Will Quantitative Easing Be Japan's Savior?

[Larry1234 10]

Folks are invited to discuss about the Japanese economy, their currency and their relationship.

 

I recently came to know that Japan is back in the news because of its Quantitative easing and depreciating currency.

 

Will Quantitative Easing Be Japan's Savior ? Lets discuss .

 

 

Japan is the fourth-largest economy in the world.

 

Issue -

 

The country remains in a deflationary environment due to a variety of factors. Employment is down, the population is aging, the Yen (Japan’s currency) is weakening, and there is very little immigration into the country.

 

 

Japan’s New Idea to tackle the issue

 

The new idea is not new at all. More quantitative easing, but this time on a massive scale. The program, recently announced by the new governor of the Bank of Japan, Haruhiko Kuroda, is for a cash infusion of $1.4 trillion by the end of 2014. The hope is that this new round of QE will transform the economy from a deflationary environment to one of 2% inflation. Japan’s version of quantitative easing is 60% larger than the United States.

 

But will it work? Much like in the United States, the armchair politicians and economists are hard at work debating the issue. Some believe that previous quantitative easing proved fruitless so there is no reason to believe that it will work this time.

 

Even if it does work, Japan will be left with even more public debt. Its debt load is currently 214% of GDP with a quarter of the country’s budget going to service that debt. If this round of QE does create inflation, interest rates will rise.

 

Others are supportive of the plan. The IMF’s Christine Lagarde said that the newly announced plan was a step in the right direction. Others applauded the effort as a big solution to a big problem.

 

Impact on Currency

 

Forecasts call for the Yen to continue weakening to 105 against the U.S. dollar by the end of 2013 and 110 in 2014.

 

Market Impact

 

Whether or not QE in the United States aided in the economic recovery will likely be a debate that lasts for decades, but nobody argues that the markets have seen considerable appreciation since the program was announced.

 

Regardless of the reason behind the market rally, investors are betting that Japan’s markets will see the same effect.

 

Actions to be Taken

 

If this new round of QE does for Japanese markets what it has done for U.S. markets, a bullish position on the Japanese economy through equity, bond, or total market ETFs may be warranted. Currency traders may try to take advantage of the weakening Yen in the Forex market. However, investing in international markets is difficult for retail investors due to the relative lack of information available.

[Larry1234 10]

Since 2000, Japan has managed to offset its shrinking labor force with increased worker productivity – at a rate higher than most other advanced economies. But, Japan’s productivity gains are soon reaching its limits and the nation must once again find new solutions to maintain economic progress a midst the world’s fastest aging population.

 

A Major Rethink For Japan?s Age-Old Problem? | Economy Watch

[Larry1234 10]

The Bank of Japan maintained its unprecedented plan to boost money supply at a policy meeting today, and predicted inflation will almost match its target in two years even after a report highlighted deflation’s grip.

 

BOJ Governor Haruhiko Kuroda’s faith that monetary policy alone will end more than a decade of deflation weighing down the world’s third-largest economy has run up against predictions of failure from former central bankers and ex colleagues from his Finance Ministry days. Policy makers may come under pressure to expand stimulus should prices continue to drop.

 

“It’s unrealistic -- they won’t be able to reach their target in two years, or even in five,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official. Extra easing may be needed as early as October, when the BOJ releases new price forecasts, he said.

 

Economic growth may be 2.9 percent this fiscal year, followed by gains of 1.4 percent and 1.6 percent, according to today’s forecasts.

 

“We can expect more easing later this year if prices refuse to edge up,” Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc (RBS) in Tokyo and a former BOJ official, said before the bank released its updated economic projections. “It’s imperative for the BOJ to clearly communicate its objectives to maintain expectations that prices will rise.”

 

Matching Forecast

 

The bank earlier this month committed to double the monetary base in two years, exceeding analysts’ estimates, through increased purchases mainly of government bonds, along with exchange-traded funds.

 

The BOJ’s easing is pushing up property prices and is likely to lead to higher rents -- a key consumer-price driver. Prime Minister Shinzo Abe is also using his ties with business leaders to try to pressure companies to raise wages.

 

Last year’s “sharp” price increases for gasoline, kerosene, and other energy-related goods mean Japan’s core consumer-price index will probably remain negative through at least this month.

