Japan is now in recession and the way things are developing it's starting look like a full blown crises is on the cards. Given the fragility of the global economic environment it's look more like Japan could be the catalyst for the next GFC. This doesn't mean that it could originate in Japan but that Japanese policy could trigger retaliatory action that precipitates a crises somewhere else.
Once Abe's party took power it became clear they would do whatever it took to halt the deflationary spiral and try to push inflation up to 2%. Most pundits consider a 2% inflation rate for Japan as suicidal (pushes up the cost of govt borrowing to unsustainable levels given the size of their debt). We shall see I suppose.
Probably the more threatening is their apparent aggressive takeover of the BOJ. If not directly then by threat.
The following article covers much of the recent activity around this and indicates the likely fallout internationally of Japanese government policy.
Adding to this is Germany's threat to Japan.
http://online.wsj.com/article/SB10001424127887323301104578255983113727030.html
Let the currency wars begin.
As a curious bystander to international politics without any real knowledge, what effect would this have on Australia and property in your opinion Freckle?
Japan is struggling with collapsing export volumes. Given that it is a value adder then if exports fall it follows that imports must fall also. If it succeeds in devaluing it's currency that is also an inhibitor to imports. Australian exports to Japan make up something like 16% of Australia's total exports.
The wider connotation is that Japan is the 3rd largest economy and that if it falls could it start a domino affect.
2013 should be extremely interesting. Global economies have only gotten weaker since 2008. That's led to economies becoming considerably more hypersensitive to shifts in foreign economic policy.
Tourism was also expected to rise:
Can't for the life of me see tourist numbers rising under these conditions.
Freckle wrote:. Most pundits consider a 2% inflation rate for Japan as suicidal (pushes up the cost of govt borrowing to unsustainable levels given the size of their debt). We shall see I suppose.Where did you get this little pearl? Interest rates don't automatically go up because there is inflation (that's what would happen in a market not being manipulated by Government or central banks). Further, inflation will help the Japanese Government pay its debts, which is largely denominated in Yen, as it represents a reduction in the value of the money they owe.
Money is not wealth, money is how modern societies transact wealth. Wealth is the mixture of goods and services used by consumers and businesses. For those who find this confusing consider if a country had 10 units of wealth and 10 units of money, each unit of wealth (in an efficient economy) would be worth 1 unit of money. In this situation if the central bank decides to print a further 10 units of money, this has no effect on real wealth but would cause 100% inflation i.e. each unit of wealth would now be worth 2 units of money. In this case if there were funds borrowed prior to the money printing the debt would be exactly half as onerous. This is very basic economics!
APerry wrote:Where did you get this little pearl? Interest rates don't automatically go up because there is inflation (that's what would happen in a market not being manipulated by Government or central banks). Further, inflation will help the Japanese Government pay its debts, which is largely denominated in Yen, as it represents a reduction in the value of the money they owe.
C'mon Al I thought you understood this stuff.
Inflation drives savings/capital to look for a better return. Japan then has to compete at higher rates to sell bonds. 60% of income will go on debt this financial year. Much of that debt is near 0%. If debt costs rise even 0.25% as it rolls over bonds and raises new ones Japan is all but gone.
It's what the likes of Bass and others are saying. The risk is increasing over time that as Japan is forced to look to external sources of funding for financing its debt and deficits it will eventually go belly up. Bass has upped his time line to 12 – 18 months. He expects to see the first signs of this as downside changes in margins on swaps if I understand him correctly.
Simple rule of economics as I understand it (and maths for that matter) – you can't inflate your debt away at 0%. What's the other saying; You can't have your cake and eat it too.
Freckle wrote:APerry wrote:Where did you get this little pearl? Interest rates don't automatically go up because there is inflation (that's what would happen in a market not being manipulated by Government or central banks). Further, inflation will help the Japanese Government pay its debts, which is largely denominated in Yen, as it represents a reduction in the value of the money they owe.
C'mon Al I thought you understood this stuff.
Inflation drives savings/capital to look for a better return. Japan then has to compete at higher rates to sell bonds. 60% of income will go on debt this financial year. Much of that debt is near 0%. If debt costs rise even 0.25% as it rolls over bonds and raises new ones Japan is all but gone.
