yen watch

In 2008 in America there were 34,017 fatalities as a result of motor vehicle accident. This was a good number because in 2005 it had been 39,252. In fact from over the decade from 1999 to 2008 according to the DOT in America there have been 377,292 deaths that can be attributed to motor vehicle accidents. You can find the statistics here. Guess what, that's almost as many Americans died in World War II.

Now who is responsible for all these deaths? For the most part I agree with Walter Block that this is death by government. The government manages the roads and like most things managed by the government, they don't do a particularly good job. But discussing this would go beyond what I wanted to say here, so I'll have to simply refer you to Mr. Block's article, Deaths by Government: Another Missing Chapter.

Now here is some recent news:

The US House of Representatives has announced an investigation into Toyota’s faulty accelerator pedals and other problems that may have caused 19 deaths over the past decade and triggered a global recall of nearly eight million vehicles.

Okay, so 19 deaths out of nearly 400,000, maybe. I mean, yeah, if a car company is making a car that will cause someone to die, that's really wrong ... but I mean how perfect can you make a car, anyway? We're talking about how many millions of cars being driven under who knows what conditions ... and we're saying that no other car manufacture has any similar problems? There aren't currently any problems with any other company's cars that might be attributed to about one or two deaths every year? Really?

Just for another comparison, remember the air bag fiasco. In order to protect lives, the US federal government mandated that air bags be installed in the passenger seats of every car. What happened, here's some thing from an older news story (the bold is mine):

Air bags are killing fewer children than they did five years ago, government data show, and safety experts give most of the credit to parents who are keeping children 12 years old and under out of the front seat. In 1996, passenger-side air bags were in about 22 million vehicles and they killed 35 children, according to the National Safety Council, a private nonprofit organization. Air bag use was growing, the council said, and so were fears about more deaths. ''We had an impending crisis,'' said Chuck Hurley, a council spokesman. Every month more than a million cars with passenger-side air bags were being put on the road and the number of child deaths were projected to double annually, Mr. Hurley said, ''until we were killing several hundred children a year with a federally mandated safety device.'' But in 2000, even though the number of cars equipped with passenger-side air bags had tripled, the number of children killed by them fell to about 18.

So in the year 2000 the federal government by mandating air bags in the passenger seat killed 18 children, and Toyota *might* be responsible for 19 deaths over a decade, while meanwhile people are being slaughtered in by the tens of thousands every year. Nero fiddled while Rome burned.

Am I beginning to make any sense?

One headline I saw this morning was this, Obama Administration Says It Is 'Not Finished With Toyota'. The article notes:

The Obama administration toughened its stance toward Toyota Motor Corp. on Tuesday, saying it is still reviewing possible safety defects in the company's vehicles and weighing other actions. "We're not finished with Toyota and are continuing to review possible defects and monitor the implementation of the recalls," Transportation Secretary Ray LaHood said in a statement. Another DOT official said the agency is considering a civil penalty against the Japanese auto maker.

I mean, is this a vendetta or something?

Let's review some recent history via Wikipedia:

On December 19, George W. Bush announced that he had approved the bailout plan, which would give loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions, "allowing the U.S. auto industry to collapse is not a responsible course of action." Bush provided $13.4 billion now, with another $4 billion available in February 2009. Funds would be made available from the Emergency Economic Stabilization Act of 2008. General Motors will get $9.4 billion and Chrysler $4 billion.

and

On the 18 February 2009, General Motors and Chrysler, again approached the US government in regards to obtaining a second bridging loan, of $21.6 billion (£15.2 billion). $16.6 billion of this would go to General Motors, while Chrysler would take $5 billion. General Motors requested the loan inline with agreements they would shed 47,000 jobs, close five plants and axe 12 car models. Chrysler agreed to cut 3,000 jobs, cut one shift from production and axe three car models.

and

On 30 April 2009, Chrysler filed for Chapter 11 bankrutpcy after talks with lenders broke down. On the 14th May 2009 Chrysler announced it was to close 25% of its US dealerships as part of its resturcturing process.

and

On the 1st June 2009, General Motors filed for Chapter 11 bankruptcy after failing to successfully negotiate deals with bond holders. On the day the application was made, General Motors was largely a nationalized institution (the US government owning 60% and the Canadian 12.5%), the remaining private stakes mainly being owned by employees.

Are things becoming a little clearer?

Another headline I saw this morning reads, Toyota's Pain, Detroit's Gain. The article notes:

U.S. auto sales were generally higher in January as the economic recovery continued to take hold, but a strong month for Ford Motor and General Motors came at least partially at the expense of a rocky performance from Toyota, which was plagued by a recall and suspended sales on several top models that resulted.

