economics

Japan Finance Minister Hirohisa Fujii is resigning. He checked into a hospital late last year facing high blood pressure and exhaustion. Well, if I had 5 yen every time some Japanese official checked into a hospital to avoid something unpleasant, I'd be ... okay, he's an old guy and has been working really hard, so who knows. Anyway, here is what Bloomberg says. I'll try to look at some other articles later today:

From Bloomberg, Hatoyama to Accept Fujii’s Resignation, Kyodo Says:

• Hatoyama tried to stop him, but Fujii insisted.
• "Investors would examine any successor’s credentials on fiscal matters after Fujii championed avoiding an increase in new bond sales." [That's interesting. But the budget is bad as it is. Would it have been worse without Fujii?]
• Fujii was good because he was veteran and had connections and so and so forth; he was perceived as safe. [So he was good because he was perceived as a person who wouldn't rock the boat? What if the boat needed rocking?]
• "Financial markets indicated little immediate concern over doubts about Fujii’s future ..." [In other words, so far this isn't really big news.]
• "While the DPJ-led coalition’s majority in the Diet means Hatoyama’s 2010 budget is likely to be little affected by a Fujii departure, it could complicate any effort to compile an additional fiscal stimulus ... " [Anything that keeps the government from spending money is good.]
• "In the course of compiling the 2010 budget, Fujii urged ministers to restrain outlays after their requests amounted to an unprecedented 95 trillion yen. He said the government must keep its promise of holding bond sales around 44 trillion yen to contain the world’s largest public debt burden -- even after Hatoyama indicated he wouldn’t strictly adhere to the cap should more spending be necessary." [The budget is ¥92.299 trillion, so okay, he saved almost ¥3 trillion yen, I guess. Or perhaps this is just one big smoke and mirrors game like most politics.]
• Without Fuji fiscal discipline might relax. [Okay, we'll see. The government needs more fiscal discipline not less.]
• "Some analysts said Fujii wouldn’t necessarily be missed by investors after he indicated he supported a stronger yen, only to later say that the government is prepared to step into the currency market to stem its gains. As finance minister, Fujii is responsible for overseeing Japan’s exchange-rate policy." [I didn't realize this was so serious a gaffé.]

Here's another prediction on Japan, this time from Ambrose Evans-Pritchard:

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star. Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

This is an interesting analysis to say the least. I think there's some truth here, but only an element of it. Japan's private debt is not nearly as serious as its public debt, is it? And Japan's external debt is relatively low compared to other developed countries, right? Also, so far, Japanese savers have been fairly placid and undemanding, I would guess. I suppose I need to look into this. 

What are recent trends in Japanese savings habits? Are they away from standard savings accounts and CDs (like at the post office) and into more competitive types of investments? If so, that might lend some credence to the above. It would take a mass movement away from standards savings to really rile the Japanese government bond market, wouldn't it? Is that a possibility in Japan? It's hard to imagine hyperinflation in Japan so long as government debt is mostly owed domestically. I can certainly see the potential for mild inflation. (Basically the government cheating it's own investors slowly over time by printing money, something that happens even during deflation, when the deflation is less than what it would have been.* )

Again, though with the population aging, the trend will have to go from savings towards consumption as an older population retires and begins to draw upon their pensions. So how will Japan deal with its growing debt then?

*Actually, if inflation is money creation, Japan has been facing more inflation over recent years than deflation. Even if prices are going down, they'd go down more without money creation. It used to be that inflation was associated with money creation not increases in prices.

From Seeking Alpha: Japanese Government Bond Market at Risk of Collapse?

... a number of hedge funds are starting to place bets on the collapse of the Japanese government bond market. Kyle Bass, head of Hayman Advisors in Dallas, TX said it “is going to happen; it’s just a question of when."

I note here that I don't think the bond market will collapse because (as the article notes) most bonds are held by Japanese (through institutions like the post office). However, considering that the population is aging and the savings rate has been decreasing, there's obviously going to be future problems. Moreover in a country known to indulge various booms, it's not impossible to imagine a sudden anti-bond boom. So while I don't think it will happen, I wouldn't eliminate the possibility. I would read the whole article.

What did the Asahi have to say about this years fiscal budget? Let's take a look:

In a radical departure from the traditional budget process led by bureaucrats, the spending plan for fiscal 2010 was drawn up on the basis of political leadership, with ministers and senior vice ministers playing the central role.

Hm. Okay. If you say so.

