Ambrose Evans-Pritchard: Japan prepares to print money for the whole world


By Ambrose Evans-Pritchard
The Telegraph, London
Monday, December 17, 2012

The profound shift in economic strategy by the world's top creditor nation could prove a powerful tonic for the global economy, with stimulus leaking into bourses and bond markets -- a variant of the "carry trade" earlier this decade but potentially on a larger scale.

"We think this could be the beginning of a fresh reflation cycle for the global system, combining with the US recovery to mark a turning point in the crisis," said Simon Derrick from BNY Mellon.

"It is tremendously important for global growth, and markets are starting to take note," said Lars Christensen from Danske Bank.

Mr Abe's Liberal Democratic Party (LDP) won a landslide victory on Sunday, securing a two-thirds "super-majority" in the Diet with allies that can override senate vetoes.

Armed with a crushing mandate, Mr Abe said he would "set a policy accord" with the Bank of Japan for a mandatory inflation target of 2pc, backed by "unlimited" monetary stimulus.

... Dispatch continues below ...


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"It's very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision," he said.

The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan's governing law if it refuses to comply. "An all-out attack on deflation is on its way," said Jesper Koll, Japanese equity chief at JP Morgan.

Mr Abe plans to empower an economic council to "spearhead" a shift in fiscal and monetary strategy, eviscerating the central bank’s independence.

The council is to set a 3 percent growth target for nominal GDP, embracing a theory pushed by a small band of "market monetarists" around the world. "This is a big deal. There has been no nominal GDP growth in Japan for 15 years," said Mr Christensen.

The yen depreciated sharply to Y84.48 against the dollar on Monday, the weakest in nearly two years, as traders bet that the LDP will this time bend the Bank of Japan to its will.

The yen has weakened 5 percent over the past month, helping to lift the Nikkei index of stocks by 10 percent. The Tokyo bourse is still down 75 percent since peaking in 1989. Land prices have fallen by two-thirds.

The LDP plans what some have dubbed a "currency warfare fund" to weaken the yen with a blitz of foreign bond purchases, copying Switzerland's success in capping the franc.

The effect of Switzerland's unlimited bond purchases has been to finance most of the eurozone's budget deficits for the last year with printed money. If Japan tries to do this -- with a vastly bigger economy -- it would amount a blast of quantitative easing for the world.

Japan's curse as creditor nation with $3 trillion of net assets abroad is that safe-haven flows cause the yen to strengthen during a crisis, tightening policy in a "pro-cyclical" fashion when least wanted, this time due to the Fukushima nuclear disaster and Europe's sovereign debt saga.

The effect of the strong yen has been to asphyxiate Japan's exporters, leading to a "hollowing out" of manfacturing as companies switch plant abroad. Fuel imports to replace the closure of nuclear plants amount to an added import shock.

The combined effect has caused the country's historic trade surplus to evaporate altogether, not helped in recent months by a partial boycott of Japanese goods in China over the Diayou-Senkaku island dispute. The burden of the strong yen has finally become too great to bear.

Opinion is split over the wisdom of ultra-loose money. Although Japan is trapped in chronic deflation, it is a stable -- almost comfortable -- equilibrium. The "real" value of savings is rising, in stark contrast to the West.

Stephen Jen from SLJ Macro Partners said the Bank of Japan is right to fret that a return to inflation could set off a spike in debt costs and a flight from Japanese government bonds (JGBs).

"Any meaningful selloff in the JGBs could trigger a serious problem in Japan’s banking system. The holdings of JGBs by Japanese banks account for 900 percent of their Tier I capital," he said. Better the devil you know.

Professor Richard Werner from Southampton University, author of "Princes of the Yen," said the Bank of Japan is to blame for the country's failure to shake off its financial crisis in the early 1990s and for two lost decades of perma-slump that have followed. He accused the bank of dragging its feet at every stage, forcing governments to rely on huge fiscal deficits instead.

This tight-money/loose fiscal mix has pushed public debt to 240 percent of GDP. The country would have been better served if the bank had stopped the rot immediately by flooding the money supply to kickstart lending. "It has taken 20 years and the Fed's Ben Bernanke to show them how to do it."

"Mr Abe has the right intentions but the Bank of Japan knows how to put up a fight. After watching the glacial moves in Japan for over 20 years -- often in the wrong direction -- I want to see the details before being sure that something really big is happening," he said.

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