Tag Archives: Japan

One small picture says it all

Standing about 2-3 inches tell and 1-2 inches across, a small chart in page A6 of this last weekend’s Wall Street Journal, sums up our economic predicament. The article, Japan Firms End Yearslong Price Freezes, reports that a growing number of businesses are reporting that labor shortages and increasing demand are leading to price increases. The chart shows a pleasing, gradual but clear rise in prices in Japan over the last year, now approaching 1%. This is important.

Though 1% inflation sounds measly for Japan it could be a short-term boon. The nation has been bedeviled for over 20 years with meager growth, stagnant wages, and tepid productivity growth. In fact some economist suggest that Japan’s fall from economic grace that preceded the West’s financial crisis of 2007, demonstrated early what would happen in a deflationary economy with massive quantitative easing. QE did not drive Japan’s economy to growth; it does not seem to have done so in the west, though it may have saved it from crashing and now we see how it’s persistence has led to financial and investment dislocation.

The news all around us is quite positive:

  • Most recent quarterly GDP in US was restated up to 3.3%, almost unimaginable a year ago.
  • EU economic growth rates are forecasted to grow above their recent meager levels in recent OECD reports
  • ‘Currency war’ reports appear in the press infrequently, even though global trade remains torn by the idea that the US wants a stronger negotiating position (for what is, essentially, a very small part of the US economy).

But inflation remains stubbornly low almost everywhere. If Japan soon demonstrates ongoing growth in inflation, and global commodity prices push up, the result will be a wave of input price increase around the world. Some months later the US and more clearly the EU will see producer price increase and so consumers may see pass-through increases. This will encourage central banks to continue their march toward normality.

The downside with a return to inflation: Debt servicing becomes more onerous as interest rates increase in response to inflation increases. As such, governments and businesses that stocked up on cheap debt during QE and the near-zero interest rate period will have to squirrel away more cash to pay their interest charges. This will reduce what’s available for investment, thus slowing down growth.

The cycle feeds on itself so it can sometimes stabilize or other events can kick it into maddening swings. We will just have to see what happens. It may depend on how fast inflation growth returns. But for now, that little picture on page A6 looks very nice in a chilly autumn morning.


Negative Rate Madness Continues

he headline on page 4 of my US print edition of the financial times read, Japan debates how to use negative rates windfall. The article highlights the perverse outcome from a government setting negative interest rates. Borrowers are paid, in effect, to borrow. And governments are the largest borrowers. And so the largest borrowers gain the biggest kickback for going further into debt! What a fiasco.
The intent of course is to encourage investment and spending. The problem is that firms have not responded to quantitative easing (QE), as it’s called. Research suggests that firms develop their investment patterns based on things like competitive strategy and overall economic climate. Firms have not responded to cheap money the way central bank’s wanted them too.  That is, other than to use  cheap cash to fund stock buy-backs, which elevates EPS that pay bosses bonuses, and increased mergers and acquisitions. In both cases such investments have nothing to do with economic or productive growth. QE has failed in this respect. Now the latest result will be increased public debt.  

And such debt will become crippling as rates start their journey toward normalization, if they ever get there. With significant debt and growing (positive) interest rates goes higher and higher debt service payments. This will eat into any tax income from growth, leaving less for big brother to spend as economies start to grow again. So our leaders are playing with a double edged sword.

Our profligate, ‘we know best’ leaders are now going to print themselves more money to reward their abusive behavior. And we can’t stop it. In fact we must not. The whole point of negative interest rates comes down to this perverse behavior. To not complete this foul circle would be silly.

The reality is that these policies have not worked. Soon enough a leader will get voted in, someplace, that is so anti-establishment. That leader will defy all ‘normal’ rules of the day and upset the apple cart. In so doing this leader will help right the mess we are now in. I wonder who is silly enough to run for office and try this? I wonder….

