Japan’s Big Stimulus to Fight Deflation Risk

http://online.wsj.com/articles/bank-of-japan-announces-massive-stimulus-move-1414773082

Is an interesting article…

Bank of Japan Announces Massive Stimulus Move
In Stunning Reversal, Japan’s Central Bank and Government Pension Fund Vow to Pump Trillions of Yen into Assets

By JACOB M. SCHLESINGER, ELEANOR WARNOCK and TAKASHI NAKAMICHI
Updated Oct. 31, 2014 7:52 p.m. ET
75 COMMENTS
TOKYO—Japan’s central bank and its main government pension fund said Friday they would pump trillions more yen into the country’s sputtering economy, taking a risky new stimulus tack that jolted global markets.

Faced with fresh evidence that Prime Minister Shinzo Abe ’s campaign to end the country’s long bout with deflation was faltering, the two institutions steered Japanese economic policy into the uncharted territory of extreme stimulus that appeared to go even beyond the often radical measures taken by other advanced economies in recent years.

A long article, but well worth the read. Also has some nice graphs. One showing asset purchases for US, Eu, and Japan as percent of GDP. Japan shooting up, USA rising, EU with a hump, but rolling down now.

Looks to me like The Japanese Model of how to stimulate an economy teetering on deflation hasn’t worked, but they are going to shove the money throttle to the wall. One way or the other we’ll get an answer. Hopefully before the USA and EU hit that same wall…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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23 Responses to Japan’s Big Stimulus to Fight Deflation Risk

  1. BobN says:

    i’m not an expert on Japanese economic issues, but I thought that initially they spent huge amounts of money trying to restart there economy and it failed leaving them with a huge debt. This retry sounds like desperation setting in!

  2. M Simon says:

    BobN,

    Real estate was over valued and they tried to prevent that bubble from collapsing to far too fast.

    In the mean time Japanese electronics companies are faltering. And they have no new economic engine to rely on.

    They are even more opposed to cannabinoid medicine than the US is.

  3. E.M.Smith says:

    @Bob N:

    As M. Simon described. Huge bubble in Real Estate (and also a giant bubble in their stock market). It started ‘going south’ and their Central Bank tried to stop it. Result was mild deflation, then stagnation, then some stagflation. Essentially they had the same thing we are having now, but earlier. (And not quite as spectacular… as we invented crazy “Financial Instruments” so ours could get even larger AND we had legal mandates to do stupid lending via the CRA Community Reinvestment Act… but their stock market was more nutty high. Dropped by something like 75% or so from about 44,000 to near 11,000.)

    So since darned near every company in Japan was whacked in the stock price and held a lot of cross holdings and large pension plans, either their whole economy was going to die and nobody gets a pension; or Drastic Action… so the JCB started the ‘anti deflation’ push of the money river.

    Now, a couple of decades later, they are going to open the flood gates and see if “This time for sure!”…

    They, too, have the “China stealing their lunch” problem, but in some ways worse. As an export economy, they depended on global sales of expensive things. What China didn’t take, technological advance and a strong Yen destroyed. So Honda and some others set up shop in the USA to make cars (since their Yen can, and did, float up relative to the $US as trade deficits got large in the ’80s). Now the ubiquitous Cell Phone Camera is doing a number on the (prior) lucrative camera sales business. Digital cameras have destroyed their film business ( remember Konica and Fuji film anyone? I used to spend $100s on that a year. Now zip.) Minolta bought Konica just in time to have that shift sink them. Now Sony bought the Minolta camera biz… and is still trying to make money at it. And what do you think MP3 players (iPods, iPhones, etc.) are doing to sales of “Walkman” products?

    So Japan is still trying to find a niche that will bring a new golden age…

    Oh, and the EU and USA went funky economically so sales of most everything are not well…

    IFF they manage to turn the Yen into nice cheap TP, they might be able to compete with China. But the domestic political cost of that would be brutal.

    @M. Simon:

    We already have the cannabinoid discussion in two other threads, can we leave it out of this one?

