan’s efforts to achieve growth by inflation and exports have backfired. One might think that after 40 years they would try something else.

The single worst choice for Japan would be to blow its currency reserves in an attempt to defend both the Yen and its interest rate peg.

Japan, China, Germany

Japan, China, and Germany all want to strengthen exports. Trump did too, resorting to tariffs that backfired. 

Mathematically, everyone cannot be an exporter. 

The ECB has a similar problem compounded by a fundamentally flawed euro with no way to fix it. 

ECB’s Dilemma

Global Distortions

  • ECB balance sheet 82.4% of Eurozone’s GDP
  • Fed’s balance sheet 36.6% of GDP
  • BOE’s balance sheet 39.6% of GDP
  • BoJ’s balance sheet 136.3%”of GDP

Trade Wars are Class Wars

And if you think China will be a growth savior, with its imploding property bubble and dependence on exports headed into a global recession, think again. 

For more discussion of the Eurozone  please see The ECB Has a Huge Dilemma: Price stability or Bail Out Nations

This post originated at MishTalk.Com.

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49 Comments
Newest
Oldest Most Voted
mrchinup
mrchinup
4 years ago
Finally has caught up with Japan after 40 years, it might take the rest of the world with them. Where is the great reset?
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FromBrussels
FromBrussels
4 years ago
….and this one is for my lovely son in Spain ….I love you !
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Zardoz
Zardoz
4 years ago
Reply to  FromBrussels
Comrade Yoda Jr. is also shirking his duty to protect fatherland, for decadent spicy Spanish potato!
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Zardoz
who needs Speak Like a Pirate Day … Mish could have Speak Like a Brussels Day …
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Eighthman
Eighthman
4 years ago
Weirdly, Japan is well on its way to becoming a Communist nation, without hyperbole. Right wing types may like to say, “Communism requires the gov. owning the means of production”. I understand BOJ may dominate buying ETFs and corporate securities. Eventually, they get Communist by default.
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Fish1
Fish1
4 years ago
There are 2 ways to argue with my wife. Neither one works.
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FromBrussels
FromBrussels
4 years ago
Japan could start buying cheap resources from Russia, renounce american subjugation for once and for fn all, subjugation by a nation btw ,that used Japan, justified or not, as a test case for nuclear destruction …..We all love the US of A don t we ? ….or are we being armtwisted into lovin our global mfr, by means of its reserve currency status? ….for the time being anyway….
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Doug78
Doug78
4 years ago
Reply to  FromBrussels
Russian resources cheap? No, they come with too much baggage attached. You are not reliable partners. Why it might come into you mind to invade Japan, your neighbour, one day. Russia still occupies the Kuril Islands that belong to Japan.
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FromBrussels
FromBrussels
4 years ago
Reply to  Doug78
….some parts of Poland, France , Belgium, still belong to Germany , in theory…. NOTHING from Russia came with a price… if only YOUR fn nation had steered clear of Ukraine !
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Zardoz
Zardoz
4 years ago
Reply to  FromBrussels
Comrade Yoda, toilet emails from fancy Belgian indoor porcelain not protecting mother Russia from sinister Ukranian threat! Are you alligator mouth with canary backside? You feast on Belgian potato and run mouth, while comrades die in filthy Ukranian mud and grow into sunflowers. Are you coward, or are you traitor to Russian peoples?
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Tony Bennett
Tony Bennett
4 years ago
Reply to  FromBrussels
Nah. Japan very worried about China. All in on protecting Taiwan … and praying US steps up if push comes to shove.
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FromBrussels
FromBrussels
4 years ago
Reply to  Tony Bennett
….yeah sure , China s not big enough , needs the resource ‘rich’ volcanic islands of Japan, just in case….And Russia is going to invade the fckn EU, or parts of it anyway… As far as I am concerned, Russia can have Poland to start with, a country that NEVER fitted within our western frame of mind, just like the Baltics and some of the Balcans ….Id say GO FOR THEM RUSSIA ! Make the world a normal place again !
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Doug78
Doug78
4 years ago
Reply to  FromBrussels
Come’on FromBrussels. You are not from Brussels at all. I hear Wagner pays good money with no age, health or intelligence requirements. You fit the bill.
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Zardoz
Zardoz
4 years ago
Reply to  Doug78
Comrade Yoda is deserter Russian. All talky talk, no action!
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FromBrussels
FromBrussels
4 years ago
Reply to  Doug78
Zardoz gave you a like ….you were not exactly friends when he was still Realist, …the enemy of my friend is my fn enemy friend he must ve though, ….well somethin of the kind anyway…. I ve had a joint too much I am afraid
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Doug78
Doug78
4 years ago
Reply to  FromBrussels
You are deep into the vodka stupor.
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Zardoz
Zardoz
4 years ago
Reply to  FromBrussels
I am everyone comrade! This blog exists only to convince you to do duty for Russian comrades instead of hiding in palatial Belgian indoor toilet making angry emails! We have taken over internet, and you cannot escape!
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FromBrussels
FromBrussels
4 years ago
Reply to  Zardoz
How many joints did YOU smoke ? ….
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MPO45
MPO45
4 years ago
Off topic but since we’re talking about Japan, Canada just announced highest inflation in 40 years. how will the Fed deal with that inflation with US top 3 trading partner?
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8dots
8dots
4 years ago
James Baker forced Japan to stop purchasing US treasuries with profit they made from selling Sony, Panasonic, Toyota, Nisan…