Central Bank Experiment with Negative Interest Rates Not Working – Negative Wage-Price Spiral Forming

You have to realize that even though several central banks have taken their overnight or interbank rates negative (e.g. Japan, Euro-zone, others etc.) the actual interest rates to commercial and personal sectors remains positive or zero.  Real interest rates for you or I are not negative.  You then have to understand the point of negative interest rates is to help spur growth.  If it costs money to park excess funds with a bank, surely you would prefer to deploy the money and build something or invest in some initiative?  Wrong.  A report on the front page of the US print edition of the Financial Times (see Japan’s negative interest rates backfire amid Union climb down on pay claim) explains the perverse unintended consequences of negative rebates on wage demands. A union in Japan has just jettisoned its demands for a wage increase.  As such the very need for inflation is undermined and so deflation will again be the talk of the town.  We are seeing the formation of a negative wage-price spiral in that prices fall, and so wages fall, and so on.  Economists have been very much aware of the usual and positive wage-price spiral.  We are seeing the evil twin emerge before our very eyes.

And if that was not enough, other stories point to the fact that the market is expecting the ECB to further deepen their own negative interest rates.  Hang on folks, it’s gonna be a bumpy ride.

Pressure Cooker Politics and Economic Policy

In the Global Finance section of today’s Print edition of the Wall Street Journal there is an article (see Investors are betting in Yen’s strength) that exposes both the weakness of the current response to our global economic crisis in terms of politics and policy. The article explores how, with a strong yen against the dollar, Japan’s leadership will be pressured to increase quantitative easing. The yen has risen 3% against the dollar so far this year, despite the Fed increase in interest rates. This is mainly due to investor behavior changes in Japan, as money moves from more risky assets towards more trusted assets.  
The natural, local and sovereign response from the Bank of Japan would be to lower rates and inject more money into the economy, known as quantitative easing (QE), to help weaken the yen. But this might in fact reinforce the weakening faith in a stronger Japanese economy.
Worse, the behavior simply puts more volatility back into the global economy. If Japan tries this approach, other regions may well respond kind in order to preserve their notional attempt at recovery. 

 You would likely see the ECB follow with similar efforts: even pressure on the US to slow its planned rate rise, or reverse its recent rise, would increase. Thus the attempt by Japan to weaken its currency would simply attract a backlash from other sovereign states and regions that would likely put the yen back where it started. And central bank control of the global economy would be even more stretched.
Japan should, with its large partners, first agree a coordinated plan of what currency exchanges should be sustained or changed spanning the dollar, yen, renminbi, euro and sterling. Then all nations should publish their goals and then act accordingly. It maybe that Japan needs to let the yen rise for now, in order to help the bigger challenge. The needs of the many outweighs the needs of the one – and all that Spokish talk.  But the one-off individual responses we see every week are ruining our chances of recovery.  We face a global challenge and this challenge warrants a global response.  We are not seeing this yet.

The Lost Years: How Our Kids Respond to Our Success (or lack thereof)

There is a very depressing article in today’s US print edition of the Financial Times. It is the FT Big Read: Japan. The article interviews some Japanese adults that have just reached 20, the age at a which you can vote and drink in Japan, and who have only known the deflationary period we are now so enamored with. What is depressing is to read and comprehend the expectations of the next wave of workers about to join our decreasing population.  
Here is one quite: “My parents believed that the government would make their lives good and they did get richer. The lesson we have learnt is that we need to save as much as we can and take as little risk as possible.”  A Japanese economist, Hiroshi Ishida, comments in the article that “economic factors have stripped away the incentives for young Japanese people to leave home, marry, have children, take risks and generally grow up.”

Additional sources are looked at in Japan that look at the growth in a focus by consumers on microsavings – the fixation on ever smaller savings attributed to bargain pricing. The consumer mentality it seems has been trained, now over many years of deflation, to expect ever smaller benefit and savings, leading to narrower risk taking. And now those folks that grew up with this experience are setting prices as retailers, so reinforcing the cycle – a race to the bottom.  

This is a very frightening time. In one generation (I am just 50), we have seen the collapse of the industrial model, the growth of the digital economy, but also a political period that has led to economic anemia and apathy. Worse, so called “modern” thinking that undermines the values (all be they imperfect) that gave us the very growth that yielded the leisure time to come up with such stuff, is strangling its own roots.  

And it is not just economic factors that are doing this – at least in other part of the western world. Modern social policy is also depressing the motivating factors for leaving home, getting married and having kids. The nuclear family is not just dead but “wrong”, we are told, and we should now all reduce any “favoritism” (monetary, social, political, cultural) that led to the “traditional” family. The problem is, those traditional values were what gave the western world the Protestant work ethic and a basis to seek to improve one’s place in the world. Since the 1960’s we have been watering this down, letting politicians control more and more of our lives, even taking active steps to remove the desire to improve, and the chickens are coming home to roost in droves.