A government task force set up to eliminate wasteful expenditures scoured budget requests from ministries and agencies for savings, thereby reducing public works outlays by nearly 20 percent from the previous year.

This sounds impressive, but just how much money exactly was saved? In the US there was a lot of brouhaha over the issue of politicians earmarking funds for various pork projects. However, while this is a problem, the amount of money spent this way is insignificant compared to mandatory spending (on social services) and national defense. So I wonder if it's not the same in Japan. How much money is really being saved here? Something to look into. After this, the Asahi editorial just sort of goes all over the place, here are the main points they seem to be making:

1. Hatoyama made a lot of promises and tried to live up to them, but Ozawa -- concerned about fiscal discipline -- stopped him.
2. The new child care program is good as it will probably encourage people to have more children.
3. Hatoyama was right not to reduce the gasoline tax as we need a greener planet.
4. Hatoyama's budget is underfunded and relying on unsustainable funding methods.
5. Hatoyama should create a budget foundation that will last 50 or 100 years.
6. The child allowance will be expensive into the future, so sales tax should be raised right away.
7. Environmental taxes are a good idea and should be implemented as soon as possible.
8. Hatoyama should restore vitality to the nation's public finances.

My response to these would be:

1. I don't care. Never trust a politician. Always seek to limit their power.
2. The child care program is bogus, unjust, and expensive.
3. The gasoline tax is unjust. It was supposed to be temporary many many year ago. It indirectly subsidizes trains and buses corporations, who no doubt lobby for it. Internationally oppose US engagement in the Middle East.
4. Yes, that's right. It's a disaster for the future.
5. That's just silly.
6. The government gets too much money already, don't raise sales tax, cut spending. Moreover, who would raise sales tax during bad economic times? Still though, there are worse things than encouraging savings via a sales tax.
7. Global warming is probably exaggerted, but even if it's on the way, it won't happen overnight. The free market will respond better to it than the government can. Also, it's unlikely the government of Japan can stop global warming, if it is a reality, by making a few feel good taxes (in favor of the corporations and organizations that lobby best).
8. He should reduce spending where ever and how ever he can. But instead, he is increasing the total amount of spending.

Richard Koo is a name that seems to be popping up here and there when people discuss what to do about America's current continued economic problems, likewise with Japan. Richard Koo has an excellent resumé, at least it would seem that way. He has worked as an economist for the Federal Reserve Bank of New York and he is now the chief economist of Nomura Research Institute. I don't know how popular he is in Japan, but a quick look at Amazon shows he has some books in Japanese that seem to be selling relatively well. Recently I read an interview with him in Barron's online, and he said some things to me that just don't add up. In fact, they sound like ideas that would do harm to both the American and the Japanese economy if they were followed. In this post, I want to point out what it is that bothers me.

First, from the interview, he gives his standard line, which is this:

The Bank of Japan brought the rates down to zero, did massive quantitative easing, with no result whatsoever. This happens because of a balance-sheet recession. ... This happens because the private-sector companies are no longer maximizing profits; they are minimizing debt.

Now I take it that one is supposed to read this and have a eureka moment. Oh, now I see.

But basically what is being stated here makes no sense. Presumably if we are discussing a free market, then there are competitors. If one company were not to focus on profit, another company would. Eventually sales would shift to that company, and the other company would go under. Moreover, if a company is over its head in debt, then shouldn't it be going bankrupt in the first place?

While I'm not yet willing to accept Mr. Koo's theory, I will say this, to the extent that is *might* be true, it must be true because there has already been tampering with the economy. Namely, the government must be extending aid either directly or indirectly to the relevant company in order to keep it from going under. Naturally, in this case, they are not concerned with profit, but in cleaning up their balance sheets. There's a certain logic here, and I can easily imagine a situation where it makes less sense to worry about profit, and more sense to clean up one's balance sheet. This certainly would make sense to me if I were running a bank in the US right now, and various US governmental institutions were all that were keeping me afloat. The last thing I would want to do would be to take on new risks.

So my main point is that to the extent Mr. Koo might be right, his point needs to be turned on its head, namely the government shouldn't be propping up bad companies, instead it should be letting them fail.

However, here is what Mr. Koo comes around to saying:

In an ordinary, garden-variety recession, as we learned in school, the private sector uses money more efficiently, and a budget deficit is considered bad. But when the private sector is completely absent and paying down debt at zero interest rates, and the government doesn't borrow this money, what happens? Even a child would understand the whole thing could collapse. The only way the government can turn this economy around is to do the opposite of the private sector -- borrow the money the private sector saved and spend it, which means fiscal stimulus. That's what saved Japan from entering a Great Depression.

