Japan's Monetary Base Jumps from $71 to $94 Trillion
But because the value of the dollar against the yen decreased from 120 to 111 yen in the last three months, the actual monetary base in October was $93.5 trillion, which means that in just three months, the increase in the monetary base of Japan's central bank was $7.9 trillion, almost as much as the entire annual productivity of the USA. [NOTE: the yen is right now at 107/dollar, so this 10.4 quadrillion yen is now $97 trillion].
To put this into perspective, the chronic media coverage of Sumitomo Bank's $3.5 billion "loss", a sum 0.015% of this $22.8 trillion GAIN in Japan's monetary base, is like stomping on ants while you're being stomped on by elephants. The gain is 6,514 times greater than this alleged "loss" at Sumitomo (a bank which itself almost doubled in assets to more than one trillion dollars at 120 yen to the dollar and $1.5 trillion at 80 yen to the dollar).
PAUL KRUGMAN: Japan heads for the edge
The world's second-biggest economy is facing a needless slump because of the passivity of its monetary authorities
I have long been pessimistic about Japan's near-term prospects, believing that its economy requires a more aggressive and less conventional stimulus plan than the government has so far been willing to contemplate.
Until now, however, the situation seemed depressing but not alarming, with the main risk being stagnation rather than collapse. Surely, I imagined, so wealthy and sophisticated a nation will always be able and willing to do whatever is necessary to avoid disaster.
But in the past month or so the near-passivity of Japanese authorities in the face of slumping bond prices and a sky-high yen has made me wonder. It is starting to look entirely possible that the managers of the world's second-largest economy will simply stand by, paralyzed by an odd mixture of pride and intellectual confusion, as their nation goes into a deflationary tailspin.
Exactly why the yen has risen by 25 per cent since early October, and the yield on Japanese government bonds risen so sharply, can be disputed. Surely neither reflects a sudden surge of optimism about the future of the Japanese economy. The most likely explanation is that special events - the collapse of Russia, the announcement that some public agencies will not buy as many bonds as expected - started a sort of cascade of margin calls, in which highly indebted holders of both yen and dollar bonds were forced to sell their assets, driving prices down and thereby leading to further margin calls. If true, this story suggests that markets are a lot less liquid and efficient than economists like to believe.
But whatever the reasons for these market moves, their effect is clear: they impose new deflationary pressures on an economy that was already looking dangerously weak. And that means that the case for a radically expansionary monetary policy, always strong, has now become over- whelming.
Eight or nine months ago, when I and others were arguing that Japan should engage in aggressive monetary expansion and even deliberately target a positive rate of inflation, the main objections were that such a policy would be ineffective (although in that case what harm in trying?) and that it would risk an excessive depreciation of the yen. Bet ter, went the conventional view, to rely on fiscal expansion plus bank reform to get the economy moving.
But look at the situation now. If nothing else, the rise in bond yields, the awesome size of prospective deficits, and the realisation by rating agencies that Japan's debt already exceeds its gross domestic product mean that fiscal expansion has reached a limit. If the current push is not enough - and it is not - there will not be another.
The claim that bank recapitalisation will unleash massive new lending has always been a questionable proposition, and looks no more convincing now. Anyway, the contractionary effect of the strong yen and higher interest rates will probably swamp the effects of the government's stimulus plan; and falling bond and dollar prices will wipe out bank capital even as the government tries to put more in. Surely at this point the risks of printing more money are far outweighed by the risks of not doing so.
What is truly puzzling is why Japan's financial authorities have not regarded these market events as a call to action. Why did the Bank of Japan wait until the yen had risen to Y110 to the dollar before intervening, and then do so only on a small scale - rather than buying dollars aggressively months ago? Why hasn't it bought enough Japanese government bonds to keep yields from soaring?
Don't ask where the money would come from: it could and should simply be created. There would be no reason at all to "sterilise" these operations by selling other assets. On the contrary, the situation offers a perfect opportunity to effect a salutary expansion of the monetary base.
