Japan’s currency bursts its post-bubble economy

[beijingwalker]

Japan’s currency bursts its post-bubble economy​

7 October 2022

At more than 145 yen per dollar, the Japanese yen has slipped to a 24-year low. After the Bank of Japan (BoJ) signalled further depreciation would be tolerated, Finance Minister Shunichi Suzuki stated that ‘excessive, disorderly currency moves could negatively impact the economy and financial conditions’. The massive foreign exchange intervention that followed to strengthen yen could not reverse the depreciation pressure. That may signal that Japan’s post-bubble crisis management has reached its limits.

The roots of the current policy dilemma go back to the bursting of the Japanese bubble economy in December 1989 — an event triggered by the sharp interest rate cuts of the BoJ in response to the post-Plaza yen appreciation.

Since the early 1990s, Japanese policymakers have been trying to cure the persistent post-bubble recession through a long series of public expenditure programs backed by government bond purchases by the BoJ. This policy accelerated in 2013 under former prime minister Shinzo Abe with Abenomics. The Abenomics policy brought general government debt to more than 260 per cent of GDP and has inflated the BoJ’s balance sheet.

This ultra-expansionary monetary policy was for a long time accompanied by low inflation because the extensive government bond purchases of the BoJ allowed the Japanese government to subsidise corporations, goods and services. Ever-declining financing costs for enterprises, as well as subsidies for food, transportation and education, prevented the price level from rising. The generous provision of funds created zombie enterprises, which increased their capital instead of investing in higher efficiency.

The resulting low inflation and low productivity gains helped narrow nominal wage increases. As the BoJ kept long-term interest rates substantially below the United States, persistent net capital outflows financed current account surpluses.

The resulting build-up of large dollar-denominated net foreign assets (equivalent to US$3.6 trillion) implied persistent appreciation expectations on the yen since foreign assets can be reconverted into yen at any time. Because the United States followed a similar monetary expansion, the yen did not come under sustained depreciation pressure.

The situation has changed because the US Federal Reserve is now decisively increasing interest rates. With consumer price inflation reaching 8.3 per cent in August 2022, inflation has become a severe political problem for US President Joe Biden.

Rising discontent about the instability of the US dollar as the leading international currency has led to attempts to de-dollarise foreign assets in large countries such as China and Russia. More and more people in developing countries have tended to hold bitcoin instead of dollars.

Like at the end of the high-inflation period of the 1970s, the exorbitant privilege of the United States to raise foreign debt in its own currency is at risk. This heralds the end of Japan’s post-bubble model of macroeconomic stabilisation, brought to a peak in the form of Abenomics and planned to continue under Japanese Prime Minister Fumio Kishida’s New Capitalism.

If the BoJ keeps interest rates low while the US Federal Reserve keeps raising rates, the yen will continue to depreciate. Prices for imported goods — particularly raw materials, fuel and food — will rise, further eroding purchasing power.

If trade unions demand higher wages, the past wage austerity could be followed by a price-wage spiral. If the government continues to hide inflation through subsidies, the vicious circle of rising government debt and monetary expansion will accelerate, further eroding the yen’s credibility. These fears are more credible now that important trading partners such as South Korea have followed Washington’s interest rate path.

If the BoJ increases interest rates to contain yen depreciation, the government’s interest burden will rise. During three decades of rising government debt, the BoJ kept government interest rate payments low by depressing the interest rate of government bonds close to zero.

Interest on 10-year US government bonds has risen from 1.6 per cent to 3.8 per cent in 2022, while the BoJ has kept interest on 10-year Japanese government bonds at 0.24 per cent. With almost double Washington’s general government debt, a sovereign debt crisis would loom if rates rise.

Unless the US fed does not unexpectedly reverse its monetary tightening, Japan is trapped. To escape, gradual interest rate increases and substantial cuts in government expenditure would have to be implemented. That would reanimate Japan’s zombie enterprises and stimulate growth. The reforms would be facilitated by the fact that the corporations are sitting on large piles of equity. The repatriation of foreign assets could help to boost domestic investment.

Despite this positive outlook, the necessary reforms look like political suicide. Japan may first have to go through a longer period of inflation to melt down the immense burden of government debt before it can implement the necessary reforms.

Japan’s currency bursts its post-bubble economy | East Asia Forum

The Japanese yen has slipped to a 24-year low, upending decades of post-bubble monetary, fiscal and public policy expectations, writes Gunther Schnabl (Leipzig University).

www.eastasiaforum.org

 

[Viet]

Japan must raise interest rate. there is no other option.

 

[MH.Yang]

Japan must raise interest rate. there is no other option.

Japan's debt ratio is 257%, ranking first in the world. You let the Japanese govt raise interest rates, which is tantamount to letting the Japanese economy commit suicide.

By comparing the debt ratios of China and the United States, you can see how crazy Japan's debt is. The debt ratio of the United States is 135%, while that of China is 47%.

 

[Mista]

Japan must raise interest rate. there is no other option.

What for? They have been fighting against deflation through QE for years, and now they are finally eking out inflation at 3% for 1 month. Their cumulative price increases over the past years have been almost zero. Look at their inflation data, would you hike rates if you were them?

Japan Inflation Rate

Inflation Rate data for Japan. The current inflation rate, the previous month's inflation rate and the month over month inflation rate.

www.rateinflation.com

If they want to defend their currency, they can easily intervene in the FX market. They are the world's largest creditor nation.

In fact, I suspect they want inflation to go even higher and be entrenched in their economy, so that they can finally get out of their deflation spiral and inflate their massive domestic debt away. Just look at the US, their debt to GDP ratio just shrunk thanks to inflation.