There's a lot packed into this statement that would nearly take a book to discuss. There have been several contrarian views of the depression, many of them showing that government interference actually probably prolonged the depression. Here are a couple of examples, Murray N. Rothbard's America's Great Depression [pdf] and Robert Murphy's The Politically Incorrect Guide to the Great Depression and the New Deal.

Basically, the government never uses money as productively as the private sector does. It's easy to understand why. First, central planning is no match for the powers of the free market. A central planner simply cannot be made aware of the individual problems affecting each individual, while a market through alterations in price can actually fairly quickly respond to changes. This is why there were constant shortages of products in the old Soviet economy, but rarely at your local super market. Second, the government does not attempt to use money efficiently, because there is no incentive to use money efficiently. In fact, there is more incentive to use money to obtain political ends than there is to use it wisely.

So I find what Mr. Koo is recommending extraordinary. First the government interferes by keeping companies propped up rather than letting them go under. (And here I presume he's talking mostly about banks), then what happens next is that these companies stop focusing on making a profit, and so Mr. Koo suggests that the government should thereby sop up any left over savings and then spend that money. I can barely explain how horrible this all sounds to me.

Of course, in America, this is sort of a bad joke, because most of the savings is from China and Japan these days (at least it is these countries that are buying US bonds). Moreover, when you look at the horrible way the government has used most of its money in Japan, one is further depressed. A lot of this misuse of money is detailed in Dogs and Demons for anyone who wants to understand this.

I can only hope that the right people are not listening to Richard Koo.

I want to review the Japan Times editorial on DPJ administration's first budge.

The editorial notes:

Harsh financial conditions have prevented the administration from keeping all the promises that the DPJ made during its campaign last summer. But the administration has succeeded, to some extent, in realizing the party's slogan of "shifting weight to people from concrete" and its aim of providing more funds for households, rather than for industry-linked organizations and large-scale public works projects.

Be this as it may, the promises were made in full knowledge of what was happening to the economy. So using the economy an excuse to break a promise doesn't exactly smack of sincerity.

The budget includes the monthly child allowance of ¥13,000 per child (no income cap on household eligibility) ... The child allowance is significant because it embodies the idea that society as a whole must support child-rearing.

This is a ludicrous and scary proposition. Yet the Japan Times just kind of blithely embraces it. Government are instituted or at least should be instituted to protect the rights of individuals. Governments should not be instituted to create a society that is viewed as good according to some centralized expert bureaucrat. Doing so puts the importance of government above that of the individual.

Note it's one thing to charitably give through free choice to some organization that helps parents in need. It's another to have a policy that redistributes income from one group of people (those who prefer not to have children) and gives it to another (those who prefer to have children.) The idea, of course, is to alter the behavior of the individual. In this case, mildly coerce people into having more children. That is not something the government should be doing.

Fund shortages have forced the administration to give up its campaign promise of reducing the rates of gasoline and other road-related taxes.

No, that's not true. When it's convenient, the government will churn out figures to show how losing money will actually generate more money. Free roads, more travel, more spending, a bigger GDP, more tax revenue. (I don't believe that, but when it's convenient politicians will argue this way.) The real problem here was the train companies got angry and exercised their clout in Nagatacho. (At least that's my guess.)

While the fiscal 2010 budget's general account reached the largest-ever at ¥92.299 trillion, and general expenditures to pay for policy measures amounted to ¥53.454 trillion, also an all-time high, the economic downturn is expected to reduce tax revenues to ¥37.39 trillion — down 18.9 percent from the initial fiscal 2009 budget and the lowest level since fiscal 1984. The government will have to issue bonds of ¥44.30 trillion, an increase of 33.1 percent and an all-time high. On an initial budget basis, new bond issuance will exceed tax revenues for the first time in the postwar years.

This is staggering. It's heart wrenching. Japan will surely suffer if it continues to follow such profligate policies. They are borrowing more money than they will raise in revenues this year! According to some, Japan's ratio of debt to GDP is the highest in the world. It's now higher than Zimbawe! The next highest OECD country with such a large ratio is Italy with about half as much.

How is Japan able to do this without going totally bankrupt? I'm not entirely sure and want to investigate this, but I take it that first of all Japan's total external debt (the amount of private and public debt owed to other countries) is actually relatively low. Also, the horrific postal savings (which the DPJ are not going to reform now) is a means whereby people's savings gets transfered effortlessly and painlessly into government debt.