Japan invested their money in Tokyo RE and the Nikkei. Their bubbles eventually collapsed.
Within 2 years, since the Plaza Accord, USD collapsed from 165 to 85.55 in Dec 1987. After the Selling Climax of Dec 1987 USD
bounced to 106.52 in June 1988. This trading range still apply today.
In Oct 1987 James Baker threatened Germany…
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oee
oee
4 years ago
According to Japan bashers, Japan should have been sunk a long time ago. The Japan Doomers predicted higher rates of their treasuries, and a constant recession. Never happened. Thier yeilds went negative for much of the late 2010’s even though their gov debt is sky high. Employment was gowing at 3 million jobs in terms of the US during a period of the 2010’s. Their life expancy is 84 vs. 76.6 in the US. Covid deaths have been 247.32 deaths per million whearas the US has more than 3000 per million. Japan spends $ 4360.00 per person vs. $ 11945.00 in the US.
It is the US that is a basket case not Japan.
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Jackula
Jackula
4 years ago
Reply to  oee
Except the ascendent generation can’t afford to have children in Japan similar to western countries but worse. What happens with the further rise of automation when western countries restore their manufacturing base?
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Tony Bennett
Tony Bennett
4 years ago
Reply to  oee
“a constant recession. Never happened.”
…
Japan in / out of recessions. Mild variety.
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hmk
hmk
4 years ago
Reply to  oee
Agree with that but there is one immutable fact: want can’t go on indefintely will stop at some point. The million dollar question is when and also why it hasn’t happened any sooner.
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oee
oee
4 years ago
Reply to  hmk
According to the Doomers, it should have had happened a long time ago. See Kyle Bass.
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soupcon
soupcon
4 years ago
Japan destroyed its currency and its economy with the Plaza accords in 1985 and it never recovered. Japan has been occupied since 1945 and is still occupied mentally, militarily and economically by the US. It is still subjugating itself to the US at the expense of itself.
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SleemoG
SleemoG
4 years ago
Reply to  soupcon
To the victor goes the spoils? Or, wars have consequences?
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RonJ
RonJ
4 years ago
“Mathematically, everyone cannot be an exporter.”
Mathematically, someone is left holding the bag.
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Tony Bennett
Tony Bennett
4 years ago
What no one talks about re yen is the pain being dealt to Beijing. Usdjpy near 136 … other Asian currencies have weakened to remain competitive (South Korean Won down almost 14% to $US past 12 months). If China sticks to its peg, it will lose out on exports … while it deals with RE bubble deflating.
A yuan devaluation potential Black Swan.
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Tony Bennett
Tony Bennett
4 years ago
“Japan can defend its interest rate line by printing more money but at expense of the yen”
…
Days may be numbered. Japan CPI year over year:
January … +0.5%
February … +0.9%
March … +1.5%
April … +2.5% (expected +1.5%)
May … announced tomorrow
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Robbyrob
Robbyrob
4 years ago
Russian ruble now strongest against the dollar in seven years despite sanctions https://www.washingtonexaminer.com/policy/economy/russia-ruble-multi-year-high-sanctions
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Doug78
Doug78
4 years ago
Reply to  Robbyrob
In Moscow trading.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Doug78
Russia a commodity exporter.
No shortage of buyers for what Russia selling.
Russia can convert currency of buying country into whatever currency it wants (if they don’t demand to be paid in rubles).
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Doug78
Doug78
4 years ago
Reply to  Tony Bennett
They have strict capital controls on. Companies have to sell 80% pf their dollars to the central bank at the price the bank quote and anyone who has a dollar account in Russia can’t use them except to transfer the dollars into rubles. Those controls are there to support the ruble and it works well as long as you are inside Russia. Outside is a different matter. Russia’s attempted to force Europeans to pay in rubles forcing them to buy rubles on the market thereby cause demand for the ruble outside of Russia fell flat as the Europeans refused. To save face Russia took the dollars and Euros then converted them in their bank saying that the Europeans paid in rubles. The reality is that the Europeans did not buy rubles on the open market so there was no creation of demand for that currency. Russia’s conversion within their own bank just created more rubles which will roll into the Russian economy which by the way has less things to buy than before.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Doug78
Russia has trade partners outside of Europe.
China – for one – stepping in to buy stuff formerly going to Europe.
Are implying Russian trade suffering? If so, please enlighten. Thanks.
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Doug78
Doug78
4 years ago
Reply to  Tony Bennett
Trade in volumes or in total price? In volumes China is hardly buying more than before. India has bought more taking advantage of the discounts offered. That’s the problem with countries who depend on commodities. Commodity prices vary by large amounts. Russia’s wellbeing and its not-so wellbeing since the 1970’s has mirrored the prices of the commodities it sells. You ask me if Russia’s trade is suffering and I would have to say the export trade is holding up for the moment because prices are good for now. On the import side they are not getting what their industries need and although many expect China to furnish the shortfall that might not happen to the extent that Russia needs because of commercial risks to the supplying companies. Russians are also worried that it would make them totally dependent on China to buy their gas and oil and to furnish their industry as well. It is exchanging one dependency for another one which would be more encompassing and with territorial revendications on top. Not a good position. The only positive point is that oil and gas prices are good for now. Volumes are down and will continue to slide.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Doug78
