Tuesday, January 22, 2013

Will Japan Study Itself?

Several interesting observations on Japan and the US in this article from Japan hedge fund manager Peter Tasker.  I've copied and pasted what I think are the most pertinent paragraphs below.  Please visit his website for the original article (Abe Gets His Ya-Ya's Out).

I think it was sometime in 1999 or 2000 that I heard of a well-known Japan based economist speak.  He noted that he had consulted with Bernanke and the US congress on Japan's experience what the US  should do to steer clear of the post Japan bubble economic stagnation.  Given the timing (I think I saw the speech took place soon after or just before the first "quantitative easing", it seemed that his advice was taken wholeheartedly.

His view was that Japan's pump-priming/quantitative easing, was too little and too late.  Government and central bank officials assumed the first few recessions were cyclical, rather than longer-term and structural.   He came to the conclusion that, in retrospect, a large shock to the Japanese economy would have been better rather than small and incremental steps.  (If I remember my college economics courses correctly, it is only the unexpected monetary 'shocks' that had any meaningful effects.  And even these may be short-lived).

Another very interesting article notes that the Bank of Japan is one of the only central banks in the world that is publicly traded.  And it is not even traded on the main board, but on Jasdaq, with a market cap of about US$520m (Bloomberg ticker is 8301:JP) (The Bank of Japan is the Weirdest Central Bank in the World - Quartz)


"How long is the new normal going to last? Nobody knows, but the example of Japan is often cited as an awful warning. Policy-makers have searched frantically for new tools to avoid the fate of “turning Japanese” and suffering decades of weak growth and deflation.

"Since inflation and deflation are monetary phenomena, the main emphasis has been on monetary policy. The US Federal Reserve under Chairman Ben Bernanke was the quickest and most aggressive in its response, launching wave after wave of quantitative easing.

Right from the start, the policy was controversial . Conservatives blasted Bernanke for irresponsible debasement of the currency. Texas governor and presidential contender Rick Perry went so far as to call Bernanke’s policies “treasonous” and warned that he would be “treated ugly” if he ventured into the lone star state.

"But the critics have been proved totally wrong. The hyper-inflation they predicted never arrived. Instead the S&P index doubled, the dollar weakened, helping US exporters, and expectations of inflation recovered to the average pre-crisis level. The US economy is still far from vibrant. But it is in much better shape than Europe and Japan.

"Other central banks have followed Bernanke’s lead. The Bank of England appointed the American Japan hand Adam Posen to its monetary affairs committee. Acutely aware of Japan’s policy errors, he was vocal in recommending aggressive quantitative easing.

"Again this was controversial. Other members of the committee worried about inflation, and the consensus was that the economy would recover soon anyway. Posen was proven right. The UK economy was much weaker than expected and inflation failed to accelerate.

"Europe eventually followed suit. In order to prevent a break-up of the euro, the European Central Bank was forced into large-scale purchases of bonds issued by weak borrowers such as Spain and Greece. Even more remarkably, Switzerland, famous as a bastion of monetary conservatism, made a 180 degree change in policy in order to stop the franc appreciating any further and damaging its exporters.

"Incredibly, the one country that has done nothing to avoid turning Japanese has been Japan itself. Almost every Japanese administration this century made the conquest of deflation a policy priority, but no progress was made. The reason is simple. Thanks to defects in the laws that gave the Bank of Japan independence in 1998, the central bank is essentially unaccountable." (bold font added by Mike)

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