 

Exchange Rate

 

The yen has retreated more than 3 percent against the dollar since the April 4 announcement of increased monetary easing, and is down about 12 percent this year.

A more competitive exchange rate helped Sony Corp. Japan’s biggest television maker, yesterday report its first annual profit in five years.

 

While South Korean officials have highlighted risks to their economy from a sinking yen. Kuroda and Abe’s government have portrayed Japan’s stimulus as a campaign to reflate the domestic economy, rather than to win a more competitive exchange rate.

 

 

Stock Gain

 

The Nikkei 225 Stock Average has soared 60 percent since mid-November, when it became clear that Abe would win office in ensuing national elections, giving him rein to overhaul the BOJ’s leadership and implement reflationary policies.

 

Japan’s efforts to reflate its economy coincide with a slowing in some of its fellow Asian nations. Singapore today reported that industrial production slumped 4.1 percent in March from a year before. China last week said its gross domestic product rose 7.7 percent in the first quarter, capping the longest streak of expansion below 8 percent in at least 20 years.

 

Elsewhere around the world, a report today may show the U.S. economy expanded at a faster pace in the first quarter. Growth quickened to a 3 percent annual rate from 0.4 percent in the final three months of 2012.

 

Also due are indicators of consumer confidence in France and money supply across the euro area. In the Asia Pacific region, South Korean consumer confidence slipped this month, a report showed in Seoul.

[zdo 20]

...but nobody argues that the markets have seen considerable appreciation since the program was announced.

 

This nobody argues that, even in nominal terms, the markets have not seen considerable appreciation since QE 66 was implemented, then announced...

[Larry1234 10]

Japan's monetary base soared to a record in April as the central bank's more aggressive quantitative easing program boosts the amount of money flowing through the economy.

 

The central bank aims to roughly double the monetary base over two years by increasing purchases of government debt to end 15 years of nagging deflation.

 

Under its new quantitative and qualitative monetary easing, the BOJ expects the monetary base to reach 200 trillion yen at the end of this year and then rise to 270 trillion yen at the end of 2014. ($1 = 97.3450 Japanese yen)

[Larry1234 10]

Prime Minister Shinzo Abe’s new government has embraced a revolutionary economic-policy approach that engages several initiatives, some of which were once deemed implausible, unthinkable, or even undesirable. From the doubling of the money supply to additional fiscal stimulus and wide-ranging structural reforms, the new policy paradigm is nothing less than one of the boldest economic-policy experiments in Japan’s post-war history.

 

Already, financial markets have responded with alacrity. The Japanese equity market is up an impressive 55 percent since hints of the paradigm shift started hitting investors’ radar screens. At the same time, the Japanese yen has depreciated sharply, including by more than 20 percent against the struggling euro.

 

The full article can be read at the given link -

 

External Realities May Ruin Japan?s Economic Experiment: Mohamed El-Erian | Economy Watch

 

Opinions are invited.

[bobcollett 10]

Hi Larry

Interesting thread.

Do you trade for a living?

regards

bobc

[henry1000 10]

Hello Larry:

 

Quantitative easing is simply printing money.

XX. INTEREST, CREDIT EXPANSION, AND THE TRADE CYCLE

 

Quantitative easing will not save Japan or the United States or Europe. It just encourages further malinvestments instead of letting failing businesses go bankrupt and letting the free market adjust free of government interference. The president’s quantitative easing solution to our countries economic problems is a disaster and is no different from what Bush would be doing if he were still president.

 

“Quantitative easing is a euphemism for an inflationary strategy of monetary policy pursued by central banks. The bank adds money to its balance sheet ex nihilo (out of nothing), and uses the new money to purchase government securities, thus increasing bank reserves, raising the prices of government securities, and lowering their interest rates. It is equivalent to simply printing additional legal tender.”

Quantitative easing - Mises Wiki

 

See below for a good video explanation of quantitative easing:

 

What is QE2? What Does it Mean?

[ame=http://www.youtube.com/watch?v=Sc7GcD2FMB8&feature=player_embedded]What is QE2? What Does it Mean? - YouTube[/ame]

 

 

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. “-- Ludwig von Mises

 

If you finally understand what quantitative easing really means, then ask your self is it really possible to just print money and stimulate the economy to prosperity ? If that were true then why do we still have poor people and poor nations ? Why do we still have poverty ? Why do people who counterfeit money get arrested and thrown in jail when according to Bernanke and company printing money stimulates the economy ? Shouldn’t counterfeiters be hailed as heroes since they are stimulating the local economy. Do as I say not as I do.

