Up and Down Wall Street
THURSDAY, APRIL 18, 2013
Japan's New Export: Deflation?
By RANDALL W. FORSYTH
Lower yen means dearer currencies for Asian competitors, just as China slows. 1997 redux?
The Bank of Japan's plan to double the size of its balance sheet, with the aim of lifting its nation's inflation to 2%, appears to be having the precise opposite effect on the rest of the world.
By sending the value of the yen sharply lower, the Japanese central bank's money-printing scheme effectively has lifted the exchange rates of the currencies of its Asian neighbors and other competitors in the global export market. That's especially true for China, the world's second-largest economy, which already was slowing.
China's currency, the yuan, already has risen to a record high versus the dollar. The greenback, meanwhile, also has appreciated more than 20% against the Japanese yen since late last year, when it became apparent that Shinzo Abe would become Japan's new prime minister and would set the government's policy on a course for radical reflation. Thus, China's yuan has increased in value even more than Japan's yet—an extreme disadvantage for the former's economy, which is dependent on cheap exports.
The effects are evident in the freefall of commodity prices, especially metals. And that has extended to the much discussed plunges in gold and silver, which has exerted a deflationary undertow on global equity markets. The Dow Jones Industrial Average fell only 138 points, or 0.9%, Wednesday.
In so doing, it held up better than other major market measures by virtue of not including Apple (ticker: AAPL) among its select 30 stocks, which lost 5% after briefly dipping below the $400 a share level. Apple still exerts a big influence on other market measures, even though it was eclipsed again by ExxonMobil (XOM) as the biggest market-capitalization stock in the Standard & Poor's 500; the large-capitalization-stock benchmark fell twice as much as the Dow Wednesday, or 1.8%.
But the market's woes extend beyond Apple. Dr. Copper—the commodity with a putative Ph.D. in economics—fell another 3.6% Wednesday, to a 17-month low of $3,1880 a pound for a June futures contract on the Comex division of the New York Mercantile Exchange.
With upbeat numbers for U.S. housing and auto activity, two major uses of the red metal, the weakest link appears to be China.
To Albert Edwards, Société Générale's chief global strategist, the yen's slide has echoes of 1997.
That's when the plunge in the Japanese currency set off a spill of dominoes in Asia, starting with the Thai baht, as the region's currencies suddenly were rendered uncompetitive versus the cheap yen. The same pattern may be playing out now, with similarly destabilizing ripple effects throughout the region.
This isn't how the Bank of Japan's monetary stimulus was supposed to work. The purchase of Japanese government bonds and other securities, in theory, should have worked to lower interest rates and put more cash into the coffers of the nation's banks, which they were supposed to lend out the money to support recovery. None of those simplistic effects described in elementary economics textbooks are playing out as described, however.
As Richard Koo, chief economist of the Nomura Research Institute details in his latest research report, past Bank of Japan programs of "quantitative easing"—the large-scale purchase of securities by the central bank—have not produced economic growth. That's even though the Bank of Japan's expansion of its balance sheet has been proportionately bigger than the Federal Reserve's or the Bank of England's, he notes.
In the case of Japan, the central bank's securities purchases—which inject liquidity into the financial system—have failed to produce a similar expansion of the money supply. That requires an increase in bank lending, which hasn't happened either because of banks' reluctance to lend or borrowers' reluctance to borrow. Koo pins the problem on the latter in a balance-sheet recession, where businesses and consumers are more apt to shed debt than take it on—even at interest rates of virtually zero.
As a result, the impact of the Bank of Japan's actions so far mainly has been felt in the currency markets, not the credit markets. Moreover, despite the prospect of heavy, continued purchases of Japanese government bonds by the central banks, JGB yields have been bouncing higher. Again, precisely the opposite of the planned outcome predicted in the textbooks.
Japan's actions mainly have worked to lower the yen, which in turn raises the exchange rate of the currencies of its export competitors around the globe. In effect, that is a tightening of monetary policy for everybody else—at a time that global growth is slowing. Viewed from that perspective, no wonder gold is being battered.
In his maiden voyage around the world as U.S. Treasury Secretary, Jack Lew implored the Group of 20 to eschew "beggar thy neighbor" policies, a phrase describing the destructive protectionist currency and trade practices of the 1930s. But the example of the meltdown of the emerging markets in 1997 and 1998 may be more relevant to what policy makers should guard against.