Now are things beginning to clear up?

I'll note that in 2008, total contributions from the auto industry to various politicians amounted to $2,655,645. I supposed that's quite paltry compared compared to what the financial sector donates, but you get what you pay for, bailouts for the automotive industry have not been nearly as generous as what the financial sector has been getting.

I'll note one more headline, U.S.: Toyota footdragged on recall and is 'a little safety deaf', the article states:

Toyota was "a little safety deaf" and had to be prodded into recalling vehicles over its sticky pedal issues, Transportation Secretary Ray LaHood told the Associated Press. It wasn't until a Transportation official took a trip to Japan to talk to Toyota officials directly that the automaker acted, stopping sales of eight models and recalling 2.3 million cars.

Let's bad mouth the competition, shall we? Hold your breath, because it ain't about safety, it's all just politics.

What can Toyota do but bow their heads and apologize and express remorse, again and again and again.

Finally, I'll have to note that what goes around comes around.

Robert Madsen had an editorial in the WSJ recently, and I want to comment on some of it. His article was titled, Playing Politics With Japan's Money Supply. Note the title already tells you something, that Mr. Madsen views the money supply as something that can be played with. He's exactly right though, fiat currency can be played with, and with disastrous results. Now let's look at the article:

The Japanese central bank has a long record of failure in its primary duty of maintaining price stability, which most economists define as an annual increase in the consumer price index of 1% to 2%. Since gaining its statutory independence from the Ministry of Finance in 1998, the BOJ has never attained that goal.

This is just a bizarre statement really. Does anyone at all believe that the Bank of Japan is actually capable of this? First of all the exchange rate is a huge factor in terms of the price of goods, especially for Japan. Now the exchange rate depends a lot on the policy of other central banks. If they have loose, irresponsible policies, the value of the yen will increase, will it not? This means that there will then be a general lowering of the consumer price index as foreign imported items become cheaper, right? And if that happens, the Bank of Japan is suppose to keep up? Anyway, obviously prices are are incredibly complicated, so the idea of the BOJ just being able to easily supply some random inflation figure is quite an amazing claim.

You know, actually, Japan's price index now is slightly below what it was in 1993. In the interim, it has gone up as much as 4% at times, before going back down. If we actually were to take price stability to mean -- gasp -- a stable price, Japan's price index has been pretty stable. I'm not saying that it should be, but as measured by the general index, it really has been.

The economy languished in deflation from 1999 until 2006, when the global economic bubble pushed up the cost of oil, metals and other imported goods.

The Bank of Japan did increase the monetary base during this time. In March 1999 the monetary base was 585,970 (100 million yen) and by January 2006 it was 1,141,316 (100 million yen). You can get the statistic here. In absolute terms that's nearly a doubling of the monetary base in seven years. But according to Mr. Madsen the BOJ did not inflate enough? I'm truly confused. I'll note that a big problem here was lending. Banks did not want to lend out money.

I'm not sure, but I take it that a lot of these banks were ready to go under. Instead of letting that happen the BOJ deposited with them high powered money (-- okay it was more complicated than that but just to keep things simple --) and that money just stayed on their balance sheets while they slowly cleaned up their bad debts. That is, they used the money only so they could keep their balance sheets looking good, while they slowly cleaned up their real balance sheets. I don't agree with what the BOJ did, but clearly there was massive quantitate easing. Does Mr. Madsen suggest they should have done more?

There are multiple reasons for the BOJ's poor performance. The main political factor is the central bank's determination to assert its autonomy by resisting pressure for easy money.

Hm. But there surly was easy money in the period Mr. Madsen was most concerned with, 1999 to 2006. How else can one explain the numbers?

The foremost economic factor is the inadequate demand that has bedeviled Japan for nearly 20 years, impairing the efficacy of such conventional monetary mechanisms as interest rates and reserve ratios. So when the banking system approached collapse a decade ago, the BOJ was compelled to pioneer what is now called "quantitative easing"—large-scale purchases of commercial paper, government and corporate bonds, equities and other securities—to improve credit conditions and safeguard the financial sector.

Well, I mean how much *stuff* do Japanese need, and exactly *what* stuff do they need? I'm sure there was a binge of buying stuff during the bubble economy, but did that help anyone? It used to be that when a foreign English teacher came to Japan he could pick up really good items for free on the days during the month when Japanese put large unburnable items out to be picked up for disposal. Japanese were buying so much new stuff like TVs and what have you, they'd actually throw out good stuff. It was nuts. Now people are being more conscientious. And that's bad?