Bloomberg - Are you a robot?

 

[Viet]

Japan's debt ratio is 257%, ranking first in the world. You let the Japanese govt raise interest rates, which is tantamount to letting the Japanese economy commit suicide.

By comparing the debt ratios of China and the United States, you can see how crazy Japan's debt is. The debt ratio of the United States is 135%, while that of China is 47%.

What other options? waiting until the Yen crash to 200 then raise the interest rate? The US will continue to raise the rates. Don’t forget Japan relies on imports of fuels and resources which are paid in dollars. That will end ugly.
luckily for the Japanese most their debts are owned by Japanese themselves. Also, Japan can sell dollar holdings.

 

[Viet]

What for? They have been fighting against deflation through QE for years, and now they are finally eking out inflation at 3% for 1 month. Their cumulative price increases over the past years have been almost zero. Look at their inflation data, would you hike rates if you were them?

View attachment 885585

Japan Inflation Rate

Inflation Rate data for Japan. The current inflation rate, the previous month's inflation rate and the month over month inflation rate.

www.rateinflation.com

If they want to defend their currency, they can easily intervene in the FX market. They are the world's largest creditor nation.

In fact, I suspect they want inflation to go even higher and be entrenched in their economy, so that they can finally get out of their deflation spiral and inflate their massive domestic debt away. Just look at the US, their debt to GDP ratio just shrunk thanks to inflation.

Bloomberg - Are you a robot?

That’s not the same. Inflation in the US is caused by gov massive deficits spendings, lack of supply vs. huge demand of goods and services. The Biden gov gives free money to every US citizens so they can buy things they need or don’t need. All push the inflation rate.

Inflation in Japan is non existent because there is lack of demands. Japan has very old population. the elders don’t need second home, smartphone, cars, tv sets, etc.
If nobody buys your potatoes then you sell it cheaper.

 

[MH.Yang]

What other options? waiting until the Yen crash to 200 then raise the interest rate? The US will continue to raise the rates. Don’t forget Japan relies on imports of fuels and resources which are paid in dollars. That will end ugly.
luckily for the Japanese most their debts are owned by Japanese themselves. Also, Japan can sell dollar holdings.

Raising interest rates is suicide, which is an impossible option.
Japan can maintain the exchange rate of the yen by using foreign exchange reserves to intervene in the foreign exchange market.
But the Japanese government is likely to be happy to see the yen depreciate, as this may be the only opportunity to break Japan's economic predicament.

 

[Mista]

That’s not the same. Inflation in the US is caused by gov massive deficits spendings, lack of supply vs. huge demand of goods and services. The Biden gov gives free money to every US citizens so they can buy things they need or don’t need. All push the inflation rate.

Inflation in Japan is non existent because there is lack of demands. Japan has very old population. the elders don’t need second home, smartphone, cars, tv sets, etc.
If nobody buys your potatoes then you sell it cheaper.

And raising interest rates will help?

 

[Viet]

Raising interest rates is suicide, which is an impossible option.
Japan can maintain the exchange rate of the yen by using foreign exchange reserves to intervene in the foreign exchange market.
But the Japanese government is likely to be happy to see the yen depreciate, as this may be the only opportunity to break Japan's economic predicament.

You don’t understand. It’s like the price of a single banana. Who tells you what’s the fair price of this single banana? Or another example, I have euros in surplus I want to invest. I can convert it then put either to dollars or yen account. Putting my money in yen makes no sense I will only earn peanuts.

Even if Japan gov sells all dollars holdings the exchange rate will not be much affected. That’s too little. The flows of money is multiple times higher than the entire Japan dollar holdings.

 

[Viet]

And raising interest rates will help?

Yes that will help because I will put my money in Yen.

 

[Mista]

Yes that will help because I will put my money in Yen.

No it won't. Japan is not facing an inflation problem, they are only facing a weakness in the Yen. Like I've already said, they are the world's largest net creditor nation and they have massive foreign reserves. If the BoJ is serious in defending their currency, no one can fight them because foreigners don't own as much Japanese assets to sell compared to their firepower. And with the Yen already depreciated >20% YTD, foreigners now own even lesser Japanese assets to sell.

 

[Mista]

this may be the only opportunity to break Japan's economic predicament.

I doubt it. Japan's fundamental problem is their aging and shrinking population.

Japan has actually been growing faster than the US over the past few decades in terms of GDP per worker, but their total GDP has been stagnant because their working age population has been shrinking and will continue to shrink.

If productivity grows 1.5% and labor force shrinks 1%, you only grow ~0.5%. If Japan's labor force can grow 1% like the US/Canada, their economy would be growing ~2.5% instead.

As long as we keep measuring economic performance using total GDP growth, Japan's economy will always look stagnant.

 

[beijingwalker]

Japan's 2022's GDP is much lower than it was in 1995

 

[Viet]

No it won't. Japan is not facing an inflation problem, they are only facing a weakness in the Yen. Like I've already said, they are the world's largest net creditor nation and they have massive foreign reserves. If the BoJ is serious in defending their currency, no one can fight them because foreigners don't own as much Japanese assets to sell compared to their firepower. And with the Yen already depreciated >20% YTD, foreigners now own even lesser Japanese assets to sell.

We talking about exchange rate. The dollar/yen is determined by demand, not by inflation. Otherwise yen value must go up by zero or negative inflation rate, which is not the case.

 

[Mista]

The dollar/yen is determined by demand, not by inflation. Otherwise yen value must go up by zero inflation rate, which is not the case.

Determined by demand and supply*.

Japan can prop up the demand of Yen through selling of external assets, and supply (foreigners selling Japanese assets) won't be able to match it because external liabilities are lesser than external assets.