Monday, January 21, 2013

On Japan's Abe's Attempt at Reflation, Telegraph's Evans-Pritchard Refuses to Connect the Dots

I'm not sure if he refuses to connect the dots or he does not see the dots, but either way he does not come to a logical conclusion like Kyle Bass did when he said about money printing and unprecedented accumulation of debt worldwide, " know how this ends right? This ends through war".

Ambrose Evans-Pritchard compares the current Japan under the Abe administration to the one existed right before the start of World War II, and laments that it was just too bad that then-Finance Minister Korekiyo Takahashi couldn't finish off his highly inflationary monetary policy to peaceful conclusion (in Evans-Pritchard's mind, I think) of tightening, because Takahashi was assassinated by the imperial army officers incensed that their budget was being cut under Takahashi's tightening.

Of course the ostensible cause for these army officers was not the budget cut but "restoration of imperial power and direct rule by the emperor to rid Japan of many ills".

That was the failed February-26 coup, in 1936. The Second Sino-Japanese War (though Japanese and Chinese don't use the word "war" but call it an "incident") started the next year in 1937, which ended in 1945 with the unconditional surrender by Japan to the Allied forces.

Evans-Pritchard doesn't go there.

From UK's Telegraph's article by Ambrose Evans-Pritchard (1/20/2013; emphasis is mine), with my comments in square brakets in blue italic:

Revolutionary Japan is suddenly the centre of world affairs

[Evans-Pritchard starts off his article promisingly enough (that he may have finally got it), mentioning the military tension between Japan and China over the Senkaku Islands.]

We all watch with disbelief as China and Japan rattle sabres over the Senkaku/Diaoyu islands, so like the seemingly minor events that drew Europe's alliance systems into conflict from 1911 onwards.

Both graduated to fighter jets last week: Japan sending in F-15s; China deploying J-10s, and mobilising the East China Sea fleet for live ammo drills.

China's purpose is clear. It is testing the US security umbrella, and Washington's willingness to risk conflict to back Asian allies. There is a minority in Beijing who think America is a busted flush, a mistake made repeatedly by different powers over the last hundred years.

The possibility that the world's three largest economies could come to blows -- as feared by US defense secretary Leon Panetta -- is a sobering thought.

[So, where does he go from here? Evans-Pritchard then draws an interesting parallel to Japan in 1930s, under Finance Minister Korekiyo Takahashi, who inflated, devalued, doing everything that would make Keynes proud - it made Ben Bernanke proud.]

...Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.

This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who "brilliantly rescued" his country from the Great Depression.

Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran "Keynesian" budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.

He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity.

He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan's textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow -- and there lies the rub, you might say.

Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation.

[So, after talking about increasing military tension between Japan and China, then about centrally-planned highly inflationary policy ended up in a military coup, albeit failed, which triggered a war with China a year later which was practically the start of World War II, where does Evans-Pritchard go from there? That this government-led reflation and further debt accumulation will lead once again to a large-scale war? No. He goes on to praise the scheme, and demands more.]

...Mr Abe has lost patience. This time the Bank of Japan (BoJ) will do what it is told, the first of the big central banks to be stripped of its independence, and probably not the last. As Milton Friedman said -- quoting Clemenceau -- "monetary policy is far too important to be left to central bankers".

Mr Abe said the next governor to take office in April must be a soulmate "with the will and ability to pull the nation out of deflation".

Leaks suggest that the BoJ will set an inflation target of 2pc this week, to be achieved by unlimited bond purchases.

The liquidity effects of this by the world's top external creditor could be large enough to leak into everything from New Zealand bonds, Brazilian equities, and Chelsea property, a sort of `carry trade' on steroids.

...When a large country with its own currency reaches its fiscal limit, growth ends not with a bang but a whimper of declining vitality," he said. Mr Posen advises Japan to rely on monetary policy alone to right the ship.

I broadly agree, though this time the kindling wood of fiscal spending may be what is needed to ignite damp money. If Mr Abe means what he says, this is not just more of the same.

[And he repeats the mantra of Keynesians - deflation is bad.]

Needless to say, printing money has its perils too. The risk is that Japan could escape gentle but stable deflation -- the Devil it knows -- only to see a panic flight from bonds that overwhelms the Bank of Japan.

[Evans-Pritchard fully knows what risks Abe's policy entails. Somehow, he stops by presenting only the economic and monetary consequences.]

...Banks hold JGBs worth 900pc of their Tier 1 capital. Their portfolios would be decimated if long rates punched above 2pc. Japan might then face a banking disaster as well. These are the hard choices that Mr Abe has to make.

Nor can he continue to weaken the yen without irking Washington and jeopardising the alliance on which he depends. His rhetoric alone has already triggered a 12pc fall in the yen against the dollar, and a 20pc fall against the euro. He seems to be eyeing a dollar rate near Y100.

... Huge issues are at play here. The world's trade system is fragile. The wasting disease behind the Long Slump is a record high savings rate of 24pc of global GDP, and too little demand to go around. Everybody wants a weaker a currency. They can't all have it.

Japan's great experiment cuts both ways for the rest of us: the reflation blitz helps lift the global economy out of the doldrums: but yen manipulation snatches market share, incites protectionism, and takes us into the brave new world of "actively managed exchange rates", as Sir Mervyn King put it last month.

We will find out soon enough which is the more powerful effect.

We will find out soon enough. By bullets and missiles flying over our heads, if Kyle Bass is right.

Mr. Korekiyo Takahashi, who was also the 7th governor of Bank of Japan, was a one tough cookie. At the age of 13, he was ordered by his lord to study abroad. However, the American merchant living in Yokohama who was supposed to arrange for his study stole the money and his belongings, and he was duped by the parents of this merchant into signing a contract as indentured servant and was sold to a family in Oakland, California. He was then sold several more times, forced to work in vineyards and herding cattle, until he somehow managed to get back to Japan a year later.

Shinzo "pork-cutlet-curry-rice" Abe does not have a sturdy man who has grown into adult. Like himself, all he has is boys simply grown bigger with more wrinkles. We will found soon enough indeed what these boys will do.


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