One can only guess why none of this is happening. Is Japan's Ministry of Finance so committed to promoting the yen's role as an international currency that it does not care if that currency is backed by an imploding real economy? Does it still fear, after eight years of slump, that expanding the monetary base will reinflate the asset market bubble? Has it developed some novel economic theory under which a strong yen and high interest rates are expansionary?
Whatever the reasons for inaction, the story is starting to look like a tragedy. A great economy, which does not deserve or need to be in a slump at all, is heading for the edge of the cliff - and its drivers refuse to turn the wheel.
The author is professor of economics at the Massachusetts Institute of Technology
Turning Reflationary? Japan might join the U.S.
apan might pull out of deflation and join the U.S. in a multi-year reflation process. The key test will be whether the Ministry of Finance and Bank of Japan keep the yen from strengthening against the dollar as the U.S. reflates and Japans equities strengthen.
The yen has been relatively stable against the dollar in 2003, and the Ministry of Finance has been more adamant that it will prevent yen strength (though its still not clear whether the Bank of Japan will conduct unsterilized currency intervention). In contrast, the last time you could be optimistic about Japans outlook (from April to July 2002), Japan let the yen strengthen suddenly from 133 yen per dollar to 116, undermining the recovery.
But new Bank of Japan (BOJ) governor Fukui has shown more flexibility than his predecessor, taking small steps in the right direction by suggesting that the BOJ will buy a range of longer-term Japanese assets. The BOJs tolerance of rising yields and falling prices on Japanese government bonds is also encouraging.
To be sure, the BOJ will be Japans biggest financial loser in the event of a reflation, since it is a giant holder of Japanese government bonds. Former governor Hayami made clear that he didnt want to see the BOJ lose money, the yen lose value, the Japanese consumer suffer negative real interest rates, or the consumer pay higher prices in effect, he made it clear that he preferred deflation to the alternatives.
Fukui hasnt expressed these views.
Japans monetary base is already huge ($10,000 per adult Japanese, quadruple the U.S.). [NOTE: this is not correct. $93 trillion divided by 100 million adults = $930,000, so he's off by 93 TIMES] If Japans risk-aversion subsides, perhaps due to U.S. leadership, Japan is liquid enough for growth to start. The yen price of gold is above its 10-year moving average. This indicates that Japan no longer has a scarcity of yen. Instead, the country's deflation reflects a scarcity of risk-taking confidence, a factor that the U.S. reflation might turn around.
More, Japans consumer price inflation rate has turned less negative, though part of this is due to higher energy prices. In May 2003 (the latest reading), consumer prices were down 0.2 percent from a year earlier. In the spring of 2002, consumer prices were falling at a 1.5 percent annual rate.
Make no mistake about it, Japan is still a rich country. It has the worlds biggest net international investment position, the biggest international reserves, and one of the highest per capita incomes. Despite a large government debt, Japan's debt-service ratio is low due to low interest rates. While Japan has depleted its value in recent years, it still has enough assets and educated population to create reasonably strong growth once deflation subsides.
For the record, Japan has had false reflation starts in the past. But the key difference this time around is that global monetary conditions now point to reflation. This is a sharp contrast with the global monetary conditions of the 1990s, when tight money outside Japan caused disinflation and deflation. In effect, Japans monetary stimulus is now swimming with the current, rather than against it. It should be strong enough to end Japans deflation as long as the BOJ doesnt actively derail the upturn.
Japan has a choice. As Japan attracts capital, it can let prices rise or it can let the yen rise. In May and June of 2002, it let the yen rise, causing the deflation to continue. This time it seems more strongly resolved to preventing yen strength, offering the possibility of reflation.
In the past, Japan needed to change its monetary policy in order to break its deflation spiral. But now there is another possibility U.S. reflation could be powerful enough to convince Japans private sector that deflation can end.