    Besides, I’ve done some reading on it and found a reason why I care enough to make a posting out of it (other plants and herbal medicine in general interest me, along with diet things and those are all related). So sometime in the next day or three you will get your own thread to use ;-)

  4. p.g.sharrow says:

    Japan is quite literally dieing of old age. Back in the early 1990s Japan was going to financially going to take over the world. A friend with his wife went to visit her relations in Japan and they were thinking of investments there. I caution him that this was a bubble that was about to burst. It did, while they were there! Japan has tried to keep things shored up and have endured 20 years of stagnation. Even though this method was known to fail and it has failed we now see the western banking and political system insists on following the same failed economic policies. Save the investment bankers from collapse and cause the rest of the economy to slowly collapse. Humans reduce breeding during hard times. Much of the western world is dieing of old age as their economies are being crushed by accumulated debt! 20 years ago the western world forgave large amounts of 3rd world debt to save them from being crushed. Who will save us? The 3rd world is stealing our lunch and is demanding we pay them for the favor through Ecoloon global warming reparations! Like all Bureaucrats, those in Japan have decided that if their policy has failed then they must redouble their effort because they must have been right the first time and just didn’t try hard enough! pg

  5. Ian W says:

    It is the unfortunate outcome of allowing bankers, financiers and accountants to run an economy. These groups measure everything in money, but money is not wealth it is just a representation of wealth. A country should be run by people who create wealth, engineers, farmers and small businessmen (not large businessmen as they all fall into the make money not wealth mode). The metrics for the success of a country should be based on wealth (goods) creation and productivity not monetary metrics which are meaningless as units of money are variable like a measure tape made of weak elastic. Worse the money men can stretch and shrink that elastic by revaluing at will behind closed doors with the intent of making themselves more money. .It seems that countries start to become more powerful as they make things, then the accountants, financiers and economists start moving in and the country starts making more money and less wealth – from ‘workshop of the world’ to financial basket case with bankers holding lots of ‘money’ that is worth less each day.
    Unfortunately, these people have now taken over running the world economy and as they do with countries are making money for themselves and are now running the world into the ground. All the larger economies including China and India seem to following the race to the bottom set up by the bankers, who will of course make lots of ‘money’ by shorting entire economies, but greatly reducing wealth.

  6. philjourdan says:

    @E.M. Smith – Re: $100s of dollars on it – Yea, me too. But I left it before digital (the fortunes of family and growing up). Still it is another excellent example of an industry fighting a paradigm shift. The Swiss lost out on watches – that use to be the example, but for today’s generations that never knew about finely crafted Swiss watches, the film industry is more relate-able (if that is a word).

    Japan has more issues than the US (perhaps the same as Europe). And that is a declining population, But they are still a good road map for what lies ahead for the US and Europe.

  7. Larry Ledwick says:

    Japan has been a disaster waiting to happen for years, it is clear that they have backed themselves into a corner and there is no longer any clean way out.

    Kyle Bass has been warning about the structural problems of Japan for years now, but some how they have managed to hang on by their fingernails long enough for the ultimate shake out to be much worse than it would have been if they had just let things de-leverage and blow off all the excesses.

    This video is 58 min long but his talk does not start until about 9:30

    He points out that today with nearly free money they are spending 25% of their tax revenue just to service their debt interest. If the interest rate goes up when they actually get to the inflation level they are trying to reach their debt service interest costs will explode and they will wipe out their entire tax revenue stream just paying the debt. If/when that happens the only option will be a collapse as they will be out of options, and in a dead end debt trap. The picture he paints is not pretty.

    http://davidstockmanscontracorner.com/japans-inflation-is-3-2-but-madman-kuroda-crushes-its-consumers-with-collapsing-yen/