OK, I’ll buy that. Especially, where Russia at the mercy of commodity prices … which I think will tank in near future.
Question: Who is better off (for now) – Europe or Russia – from sanctions?
Europe pretty much in – or near – a recession, which will only deepen.
My point – I agree with Mish that sanctions not working (or not nearly as severe as forecasted).
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Doug78
Doug78
4 years ago
Reply to  Tony Bennett
Who is better off for now? I would say Europe even with the energy shortages that for the moment restricted to just a few energy-intensive industries but everybody expects Russia to cut off completely soon and the resulting recession already factored in. You might say the surprise factor is gone and Europeans are making realistic choices on how to overcome and later prosper. The coal decision in Germany and the Netherlands is an example of this and I expect nuclear might follow. I was discussing with a German friend about the German government’s plan to build LNG terminals within one year. He said they will do it because they are released from the bureaucracy. I said “Germans unbound.” He said “Yes. Get used to it”. I would say that is new feeling we are seeing and it is not just confined to Germany. They said don’t poke the Russian bear but the Russian bear poked the sleeping giant that is Europe and woke him up.
The sanctions are working and will work even better with time. The Siemens gas pump stuck in Canada because of the sanctions shows that. Russia can’t make these things and that is true throughout Russian industry. There will be a primitivation of their processes which will diminish Russia’s war-making possibilities. Lots of things going on now. New things that I never would have though before.
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Captain Ahab
Captain Ahab
4 years ago
There was a time when US liberals exalted Japan for investing in ‘low return-long time frame’ projects while the US had much higher required rates of return and a short term view.
Curiously, it is always the low-hanging fruit that get eaten first.
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KidHorn
KidHorn
4 years ago
Another option is a country other than Japan steps in to defend the Yen. Like maybe China. Historically China defended USD so they could export more. Maybe they would see the Yen cratering as something bad for them. Makes Japanese goods cheaper.
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8dots
8dots
4 years ago
UK is Turkey
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8dots
8dots
4 years ago
Japan CPI y/y is 2.4%, but that’s is good enough to increase BOJ unrealized losses. They don’t care, because the BOJ will click more credit to their buds in the gov in exchange for JGB. Their buds have more money to spend and BOJ reboot itself. When will it stop : when they nuke inflation.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  8dots
Wanna bet that Japanese low rates/yields have eliminated the competitive urge and GNP is near zero (in real terms) to match?
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killben
killben
4 years ago
“One might think that after 40 years they would try something else.”
Who knows – For Japan that might be short-term thinking. Take your pick 50, 60, 75, 100.
“The single worst choice for Japan would be to blow its currency reserves in an attempt to defend both the Yen and its interest rate peg.”
Seeing the obvious is not something that central bankers are good at – e.g.”inflation is transitory”
As Mike Tyson said everyone has a plan until they get punched in the face. The Fed thought it can print to eternity and get away with it till inflation landed a nice juicy one on its face and ripped its mask off and showed them for what they are – “Arsonists&Firefighters”
Some people will understand only when it blows up on your face – like “inflation is transitory”
Yen and Euro are doomed if inflation does not come down or a credit event does not occur (when no one knows what happens if it does – while money printers might love it one should be careful what one wishes for).
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Captain Ahab
Captain Ahab
4 years ago
Reply to  killben
Like ‘hope and change’, this is long-term nonsense to justify Japan’s ridiculous low interest rates. Competition drives innovation–not 80-year payback periods. Capital MUST be put to the most intensive/productive use.
As for, “Seeing the obvious is not something that central bankers are good at…” It might be that central bankers are not imbeciles, and know exactly what they are doing. Smoke and mirrors are always a possibility,
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killben
killben
4 years ago
Reply to  Captain Ahab
Smoke and mirrors are always a possibility – Oh yes, like soft-landing, employment is strong, never utter the “R’ word.
But “inflation is transitory” – might be part wishful thinking, part imbeciles, part fear (market will crack on rate hikes), part bluster.
They should be considered as imbeciles for thinking you can control an economy with money printing and interest rate and not allowing market or capitalism to do what it does best – make best use of resources including capital and not controlling the cost of capital and quantity.People have been hung for much less that what these jokers have been doing since Greenspan days and further Bernanke days (this guy should be clobbered for what he has done to cost of capital and capitalism).
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radar
radar
4 years ago
Reply to  Captain Ahab
Most government workers I’ve been around are imbeciles.
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Doug78
Doug78
4 years ago
Reply to  radar
No they are not. They are sloths.
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Zardoz
Zardoz
4 years ago
Reply to  radar
Most government jobs are basically welfare for the people that are useless for anything else. All the benefits of welfare, but with the added benefit of a massive waste of resources!
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