Still Raining in Japan

Marc To Market's picture


The Abe government is lucky.  The previous government wasted the little political capital it had on pushing through the controversial retail sales tax hike that won't be even implemented until 2014 at the earliest.  


The LDP ran its campaign as the some of the safe haven investor behavior was unwound.  At the same time, the weakness in the euro area economy and the spat with China (as the DPJ tried to maneuver around the fait accompli delivered by the nationalistic governor of Tokyo) weighed on Japan's exports. Nearly every one attributes the yen's decline to the rhetoric of Abe and other senior officials.  This serves to bolster Abe's image as a decisively and effective prime minister.  


Abenomics is simply the past LDP neo-Keynesian policies on steroids.  Monetary policy is to become significantly more accommodative.   Fiscal policy will become more stimulative.  There is not much discussion of much needed structural reform or a bold vision of Japan's in the 21st century.  



If there is a new tactic, it may be trial balloons of buying foreign bonds.  Yet, this seems to be a non-starter.  It is too close to intervention and would incur the wrath of its main trading partners.  Although it would be a positive carry for Japan, it is not clear that it would succeed in driving the yen lower.  Buying foreign bonds would its reserves, which are already too large at nearly $1.2 trillion. 


Indeed, quite the opposite should be considered.  Nearly five years ago, the Financial Times published an op-ed piece of mine that proposed the Japanese government redistribute a quarter of its reserves to the Japanese people (here:  The essence of the argument has not changed.  The focus should be on consumption not investment.  The return on private investment remains lows, suggests too much rather than too little.  The public works, which the Abe government, like earlier LDP governments, is emphasizing reinforces the rent-seeking sector over the profit-seeking sector and is prone to corruption and waste.   


Two elements have changed and they make the proposal even more stimulative.  First, reserves are more than 20% higher, which means the distribution could be larger,  Second, the propensity to consumer has, according to the Ministry of Internal Affairs an Communication has risen a by nearly 1 percentage point to 73.4%.  This means a greater amount of the distribution would be spent rather than saved.  It could boost the world's third largest economy by 2-3%.  


I had the opportunity to discuss the issue with senior BOJ officials.  Though they were interested, they expressed two reservation.  The first is that it would be the Ministry of Finance decision not the central bank's.   This is not an insurmountable obstacle.  Over the past couple of years the Ministry of Finance has been more creative in its use of reserves.  For example, has offered a facility to help businesses make direct investment abroad.  


The other objection is that the reserves are not like US, BOE or ECB reserves that are owned outright.  Japan's reserves, like China's have been largely purchased by the issuance of short-term bills.  This means that reserves are mostly associated with a liability.  The return of the reserves, then, would leave an uncovered liability.  


This too does not seem insurmountable, if the political will is there and, perhaps, with the Abe government seemingly more pro-growth than the DPJ governments, it is worth discussing again.  Moreover, stimulus impact would increase different tax revenues and reduce counter-cyclical spending (a record number of Japanese households receive government transfer payments) and help pay for the new debt.   


The accumulation of reserves are meant to cushion the country in case of adverse circumstances.  Japan remains in dire straits.  Not utilizing the reserves now is not opening the umbrella in your hand when you are in a down pour.  

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falak pema's picture

This has to take the cake in Krugmanian razmattaz : Paul Krugman On Japan - Business Insider

bottom line : What Japan may be in the process of doing -- by having the Bank of Japan take orders from the Ministry of Finance and the new Prime Minister -- is solve this problem, by having the bank commit to being irresponsible.


Print, print and damned be he who cries : hold enuff! 

suteibu's picture

And how long would this stimulus last?  Isn't it simply another short-term boost in the hope that the economy will finally take off again?  Seems that all of the past two decades that has been the plan, all based on hope of growing out of the mistakes of the past. Can't anyone think any further past their own book?  Japan has too many systemic problems, mostly caused by the system, itself, to keep pushing these hare-brained schemes.  Haven't 20 years of failed policy been enough?

Ozawa had it right.  The reserves should have been used to pay 3/11 recovery and reduce the debt instead of pushing yet more debt onto the future - shrinking - generations.

Marc To Market's picture

Q:  How does Japan give money to the citizens ?

A:  They would not print money.  They would covert some of their reserves, large Treasuries into yen.   Rather than grow reserves, they would drawm them down.  The exact opposite of buying foreign bonds.  

Q:  Exactly how do they give the money to the people?

A:  The precise details could be quite boring.  It could be a check sent to every household.  It could be a coupon that can be used to buy goods/services for a fixed period of time.  It could work like a simply tax break, boosting disposable income.  Unlike some problems,the real obstacle is not in the details, but with the lack of sufficient will.  

mind_imminst's picture

How did they buy/get all of those "large treasuries"?

mind_imminst's picture

I could have written this article much quicker. "Print money and give it to the people". Done. What could possibly go wrong?

The Heart's picture

So, one always wonders what it will take for the materialists to see the light and actually DO something to change the tragicomedy matrix of evil distracting and pursuing this agenda to kill off every human on the planet?

Eh, who cares right?

Here is a total channel change for you all to ponder.

This man has some VERY INTERESTING things to share here in his videos. What is noteworthy is the outbreak of this norovirus that no doubt came from any number of sorted nasty chem/bio labs that were flooded during Katrina. And of course what may be more prevalent is the deliberate poisoning of that entire region with corexit and the horrendous amounts of crude that have killed off most of the biology in the gulf and up the Atlantic, and over now to the western shores of Europe.

Oh, back to this. Will there be a Superbowl, or is this a horse wash to be horsewashed?

V214 Super Bowl insurance cancelled.:

Corexit is killing the Gulf:

Peter Pan's picture

I am always intrigued how paper that does not attach to any specific asset is considered a reserve.

Perhaps it is time for nations which hold these reserves to use them in wiping off the debt of debtors.

mightycluck's picture

They have a serious demographic problem, much like where the US is heading. I found this site comparing US and Japan's employmnt trends (although I have never heard of this university). EWWWW!!!!!

Orly's picture

"Japan's reserves, like China's have been largely purchased by the issuance of short-term bills.  This means that reserves are mostly associated with a liability.  The return of the reserves, then, would leave an uncovered liability."

What would be the mechanism behind the Japanese "returning" the reserves to the people? Would it be to simply write a check to every citizen?

Also, in order to cover the liability on the balance sheet, wouldn't it be as simple as "printing" more yen to pay for it, which would certainly target the onset of inflation as Abe desires, as well as weaken the yen considerably?

The printing of new money, along with the onset of consumption rather than savings sounds like it would work, especially if some of the spending were going to buy the Nikkei because the "wealth effect" would then bolster more consumption.

What do you see as the downside?  Wouldn't this essentially be digging the same hole all over again, a la "Cool Hand Luke"?

Thanks for the thought-provoking articles.