  8. Philjourdan, I think you have Switzerland wrong. They are the leading OECD country on a GNP/capita basis well above USA. They still sell watches which sell with huge margins as fashion items. As a land locked country they sell value added produce which have a high margin with little transport cost. They have always been bankers and a safe haven for money. Pharmaceuticals are high on the exports, so are cosmetics. They are big on investments. Holcim (Swiss) is/was the largest cement producer in the world (having a large slice of US & Canadian market) they are in the process of merging with Lafarge (French) the second largest cement producer in the world. This will be run out of Switzerland because all the rich French are fleeing from the socialists in France. ABB which into robotics and automation is head quartered in Zurich. Brown Boveri section of ABB makes the equivalent of fine Swiss watches in large industrial gearboxes. ABB is into nuclear energy.
    Switzerland is the most democratic country in the world having citizen initiated voting and a small Federal government with limited powers.
    I maybe wrong but I think Switzerland looks more to the Austrian school of economics than the Keynsian economics followed by so many countries such as Japan, USA and Europe. New Zealand via John Key has shown that a different approach than Keynsian has worked to improve the country.. Japan would be better to look at Switzerland and New Zealand.

  9. R. de Haan says:

    The experiment that will blow up the world: http://www.zerohedge.com/news/2014-11-02/experiment-will-blow-world

    Japanese Stocks Up 1600 Points, USDJPY Up 5 Handles Since QE Ended; Kuroda Opposition Grows
    http://www.zerohedge.com/news/2014-11-02/japanese-stocks-1600-points-usdjpy-5-handles-qe-ended-kuroda-opposition-grows

    In the mean time:
    Euro suddenly crashes at no news:
    http://www.zerohedge.com/news/2014-11-02/euro-suddenly-crashes-no-news

  10. R. de Haan says:

    The japanese word for an act like this is ‘seppuko’, better known as ‘Harakiri’.

  11. R. de Haan says:

    The Japanese have some interesting new technology in the pipeline in the field of power generation, the collection of solid methane hydrates from the ocean floor (clathrate) that could bring some serious money in the ‘kitty’.
    Also think about robotics where they have quite some years of advance in terms of technology development.
    The Japanese are used to live on a volcano and a permanent quake zone.
    They are extremely adaptive and if their was any lesson to be drawn from the tsunami disaster three years ago it is that they can take quite a punch (enormous coastline destruction, nuclear disaster and over 200.000 people killed).
    But their political and financial leadership is extremely corrupt and in terms of immigration, a possible compensation for their declining population is that they hate most of their fellow Asians (Koreans and Chinese) but also the Russians and this hatred is mutual.
    They will survive a monetary crises but is their pensioners lose their funding we will see a steep decline in life expectancy over the next decade.

    Agenda 21 is not only executed in the West.

  12. philjourdan says:

    @cementafriend – No, I have Swiss right. Yes, I even own a finely crafted Swiss Watch (a present). Their craft did not disappear. And it is still highly prized. But the average Joe no longer wears one. They have a cheap knockoff from (then Japan, now you name it) some Asian country.

    And yes, they are now into digitals as well. But their industry was ravished when the world went digital. Because they failed to see it coming or believe it was real.

  13. Doubting Rich says:

    Deflation is not a problem for prudent people. It is a problem for over-extended people and for governments which spend more than they raise in taxes, as their debts do not shrink away over time. Let deflation happen!

  14. J Martin says:

    If deflation happens big time, is it better to have money in the bank, or own property, or land, or something else.

  15. cdquarles says:

    If there is the Great Deflation (necessary for a real recovery), you don’t want ‘fiat’ money in a bank. Ask the Cypriots about that. You do want hard, liquid assets (land, gold/silver, seeds, water, etc., to tide you over).

  16. E.M.Smith says:

    @J Martin:

    During deflation (widespread / significant) the selling price of land and property also drops. You do not want a mortgage in currency terms against a property dropping in nominal terms…

    During deflation, you want cash and cash equivalents. Nothing of debt or commodities. Holding a mortgage against property or loan against someone else also gives benefit (if they don’t default…)

    @Doubting Rich:

    I don’t care if it inflates or deflates as my ‘debt’ roughly equals my non-debt (cash denominated) assets. I’m hedged.

    Unfortunately, almost all of ‘ordinary folks’ are in debt up to their eyeballs and strong deflation would result in wholesale debt repudiation of one sort or another. Along with a dramatic slowdown in the entire economy as it ripples through.

    Any deflation, like any inflation, to be tollerated, needs to be low single digits.

  17. J Martin says:

    So if Japan goes under in 2015 I think I heard mentioned, seems too early, presumably that’s a solitary experience that doesn’t have impacts on other countries.