Who gets to determine how much people should be consuming, and what they should be buying? What if the problem is that the market isn't providing the stuff that Japanese want to buy, and won't buy it so long as the government props up bad banks, which prop up bad companies, which make stuff no one really needs and doesn't necessarily want? In any event, for better or worse, BOJ did safeguard the financial sector, so what's Mr. Madsen's beef exactly? That there should have been inflation of 1% or 2% so that people would buy more stuff? Is he serious?

But the central bank did not go very far in this initial round of unconventional stimulus. Once the specter of a banking crisis had lifted in late 2002, the BOJ began tightening even though consumer prices were still decreasing.

Did they? Here's a graph comparing US policy with Japan (click it to make it bigger):

They didn't really abandon the policy till 2006, and I would guess by then the banks no longer needed their high powered money deposits, because a lot of them had cleaned up their balance sheets. I guess. In any event, again, what does Mr. Madsen want?

Bank spokesmen contended that the bank had done all it could to influence price levels and that the answer was for the fiscal authorities to stimulate demand more assertively. This created friction with the government, which felt that the BOJ could do more. The government was right. To paraphrase Milton Friedman, deflation is always and everywhere a monetary phenomenon. Putting the argument in the extreme, the BOJ could use its printing presses to issue an infinite supply of yen and then buy up the country's entire stock of commercial paper, government and corporate bonds, equities, real-estate investment trusts, actual real estate and—if it wanted—even commodities like rice and pork bellies. At some point the monetization of the economy would inevitably cause the inflation rate to rise into the target range.

There's simply no way the BOJ would ever be able to fine tune that, and what a disaster it would be for savers. Mr. Madsen wants inflation no matter what, so he thinks the BOJ should just keep buying stuff until they get it? How in the world can they actually know just how much to buy? And do we really need inflation?

Mr. Madsen goes on to say a recovery is immanent in the US and Great Britain. How about rampant inflation after a year or two along with continued unemployment? We'll see. I hope the BOJ doesn't take Mr. Madsen so serious.

Kevin Duffy at the mises.org blog comments briefly on the JAL bailout.

According to Bloomberg, Japan Consumer Confidence Slumps to a Six-Month Low:

Japan’s household sentiment fell to a six-month low in December, indicating the need for measures to stimulate consumer spending and sustain a recovery from the country’s worst postwar recession.

The confidence index dropped to 37.6 last month from 39.5 in November, the Cabinet Office said today in Tokyo. The government lowered its assessment of the report, describing sentiment as “weak.”

Finance Minister Naoto Kan today urged lawmakers to pass a proposed 7.4 trillion yen ($82 billion) extra budget for the current fiscal year, saying it will contribute 0.3 percentage point to economic growth. Stimulus efforts implemented by the previous administration have begun to fade, signaling it is “far too early” to see a sustained recovery in consumer spending, economist Azusa Kato says.

Why is it the government should know better how much people should be spending? Why will the government going into debt make things better?

Bloomberg has an interesting article about the carry trade, Yen Carry Trade’s Appeal Shows Japan Is Losing Mojo. I want to examine it as carefully as possible. I'm not an expert, so mostly I just want to ask the pertinent questions.

Currency strategists are more in sync than any time since the depths of the financial crisis, increasing incentives to bet against the yen after the carry trade lost money in December for the first time in 10 months.

Who are these currency strategists? Are they in Japan or America? Are they the same guys who lost massive amounts of money on Wall Street while raking in massive bonuses? Are they the same fellows who told us the US economy was on solid footing before the big crisis? I mean, I would just like to know.

Forecasts for the euro, yen and Swiss franc from 61 Bloomberg survey contributors are within 9 cents of the mean on average, down from 11 cents a year ago. They haven’t been so unified since Lehman Brothers Holdings Inc.’s 2008 bankruptcy.

Is this tongue in cheek? Right before the Lehman Brothers Holdings fallout everything was supposed to be peachy and fine, then it went kaplooy. And the article blatantly admits that just before the crisis all the experts were basically in agreement, and thus they were all wrong. Now they are basically in agreement again, heaven forbid, and this time they are supposed to be right? What?

The growing consensus signals that foreign-exchange swings will decline, luring investors to sell currencies from countries with lower interest rates to buy higher-yielding ones.