Robert Burns perhaps summed it up best: The best laid plans of mice and men often go awry (in the English version.) How well the words of the Scottish translate into Japanese, however, is beyond my ken.
By sending the value of the yen sharply lower, the Japanese central bank's money-printing scheme effectively has lifted the exchange rates of the currencies of its Asian neighbors and other competitors in the global export market. That's especially true for China, the world's second-largest economy, which already was slowing.
China's currency, the yuan, already has risen to a record high versus the dollar. The greenback, meanwhile, also has appreciated more than 20% against the Japanese yen since late last year, when it became apparent that Shinzo Abe would become Japan's new prime minister and would set the government's policy on a course for radical reflation. Thus, China's yuan has increased in value even more than Japan's yet—an extreme disadvantage for the former's economy, which is dependent on cheap exports.
The effects are evident in the freefall of commodity prices, especially metals. And that has extended to the much discussed plunges in gold and silver, which has exerted a deflationary undertow on global equity markets. The Dow Jones Industrial Average fell only 138 points, or 0.9%, Wednesday.
In so doing, it held up better than other major market measures by virtue of not including Apple (ticker: AAPL) among its select 30 stocks, which lost 5% after briefly dipping below the $400 a share level. Apple still exerts a big influence on other market measures, even though it was eclipsed again by ExxonMobil (XOM) as the biggest market-capitalization stock in the Standard & Poor's 500; the large-capitalization-stock benchmark fell twice as much as the Dow Wednesday, or 1.8%.
But the market's woes extend beyond Apple. Dr. Copper—the commodity with a putative Ph.D. in economics—fell another 3.6% Wednesday, to a 17-month low of $3,1880 a pound for a June futures contract on the Comex division of the New York Mercantile Exchange.
With upbeat numbers for U.S. housing and auto activity, two major uses of the red metal, the weakest link appears to be China.
To Albert Edwards, Société Générale's chief global strategist, the yen's slide has echoes of 1997.
That's when the plunge in the Japanese currency set off a spill of dominoes in Asia, starting with the Thai baht, as the region's currencies suddenly were rendered uncompetitive versus the cheap yen. The same pattern may be playing out now, with similarly destabilizing ripple effects throughout the region.
This isn't how the Bank of Japan's monetary stimulus was supposed to work. The purchase of Japanese government bonds and other securities, in theory, should have worked to lower interest rates and put more cash into the coffers of the nation's banks, which they were supposed to lend out the money to support recovery. None of those simplistic effects described in elementary economics textbooks are playing out as described, however.
As Richard Koo, chief economist of the Nomura Research Institute details in his latest research report, past Bank of Japan programs of "quantitative easing"—the large-scale purchase of securities by the central bank—have not produced economic growth. That's even though the Bank of Japan's expansion of its balance sheet has been proportionately bigger than the Federal Reserve's or the Bank of England's, he notes.
In the case of Japan, the central bank's securities purchases—which inject liquidity into the financial system—have failed to produce a similar expansion of the money supply. That requires an increase in bank lending, which hasn't happened either because of banks' reluctance to lend or borrowers' reluctance to borrow. Koo pins the problem on the latter in a balance-sheet recession, where businesses and consumers are more apt to shed debt than take it on—even at interest rates of virtually zero.
As a result, the impact of the Bank of Japan's actions so far mainly has been felt in the currency markets, not the credit markets. Moreover, despite the prospect of heavy, continued purchases of Japanese government bonds by the central banks, JGB yields have been bouncing higher. Again, precisely the opposite of the planned outcome predicted in the textbooks.
Japan's actions mainly have worked to lower the yen, which in turn raises the exchange rate of the currencies of its export competitors around the globe. In effect, that is a tightening of monetary policy for everybody else—at a time that global growth is slowing. Viewed from that perspective, no wonder gold is being battered.
In his maiden voyage around the world as U.S. Treasury Secretary, Jack Lew implored the Group of 20 to eschew "beggar thy neighbor" policies, a phrase describing the destructive protectionist currency and trade practices of the 1930s. But the example of the meltdown of the emerging markets in 1997 and 1998 may be more relevant to what policy makers should guard against.
Robert Burns perhaps summed it up best: The best laid plans of mice and men often go awry (in the English version.) How well the words of the Scottish translate into Japanese, however, is beyond my ken.
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