  18. E.M.Smith says:

    @J. Martin:

    Japan will not “go under” in one move. It will flounder and founder and slowly stop, then shrink slowly. It is big enough that much of the world WILL notice. (They hold about $Trillion of our debt, for example, and a decision to ‘cash it in’ would be globally brutal.)

    The more troubling thing is that right now the USA is the BEST major economic performance in the world (per a night or so ago on CNBC)… which gives you an idea how bad it is in places like the EU. Now given that Japan and the EU are doing very similar things:
    https://chiefio.wordpress.com/2014/10/30/as-the-money-tree-grows/

    Just with the EU running a bit behind Japan and with higher unemployment… and the USA kind of headed that way too… The potential for a ‘Dominos Of Deflation” is rather large.

    Not good. (As they say…)

    So if Japan buggers the Yen for no gain in market share of goods sold, their stagflation gets going (but deflation abates a little). As imports to Japan become more expensive, and exports gain less profit / foreign exchange, they retrench buying. As the economy is ‘slow’, folks don’t buy replacements internally as much either. Slowly Japan isolates from ‘international trade’.

    Now this need not go on for long before folks in Germany realize they are not selling as many BMWs in Japan and folks in the USA realize there are not as many Japanese tourists (already noticed by me…) and the money is not showing up. That slows Germany and the USA (that then start down similar paths of retrenchment and ‘stimulus’ that can’t really stimulate a Japanese retiree to buy a BMW or visit California… but does bugger their money supply while raising their import costs and cutting back their profit on exports… ( at least until existing contracts run out and prices are renegotiated).

    The problem is that we’ve got a bunch of sick economies all expecting to recover based on sales to each other… Where is the pocket of excess money to fund this? Printing more doesn’t do it once you have reached zero interest rates with a moribund economy and regulation strangulation.

    So yes, Japan matters. They started down this particular deflation road about a decade before anyone else. They are our future. They are large enough to matter to all our collective futures.

  19. R. de Haan says:

    It´s the corruption popping up everywhere: http://www.zerohedge.com/news/2014-11-12/big-banks-busted-massively-manipulating-foreign-exchange-precious-metals-%E2%80%A6-and-every and the realization this system is totally rigged beyond repair and the MSM not reporting the facts like these: http://www.zerohedge.com/news/2014-11-10/it-begins-german-banks-lower-deposit-guarantee-scheme

    Just connect the dots with the AGW scheme and UN Agenda 21 and you know the next slaughterhouse is around the corner.

  20. punmaster52 says:

    @cementafriend:
    Brown Boveri section of ABB makes the equivalent of fine Swiss watches in large industrial gearboxes.

    I drove an 18 wheeler 30 years. What the average driver would do with a Swiss watch gearbox makes me cringe. ;-)

  21. p.g.sharrow says:

    “Them double clutch-en, gear jam-en coffee drink-en nuts”
    “Think they”re gods gift to waitresses” cw machall
    Drove my own rig for 3 years. Hated it, gave the damn thing to my brother,. He loves being out on the road, still does after near 40 years. 2 wheels, 4 wheels, the more wheels the better!
    This country is huge and everything has to be moved from where it is, to where it is needed, when it is needed. From point to point, trucks are hard to beat for cost effective movement of goods. pg

  22. E.M.Smith says:

    @R.de Haan:

    Somehow I’m not surprised…. It is in keeping with human nature…

    @P.G. & Punmaster52:

    I like being on the road, but lately it’s gotten harder to sit that long. Some bones not as forgiving as they once were. Trucks are most cost effective at under 400 miles, or with time sensitive (but not urgent) deliveries. Trains are more economical over about 400 miles (depending on rail head locations). For time urgent, air freight wins. (Though at very short distances, courrier wins…).

    The intresting one is when the rail head is a few hundred miles away, at each end. Then the truck-train-truck costs more than ‘just truck it’… and that gave rise to the whole ‘intermodal’ system with trucks not unloading / recloading, but just having the box put on a train…

    But for really spectacularly low cost, a giant sea going freighter can’t be beat…

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