I do *not* believe in efficient markets. I presume the market is in a continuous process of readjustment. Kind of like the moon always falling towards the earth but always missing it, the market is always moving towards efficiency and never obtaining it. Okay, but even if the market is never perfectly efficient, to at least some extent differences in interest rate should be reflected in the values of the currency already (along with anticipation of changes). This is what has always confused me about the carry trade. Clearly you can only make money if you are more right than everyone else. So if there is a consensus, then I presume everyone must be wrong, because there shouldn't be a consensus. Does that make sense? A consensus to me implies the moon has started standing still and isn't moving anymore. Well, that can't be.

Japan’s currency, which fell 6.6 percent since its 14-year high of 84.83 per dollar on Nov. 27, may be the biggest loser as Prime Minister Yukio Hatoyama fights deflation and a recession.

I would never want to underestimate the willingness of any politician in any country to devalue their own currency. So I do think the yen will weaken. However, will it weaken against the dollar?

Declining volatility and the rising U.S. currency means “people are thinking about alternatives to the dollar as a funding vehicle, and the yen is the obvious candidate,” said Richard Franulovich, a strategist in New York at Westpac Banking Corp., Australia’s second biggest bank. “Not only do they already have low rates, the authorities are talking about a new quantitative-easing program. There’s a big fiscal expansion playing out under the new government, and the currency had a big rally last year.”

This is mind boggling. Okay, so the consensus is that the American dollar is pretty stable, and that Japanese authorities will devalue the yen. So borrowing in yen is attractive because it will be easy to pay it back when it is worth less (if you use it to buy dollars.) Okay. Wow. Sounds great. But wait, if that's the consensus, then should Japanese banks lend to people knowing that they will lose money on the deal? Why shouldn't the banks just invest in the foreign currencies directly? Or perhaps not lend the money out at all ... I don't know, this just doesn't make any sense to me. It's as if the banks were just there to give money away ... then again, maybe they are, at least if you work on Wall Street.

Funding the carry trade with the greenback lost money in December for the first time since February as the U.S. currency gained 4.8 percent against the euro amid growing confidence in the U.S. economy and expectations that the Federal Reserve will raise borrowing costs by June.

The Fed is going to raise rates? The US economy is recovering? It doesn't seem like this to me. Unemployment is climbing, the number of people who will default on mortgage payments will surly continue to go up. What planet do these people live on. I'm totally lost here.

Carry-trade returns will benefit this year from the yen dropping 7.3 percent to 98 per dollar from 90.84 today, according to the median forecasts in Bloomberg surveys. The franc is predicted to weaken 4.8 percent to 1.08 per dollar.

Okay so let's sum up all these predictions:

• The American economy will soon be in recovery mode.
• The Federal Reserve will begin to raise interest rates.
• Investors one and all know this, so are already beginning to borrow money in yen and invest in dollars.
• By the end of the year it should cost about 98 yen to buy one dollar and nearly everyone agrees about this.

Okay. Sounds good. Let's wait and see what happens.

Machinery orders were forecasted to rise slightly for the month of November, they didn't. Instead they went down a little over 11%. You can see the information here if you really want to: TABLE-Japan Nov core machinery orders.

They sky is falling. The sky is falling.

Okay, actually, I'm not really sure what this means so let's look at a couple of articles.

First the Times, Japanese machinery orders hit 23-year low:

• Machinery orders are one of the "principal engine rooms of the giant manufacturing economy"
• They "have crumpled at a “shocking” pace, plunging to levels last seen in the late 1980s."
• They are currently at a 23-year record low.
• "The machinery order numbers are often taken as a guide to future capital spending plans — the slump in orders could imply that Japanese companies are to some extent giving-up on the prospects for a domestic-demand led recovery and are now focusing on building capacity overseas to tap growth in more vigorous economies."

Okay, so according to the Times, the sky is falling. The problem with their article is they mix in a lot of information about deflation. I don't want to argue over definitions, but very mild general price reduction is what one would expect in a free capitalist society. (Something which doesn't exist today in Japan or anywhere in the developed world.)

On deflation the Times notes the following:

“The export-led economic recovery is struggling to spread over to domestic private demand,” one senior Cabinet Office official said. Domestic demand in Japan has been hurt by the “bedding-in” of deflationary expectations.

The main problem with decreasing demand overseas is Japan's economy will shrink. However, if you are a retiring saver, who cares? If the yen is strengthening, you get to buy lots of cheap overseas goods. That would be the vast majority of Japanese, retiring people with lots of savings. But wait, what's the problem? The problem is the government has borrowed so much money (and to a much less limited extent its corporate cronies as well) that they can't pay it back unless the economy grows or they devalue the yen or both. Sorry if you wanted an easy retirement that's just not in the cards.

