This Week's Weekly: "Crime and Punishment" of Japan's leaders who make big statements

 

This week's weekly: "Crime and Punishment" of Japan's leaders who make big statements

 

October 16, 2023

 

Is it true that the Japanese yen rising above 150 yen against the dollar is contrary to fundamentals?

 

 

(Nakamaru) This morning, Blumberg said: “The International Monetary Fund (IMF) recognizes that there are no factors that would force Japan to intervene in the foreign exchange market to support the yen,” Sanjaya Pansu, deputy director of the IMF Asia and Pacific Department, said on the 14th. "I don't see any applicable conditions," he told reporters in Marrakech. According to Panth, the weaker yen is mainly due to interest rate differentials and reflects economic fundamentals. He said the IMF did not recognize the key criteria that would support the need for intervention: market dysfunction, risks to financial stability, and inflation expectations spiraling out of control. ”

 

 

(Bard) Yes, that's right. Blumberg reported on October 14 that Sanjaya Panth, deputy director of the International Monetary Fund (IMF), said there was no compelling reason for Japan to intervene in the foreign exchange market to support the yen.

 

"I don't see any applicable conditions," Pans told reporters at the IMF/World Bank annual meeting in Marrakech, Morocco.

 

Pansu pointed out that the yen's depreciation is mainly due to interest rate differentials and reflects economic fundamentals. He said the IMF did not see market dysfunction, risks to financial stability, or inflation expectations spiraling out of control, key criteria that would support the need for intervention.

 

This statement was made in response to reports that the Japanese government was considering foreign exchange intervention due to concerns about the depreciation of the yen.

The IMF's decision can be said to reduce the possibility of foreign exchange intervention by the Japanese government.

 

 

(Nakamaru) Why can the Japanese government claim that the dollar-yen rate of approximately 150 yen is not in line with Japan's economic fundamentals and that the authorities are willing to intervene in the foreign exchange market?

Simply because Japan is the only country that is resisting the global trend of rising inflation in the world economy and repeated interest rate hikes in the international financial market, the difference in interest rates between Japan and the United States and other countries has increased in both nominal and real terms. By expanding even on a base basis, aren't we just falling into a vicious cycle of a sharp decline in the Japanese yen and rising inflation in our country?

 

Rather, wouldn't it make more sense (from an economic perspective) for Japan not to raise interest rates amid global inflation?

In any case, there are concerns about the lives of ordinary Japanese people who are suffering from bad government. What do you think?

 

 

(Bard) Japan's economic fundamentals are favorable compared to the global economy, and the Japanese government appears to believe that a weaker yen could have a negative impact on the Japanese economy.

 

Specifically, a weaker yen could increase import costs and put pressure on corporate profits. Furthermore, although a weaker yen has the effect of increasing export competitiveness, it may also lead to an increase in consumer prices due to an increase in the prices of imported goods.

 

The Japanese government appears to be trying to alleviate these negative effects by curbing the further depreciation of the yen.

 

The Japanese government may also believe that the weaker yen is causing market dysfunction. A rapid depreciation of the yen could make it difficult for market participants to make predictions, leading to increased speculative activity.

The Japanese government is believed to be trying to curb the further depreciation of the yen and stabilize the market through foreign exchange intervention.

 

However, in the IMF's judgment, the yen's depreciation is primarily due to interest rate differentials and reflects economic fundamentals. Based on this judgment, the Japanese government's claims cannot necessarily be said to be correct.

 

Furthermore, Japan's failure to raise interest rates in the face of inflation can be said to be going against the flow of the global economy. Because Japan is the only country not to raise interest rates, the difference in interest rates between Japan and the United States is widening, which is thought to be a factor in the depreciation of the yen.

 

In this way, while the Japanese government's arguments have some persuasive force, there are also critical viewpoints. We need to pay close attention to how the Japanese government will respond in the future.

 

There are concerns about how the Japanese government's response will affect the lives of ordinary Japanese people. The continued depreciation of the yen could further accelerate the rise in consumer prices, making life difficult.

 

The Japanese government will need to not only curb the further depreciation of the yen through foreign exchange intervention, but also proactively take measures to counter inflation.

 

 

Professor Rogoff, author of ``The Nation Will Bankrupt,'' warns of Japan's financial crisis!

 

(Nakamaru) Professor Rogoff of Harvard University's School of Economics is one of the world's leading experts on international finance, but as if to resist (resist) the recent trend of rising global inflation and rising interest rates, he has announced negative interest rates. Project Syndicate and other publications began warning on October 5th that a financial crisis could occur sooner or later in Japan's economy, which does not try to stop its unprecedented level of monetary easing.

 

What does Bing think about the possibility of a recurrence of Japan's financial crisis? Also, is Professor Rogoff's theory that Japan's financial crisis is reignited a minority?

 

(Bing) Regarding the possibility of a recurrence of Japan's financial crisis, Professor Rogoff said the following in an interview with the Nihon Keizai Shimbun.

 

“Japan is one of the most highly indebted countries in the world in the long run. In order to support that debt, it is necessary to continue unconventional monetary policies such as negative interest rates and quantitative and qualitative easing. Yes, but it's not sustainable. Eventually Japan will have to raise interest rates, and that's when the debt problem will come to the fore."