It's what the likes of Bass and others are saying. The risk is increasing over time that as Japan is forced to look to external sources of funding for financing its debt and deficits it will eventually go belly up. Bass has upped his time line to 12 – 18 months. He expects to see the first signs of this as downside changes in margins on swaps if I understand him correctly.
Simple rule of economics as I understand it (and maths for that matter) – you can't inflate your debt away at 0%. What's the other saying; You can't have your cake and eat it too.
What you are saying would be true in an open market, Japan's central bank will continue to drive bond yields down though, so they won't go up, this is part of their stated policy. The Japanese central bank can keep buying Gov bonds at 0% forever if it chooses as it creates Yen. The cost of this in terms of inflation would be horrendous, but it doesn't change the fact that the level of inflation and interest rates can be disconnected in an economy that is being manipulated.
Countries can and do inflate away debt, at the cost of large drops in their exchange rate. The US are doing the same thing. This will come back and bite them in terms of lower standards of living, but they won't go broke. It is pretty simple, a country that controls its own currency can not default on debt denominated in that currency, unless it is their choice to do so. The choice to print more money is always there and that is what Japan, and the US have decided to do. Greece doesn't have this luxury, just as private individuals and corporations don't because they don't have their own currency, they have to default openly, not by stealth (this is what inflationary policies are, default under a different guise).
Simple maths and economics is that interest rates are lower when there is more money in the system (supply and demand), putting more money into the system, without and equal or greater increase in the amount of consumer and prodcucer goods (i.e. real wealth) leads to a reduction in the unit value of that money, this is the very definition of inflation.
APerry wrote:What you are saying would be true in an open market, Japan's central bank will continue to drive bond yields down though, so they won't go up, this is part of their stated policy. The Japanese central bank can keep buying Gov bonds at 0% forever if it chooses as it creates Yen. The cost of this in terms of inflation would be horrendous, but it doesn't change the fact that the level of inflation and interest rates can be disconnected in an economy that is being manipulated.
You do realise you sound like Krugman. You cannot print your way out of debt indefinitely and that's what they're proposing to do. Every country that has ever tried it has come off second best. You also forget that the BOJ holds very little of current debt
Pension funds have already indicated they will begin to buy gold to hedge inflation and currency devaluation. Effectively this policy will drive capital investment and funding sources away. Capital flight is already apparent as corporations look for more stable economic conditions elsewhere and cheaper labor. Abe thinks that if he takes control of the BOJ he can somehow control the economy like a puppet master. Good luck with that. The 2% inflation target will be interesting. If they hit the print to infinity button then I have now idea how you contain inflation to 2%.
Quote:Countries can and do inflate away debt, at the cost of large drops in their exchange rate. The US are doing the same thing. This will come back and bite them in terms of lower standards of living, but they won't go broke. It is pretty simple, a country that controls its own currency can not default on debt denominated in that currency, unless it is their choice to do so. The choice to print more money is always there and that is what Japan, and the US have decided to do.Apples and oranges. The US has resources coming out its ears Japan has zip. The US has a reserve currency which is virtually a commodity in todays world. Japan has at best a safe haven currency and even that advantage is diminishing as we speak. The US has an economy almost 3 times the size of Japan. Inflation is a mechanism to transfer wealth from the purchaser of the debt to the issuer. That invariably ends up being the tax payer. So by the time this thing comes to its natural conclusion Japanese Joe Public will be poorer than a bean sprout.
This is all penny anti stuff anyway. The real show is the currency manipulation and the ensuing currency war. The Germans are throwing up the red flags. It's all on for young and old soon.
http://www.zerohedge.com/news/2013-01-22/germany-vs-japan-currency-war-heats
I'm sorry but I can't seem to find where I said printing money is a good idea. My opinion of Krugman is probably not much different to yours. None of this changes the fact that Japan's debt is largely in Yen, they can,have and have stated they will continue to create more Yen. Flooding the domestic financial market will keep rates low and will drive inflation and falls in the currency. How much debt the BOJ holds is largely irrelevant, your graph just means that there will be even bigger problems for Japan's people and financial institutions, but the country won't go broke. If they have no concern with the living standard of their population they can print away for as long as they like.
Japan and the US are not apples and oranges in the context that they can both print as much money as they want, same as any country who issues it's own currency. I'm not commenting on Japan's future, it may be bleak but it won't include it going broke and neither will the US. Countries using Euros are another matter.
i haven't read the article re Germany, but I think currency wars are well an truelly underway and have been for some time.
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