I mean, I'm no expert, but that is certainly the way things *look* to me. The size of the economy isn't important. Deflation is good, when you are a saver.

Moving on, let's look and see what the Wall Street Journal says about the machinery order decrease in November, Japan Machinery Orders Hit Record Low:

• "Japan's core machinery orders, an important indicator of trends in corporate capital spending, fell to their lowest level on record in November, underscoring the continued sluggishness of the country's domestic demand." [People should want more according to macroeconomists and the government.]
• "Core orders dropped 11.3% from October to 625.3 billion yen ($6.84 billion), the cabinet office said. That was in stark contrast to the 1.2% mean increase forecast in a survey by Dow Jones Newswires and the Nikkei, and followed a 4.5% month-to-month decrease in October."
• "Behind the sharp drop were big declines in orders from both manufacturers, who placed 18.2% fewer orders, and from nonmanufacturers, whose total decreased 10.6%. The Cabinet Office said demand from the telecommunications and financial industries was especially weak."
• "Machinery orders figures tend to be volatile, so a sharp downward swing in monthly data doesn't automatically mean a further weakening in capital investment is coming."
• They yen was strong in November and there has been constant cost cutting and so on says one analyist, Toshihiro Nagahama at Dai-ichi Life Research Institute.

Hm. Okay.

Well it looks like things are getting back to normal. Japan is running a big surplus:

Japan current account surplus soars 77pc as world demand boosts exports

JAPAN'S current account surplus grew for the fourth straight month in November, the Ministry of Finance said today, rising by nearly 77 per cent in November.

Demand from Asia and elsewhere overseas continued to support Japan's export-led economic recovery, the government figures showed.

Analysts said the current account, the broadest measure of Japan's trade with the rest of the world, would likely keep expanding with recovering demand for Japanese goods worldwide, though yen strength could continue to drag on exports and overseas income.

The current account surplus rose 76.9 per cent in November to Y1.103 trillion ($12.9 billion) before seasonal adjustment, compared to November 2008, according to the MOF.

Meanwhile, America's trade deficit is going back up ...

Yup. Same old, same old.

Ambrose Evans-Pritchard hasn't given up his claim. He continues to argue Japan will lead the world into a global fiasco ... or something like that. Let me review some of his points, A global fiasco is brewing in Japan:

I have felt rather lonely after suggesting in my New Year Predictions that Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.

Well, he shouldn't, there are certainly others predicting this. He continues:

My intended point — overly condensed  — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

The central bank has to buy up debt that the government has to issue. Note that nearly all government debt in Japan is held by a very conservative older generation who put their money in savings accounts at the post office. So what is it that will suddenly lead these people to panic? What are they going to do if they do panic? Take their paper money out and put it under the futon? Buy gold?

I mean, Mr. Evans-Pritchard could be right, but as someone who has lived in Japan for 15 years and interacted with these people, and discussed money matters with them, it's very, very hard for me to see this happening. I do expect a crisis, only I expect it to happen in slow motion over several years (as the population ages and begins retiring en masse), and that's presuming there isn't some type of reform first. The massive government borrowing is definitely -- how should I say it -- evil. It's no good. But will there suddenly be a panic with everyone over 60 rushing to the post office to withdrawal their money ... nobody told me there'd be days like these ...

Bloomberg reports, Moody’s Warns on Japan’s Fiscal Discipline Under Kan:

The replacement of Japan’s finance minister four months into the government’s term increases concern about the commitment to contain the world’s largest public debt burden, Moody’s Investors Service said.

“Japan’s fiscal strategy unknowns deepen” with the appointment of Naoto Kan last week, Thomas Byrne, senior vice president of Moody’s in Singapore, wrote in a note yesterday ...

“The revolving door for leadership at the Ministry of Finance does not engender confidence that Japan will put together a credible fiscal strategy to reduce deficits and stabilize the massive government debt overhang in the medium term,” Byrne said.

Some facts listed in the article:

• "Moody’s rates Japan’s debt at Aa2, the third-highest investment grade, with a stable outlook."
• "Local residents held 94 percent of Japanese government bonds as of June, Finance Ministry data show."
• "Yields on the benchmark 10-year note fell 1 basis point to 1.35 percent in Tokyo yesterday. They reached a two-month high of 1.365 percent on Jan. 8, the day after Kan was appointed."

According to a Morgan Stanely strategist quoted in the article, Finance Minister Naoto Kan is not a "fiscal expansionist." Hm. Okay.