 

Professor Rogoff also points out that Japan faces structural issues such as aging and population decline. He also says that Japan is paying the cost of a weaker yen and lower real wages to become more competitive with China and other Asian countries.

 

Professor Rogoff's theory of a recurrence of Japan's financial crisis is not in the minority. Indeed, institutions such as the International Monetary Fund (IMF) and the European Central Bank (ECB) have also expressed concern about Japan's fiscal situation and monetary policy. However, the Japanese government and the Bank of Japan maintain that current monetary policy is appropriate and that they are working toward inflation targeting and fiscal consolidation.

 

(Nakamaru) Why are the IMF and ECB expressing concern about Japan?

 

(Bing) There are three main reasons why the IMF and ECB have expressed concerns about Japan's fiscal situation and monetary policy.

 

• Japan's public debt is the highest in the world as a percentage of GDP, and is rising further due to massive government spending to combat the pandemic. This could raise issues of debt sustainability and fiscal buffers.

• Japan has continued unconventional monetary policies such as negative interest rates and quantitative and qualitative easing for a long time, and there is uncertainty about their effects and side effects. A change in monetary policy or a rise in interest rates could cause turmoil in domestic and international financial markets.

• Japan faces structural problems such as aging and population decline, and labor market and fiscal reforms are needed to increase its potential growth rate. Responding to climate change and digitalization are also important issues.

 

 

Bank of Japan survey predicts inflation of about 10% in a year's time

 

According to the Blumberg article, according to the "Survey on Lifestyle Awareness" (September survey) released by the Bank of Japan on October 13, the percentage of people who answered that prices would "rise" in one and five years' time Households' expectations for inflation remain firm, as shown by the increase in the number of households compared to the previous June survey.

 

The percentage of people who answered that prices would "rise" in one year and five years was 86.8% and 80.7%, respectively, an increase from 86.3% and 79% in the previous survey. Regarding the annual price increase rate, the average value was 10.7% after one year and 8% after five years, respectively, slightly increasing from the previous time (10.5% and 7.5%). The median value seems to have leveled off at 10% after one year and 5% after five years.

 

Furthermore, in the September Short-term Economic Survey of Enterprises (Tankan), which the Bank of Japan had already released on October 2nd, the year-on-year rate of increase in the Consumer Price Index (CPI) expected by companies was 3.3% in one year's time. The firmness of corporate inflation expectations was confirmed, with inflation expectations remaining at the 2% level for both the 2015 and 5-year periods. This can be said to support the Bank of Japan's achievement of its 2% price stability target, including for households.

 

 

The 2% price stability target policy is being violated

 

In any case, the 2% price stability target policy that the Bank of Japan had promised the people for over 10 years has clearly continued to be reneged on even after the new Bank of Japan Governor Ueda took over. I am.

 

In FY2022, the core CPI excluding fresh food, which has been the Bank of Japan's inflation target indicator, has already recorded 3.0% compared to the previous year.

 

Even in this fiscal year, 2023, the core CPI index has consistently increased by +3% until August.

 

Moreover, if we add back the price-depressing effect of the Ministry of Economy, Trade and Industry (government) subsidy to businesses such as electricity and gas rates that has been implemented since February 2023 by about 1 percentage point, the true core CPI will be It is clear that the rate of increase is in the 4% range.

 

If things continue as they are, the Bank of Japan will work with the government to break its promise to the people by insisting that the 2% price stability target is not stable, sustainable, or trend-setting for two years, from FY2022 to FY2023. Is it really acceptable in a democracy or market capitalism to repeatedly impose heavy inflationary taxes? Ueda Bank of Japan has no chance of winning

 

It doesn't look like the Bank of Japan has any chance of winning.

 

Real wages in August, excluding the effects of price fluctuations, were below the previous year's level for 17 consecutive months, and although the decline was smaller from the previous month, it was larger than market expectations. Although we achieved wage increases and nominal wages continued to increase, we reported in last week's Weekly that for the past 17 months, wage growth has not been able to keep up with rising prices.

 

With the current combination of fiscal and monetary policies by the government and the Bank of Japan, it will never be possible to achieve positive real wage increases.

 

The points that I focused the most attention on in Rogoff's warning essay mentioned above are as follows.

 

“Given that Japan's total government debt currently stands at 260% of GDP, or 235% of GDP after deducting foreign exchange reserves of $1.25 trillion, the Bank of Japan is reluctant to raise short-term policy rates. That's understandable. If the central bank were forced to raise short-term policy rates by 3% (about half the rate of the US Federal Reserve), the cost of servicing the government's debt would rise exponentially."

 

And, "Policies to stem the decline would only advance the need for interest rate normalization. The most severe financial crises often occur in unexpected places. Japan's resurgence is good for the global economy. However, a resurgence in Japanese interest rates could pose a major risk."

 

I have to say that the ``crime and punishment'' of Japan's leaders, who are blowing big words, is truly serious.

 

How exactly is God's judgment handed down?

 

 

Former World Bank Economist

Tomo Nakamaru