Back on the 6th of December 2012 I wrote an article for QFinance outlining the prospects for both Japan and Switzerland with respect to not only the reality of very expansionary monetary policies but in Japan's case the prospect of "More, More, More" of this. I was concerned then about the prospect of interest rates going below zero into the world of negative interest rates. Since then there has been a considerable number of developments as the new Liberal Democratic Party government lead by Shinzo Abe has got to work.
It was an often forgotten feature of the rational expectations theory of economics that it covered how financial markets can respond much more quickly to events that real ones. This has already been in evidence in Japan if we look at her equity market and the exchange rate of the Japanese Yen.
After being something of a serial under-performer in most of 2012 the Japanese equity market launched itself at the horizon rather intriguingly on the 5th of November which in the UK is called Guy Fawkes night where fireworks of the chemical kind are regularly released. On that date the Nikkei 225 equity index has a low of 8729 and if you look at this week's closing level of 10,802 for it you can see how quickly it has traveled (24%) in a relatively short space of time. Happy days indeed for those invested in it.
This has fallen heavily recently particularly against the Euro and there are considerable economic consequences from this. At one point today it had fallen to 120 Yen to the Euro which is a 11% fall since the beginning of December 2012. Against the US Dollar it has not fallen as far but is now over 89 Yen versus it and even the UK pound sterling which it would appear the world and his wife feels will fall in 2013 has risen to 143 Yen from 120 in early June 2012.
Another way of looking at this is to look at the performance of the Japanese Yen against the currency of Korea which is its leading economic competitor in many respects. If we do this we see that the Yen has been falling since it bought 15.09 Won each at the beginning of June 2012 and is now at 11.83. This fall accelerated in mid-October 2012.
Bank of Japan
It is easy to forget in the torrent of news about Japan that its central bank had eased policy twice in the latter part of 2012. It now plans a total purchase of 101 trillion Yen of Japanese Government Bonds and it latest overnight call rate is 0.076%. If is rather against the stereotypes that exist that it is aiming for "about" 101 trillion Yen but it is clear what is intended is "aggressive monetary easing".
What about fiscal policy?
Here we are beginning to see some actual plans being set although care is needed because it takes quite some time for the money to be actually spent. We get an idea from the title of the meeting "Urgent Economic Countermeasures for the Revival of the Japanese Economy"
- Reconstruction and Disaster Prevention
- Creation of Wealth through Growth
- Securing Safety of Livelihood and Regional Vitalization
And what will these aim to achieve?
- Boost the Real GDP Growth Rate to 2%
- Create employment for 600,000 people
Because of the past issues in this area for Shinzo Abe and the Liberal Democratic Party we also got told what this would not be.
Rapid Pork‐Barrel Spending
For those unaware of past history they have a record of being apparent fans of the Talking Heads song "Road to Nowhere",so much so that they built them! If you believe the press statement this time will be different -one of economics most unreliable statements- and we will get this instead.
Innovative Prompt Harvest of Economic Effects
How is her economy doing?
We know that according to her latest Gross Domestic Product data Japan's economy has been shrinking but we have also received some more up to date news from her indices of Business Conditions for November 2012. From the Lagging Index (86.8 to 86.5) we see that the past is worse, from the Current Index (90.7 to 90.1) we see that the present is weakening too and just to complete a clean sweep the Leading Index has fallen from 92.8 to 91.9.We also achieve some perspective if we consider that 2005 is the base of 100 for each of these measures so they have all been in decline.
What can we expect next?
Yesterday the Japanese Prime Minister Shinzo Abe continued his public campaign for a substantial change in Japanese monetary policy.
"What will be important is properly including the price goal of 2 percent"
This matters because the Bank of Japan has eased policy considerably but has failed to even hit a 1% inflation target. Ironically the rhetoric of what has become called Abenomics will help achieve that for them via the fall in the value of the Yen as commodity prices rise in Yen terms. But I feel that more will be required and note that a man who is always keen on "More,More,More" in such areas (Paul Krugman) has already become a cheerleader for the proposed policy. They make something of an odd couple don't you think?As for me I feel that negative interest-rates may yet still be on the horizon unless Abenomics involves a continuous fall.
Tags: Economy , Japan , Japanese economy , monetary policy , negative interest-rates