Now we have the fallacy of our controlled economy – central banks with their monetary policy and politicians with their fiscal policy – both trying to insert themselves Into the natural order of things, picking winners, and losers. The ultimate loser will be ourselves – but our politicians will not be happy until they have destroyed every chance of change and recovery, all in the name of post modernism and expedient political correctness.  At that point they will retire very comfortably, and we the masses will just rot in our own juices.

It’s only 7.23am and I feel like putting the coffee down and getting a rather stronger drink! I told you it was a depressing article. I would avoid it, if I were you!

Can Central Banks Run Out of Things to Buy?

There was an interesting article hidden in the depths of yesterday’s US print edition of the Wall Street Journal titled, Could Japan’s Central Bank Run Out of Bonds to Buy? This is not as far out as it sounds. Of course, the question arises from the massive amount of “quantitative easing” Japan’s central bank has undertaken in the name of driving demand in a sluggish economy. The USA has done the some thing, the U.K. And Europe too. It has been the second weapon of choice for central banks once interest rates hit rock bottom, or even gone negative.

There is not much research that proves that QE actually drives economic demand. In fact, there is ample evidence that QE does not drive demand in an economy. In fact recent data points to how firms report that their treasury departments do not seek new investments to drive growth if interest rates are rock bottom or cash is cheap; they fund their plans that are based on other factors to do with their industr.  These same firms have though sold bonds and acquired loans in order to drive M&A and larger share buy-back schemes. Thus the invester class has gotten much richer while the rest of the middle class has not.

Such massive amounts of bond buying has created huge market distortions. The interest rate at which sovereign governments can offer bonds remains depressed as central banks swallow up larger and larger amounts of bonds. Such a large buyer in the market should crowd out private sector demand for the same bonds. To help spread the impact central banks, as in Japan, have expanded the definition of what it is the central bank can acquire in the name of QE, even to the point of including shares.

In a nutshell QE has not resulted in the behavior central banks sought. And now we are in a pickle. Central bank balance sheets are ballooning, and just as the business cycle passes its peak, central banks have little wiggle room to help smooth the downswing: interest rates remain rock bottom (for the US, they are a smidgen above rock bottom) and balance sheets are full. Even in the US, words of “normalization” does not yet include the Fed selling off its war chest of invested bonds. Such offloading will take years since its impact on the market will be huge: it would drive up the need for bond issuers to offer higher returns in order sell them.

So the question asked by the WSJ is not fanciful. It is a sad reflection of the times we are in.  2016 will be a challenging year for central bankers – as well as for the rest of us. The bad news for us is that we don’t get the chance to write a book after the story has been completed and make a million from that effort. 

Happy New Year to you! 

ECB Next Week Could Signal More Quantitative Easing in a “Race to the Bottom” Move

A small but worrying story was hidden away at the bottom of page 20 in the Companies and Market section of today’s US print edition of the Financial Times. The title of the article is, “Euro falls after Nowotny inflation comments“. The article highlights the fractured nature, or shall we say complete lack, of global coordination of monetary policy. Nowotny is on the ECB governing council.
It seems that the falling euro has come to a grinding halt, due to the fact that the US Federal Reserve is now signaling a delay in raising short term interest rates. As the Fed, focused on data-ready signals from the US economy, delays rates, so the dollar weakens against other currencies – including the euro. If rates were to raise, the dollar would strengthen. As the dollar weakens, the euro’s fall has slowed, and has even reversed. Logic tells us that as a currency strengthens against its trading partners, exports get more expensive and will thus slow – which in turn will slow the Euro-zone economy.   

The result is an ongoing beggar-thy-neighbor behavior we keep seeing around the world. Somewhere between the US, China, Europe and Japan, we have a distinct lack of mutually reinforcing policy to get us all out of the trap we are in. The article suggests that the ECB may signal an increase in quantitative easing (QE) to help weaken the euro (against the dollar) to promote exports. This would have the consequences of pushing the Fed to (again) keep rates low, or in the worse case re-start QE themselves if the euro move was too successful.  
Our policy leaders are not working together. They are focused on domestic policy (good work, chaps) while being continually buttressed against the response from each others actions. If ever there was a time for a new global collaboration (think Bretton Woods 2.0) then now is the time. The “race to the bottom” we are in is killing us.