My guess is this. Japanese citizens are not at all vigilant (at least not enough of them). While Japan has accumulated a lot of wealth, this wealth is held by individuals. They put it in savings institutions (like the post office), and these institutions then lend it to the government. What no one is paying enough attention to is that the government can't pay this money back ever, so a lot of wealth has been and will continue to be squandered. It's really criminal, if you think about it. The DPJ are not only continuing this policy, but putting on all thrusters.

Bloated deficit spending and bond issuance without discipline could cause long-term interest rates to rise and have a devastating impact on people's lives. The combined long-term outstanding debt of the central and local governments is likely to reach ¥862 trillion (some ¥6.75 million per Japanese) at the end of fiscal 2010, or 1.81 times Japan's gross domestic product.

Right. Whatever savings an individual has in Japan, they should subtract ¥6.75 million yen from it right now.

On the other hand, there is concern that the budget, despite its huge size, may not adequately stimulate the economy.

This is, of course, silly. This is the exact argument that caused the problem in the first place. Let prices come down, goods are less expensive, and people will buy more. Each individual will be wealthier, the economy will naturally recover. For almost two decades Japan has been trying to stimulate the economy, with no success, yet here is the Japan Times saying we need more of the same failed policy!

How is one to respond to this?

What are some of Japan's newspapers saying about this year's budget?

First the Yomiuri:

The shift in power brought about by the last general election has caused a sea change in the process of putting together a government budget. However, the budget for the next fiscal year devised by the Democratic Party of Japan-led administration indicates that the government is unchanged in relying on the issuance of government bonds and nontax revenue for resources to underwrite its budget. In fact, the next budget shows the government has become even more dependent on borrowing as a means of securing budgetary resources ... The current economic situation is so precarious it must be rectified by an underpinning fiscal stimulus. Given this, issuing new government bonds will be unavoidable. It is easy to see, however, that the government's chronic reliance on debt cannot be left unaddressed any longer if one stops to look at the government's fiscal crisis from a medium- and long-term standpoint. ... Despite this chronic revenue shortage, Hatoyama refused to budge from his plans to implement policies spelled out in the DPJ manifesto. This greatly delayed the compilation of fiscal 2010 tax reform plans ... Worryingly, huge sums have been allocated to policies apparently designed to impress voters ahead of next year's House of Councillors election, such as an income compensation plan for individual farmers.

Okay, so they feel the budge is too high and will cause long term problems, right. They also feel that DPJ is sticking too close to their manifesto, and so spending too much money. I suppose that's right, but if you have a manifesto, I guess you are supposed to follow it. There's actually some let down here among some people. Also they are saying there is actually some of pork in the budget, hm, that's interesting. Tomorrow I'll look at what the Japan Times said.

According to Bloomberg:

The yen is poised to replace the dollar as the top funding currency for investments in cities from Sydney to Sao Paulo after borrowing from Japan became almost as cheap as U.S. loans for the first time in four months.

Rates on 90-day yen loans between banks have fallen the most in 13 years amid record deflation that prompted the Bank of Japan to start a $113 billion lending program last week. By easing demand for private-sector loans, the move helped shrink the gap between U.S. and Japanese London interbank offered rates by two-thirds over the past three months to 0.024 percentage point, the least since Aug. 26, data compiled by Bloomberg show.

In the near term this is really important because it means the yen will weaken against the dollar. Bloomberg states that many analysts are saying the yen could be back up to 100 yen to the dollar by the end of next year, 2010. However, the most important thing to note is that this analysis is based on the idea that the American economy will be recovering. That too me seems to be a bit far fetched. Or even if America's economy does manage to recover over next year, it will still be in for big trouble in the future.

Without expressing any agreement or disagreement, I'll simply note here that the Nikkei suggests the yen could lose value this week, potentially hitting the 93 yen to the dollar level. They suggest this is because there are now some positive indicators that the world economy is doing better, and so investors will be seeking more risk this week. This does not reflect long term outlooks for the yen to dollar rate.

 The dollar is falling so fast I would guess it is beyond reckless to try and keep up. Nevertheless, according to the WSJ (via GATA):

The U.S. dollar continued to tumble against most Asian currencies Thursday, prompting a wave of foreign-exchange intervention by central banks in South Korea, Taiwan, the Philippines, and Thailand seeking to limit damage to their export industries.

Also include Hong Kong and Indonesia in the list. Perhaps now that Japan is part of the anti-dollar cabal they're in no rush to intervene.