 

Printing money does not make a nation prosperous. The Germans tried it the the 1920’s when they had the Weimar Republic form of government. It was a disaster and ultimately paved the in part for Hitler. It has never worked for any nation since it is pure nonsense.

 

The below pdf book is the best explanation of money and the business cycle that I know of. Money is never explored in depth by most economists, except to say it is a medium of exchange. Rothbard describes what money really is and how government and central bank (Federal Reserve System) meddling has turned it in to inflationary fiat money. All of this meddling exaggerates business cycles. This is explained very well in this book. The 2008 financial crisis, our current economic crisis, the euro zone crisis were all caused by government and central bank manipulations of money:

What Has the Government Done With Our Money by Murray Rothbard

http://mises.org/books/whathasgovernmentdone.pdf

 

The below article explains the beauty of the free market so very well while comparing it to the flawed ideas of socialism:

What Is the Free Market ? by Murray N. Rothbard

What Is the Free Market? by Murray N. Rothbard

 

Hazlitt’s pdf book does what the title says:

Economics in One Lesson By HENRY HAZLITT

Economics in One Lesson (PDF, DOC) : Library : Foundation for Economic Education

 

The school of economics that I consider to be the most correct is the Austrian school of economics.

 

This web site will explain the origins and reasoning behind this school of economics. See their FAQ:

Ludwig von Mises Institute : The Austrian School Is Advancing Liberty

 

In this book Hayek warns against the dangers of increasing government control of the economy.

The Road to Serfdom by Friedrich A Hayek who won the Nobel Prize for economics.

 

Henry1000

Edited May 8, 2013 by henry1000

[Larry1234 10]

Hi Larry

Interesting thread.

Do you trade for a living?

regards

bobc

 

Hi Bobcollett,

 

Trading is not my primary profession but I keep tracking economic news. I have a keen interest in option trading and macro economics.

[bobcollett 10]

C'mon Larry

You haven't finished.

Who will buy all these institutional bonds that the US Fed and Japan have bought and will have to one day sell to balance the books?

Do you think the banks will buy them back when the coupon is near zero .... no interest.?

Sure they will, at 50% discount.

So what you should be telling us is that all the pigeons who hold Govt bonds have lost a lot of money.And Govt bonds are supposed to be guilt edged!!

You have painted the sunny side. Now lets see the other side.

regards

bobc

[Larry1234 10]

Hello Larry:

 

Quantitative easing will not save Japan or the United States or Europe. It just encourages further malinvestments instead of letting failing businesses go bankrupt and letting the free market adjust free of government interference.

 

Henry1000

 

Hello Henry,

 

Thanks a lot for your contribution. In this thread, we are discussing the advantages to Japan due to QE. Japan is facing a problem of deflation for the past couple of years. They are also facing ageing population problem. Bank of Japan recently announced the printing of more money just to increase the inflation. Is it going to help them in the short term or long term ? What do you think ?

[Larry1234 10]

If we all remember that, In 1998, the dollar dropped against the yen by almost 15% from peak to trough. The intensity of that market dislocation, and the sweeping global events that led to it, offer a warning about disruptions to the global financial system from the yen’s current downturn. The currency’s violent snapback 15 years ago, occurring at the height of the Asian financial crisis.

 

As with now, Japanese authorities believed strongly in 1995 that the yen was overvalued. With the dollar dropping as low as Y79.92 in April that year, Japan’s powerful export sector was suffocating while the economy strained under the costs of the Kobe earthquake. So the Bank of Japan boosted its routine “Rinban” bond-buying operations while Tokyo sought and received Washington’s blessing for a weaker yen. A massive reversal ensued. By August 1998, the dollar had almost doubled in value to a peak of Y147.62.

 

The yen-weakening policy kept Japanese exporters happy and pleased the U.S. Federal Reserve because it put a lid on inflation. But it also unraveled the “Asian miracle.” Businesses in Thailand, Korea, Indonesia and other “tiger” economies came under increasing pressure as Japan’s competitiveness improved. And as their external trade balances deteriorated, speculators targeted these countries’ pegged currencies, eventually triggering a domino collapse that would envelope the whole world.

 

Meanwhile, the short-selling bets that traders had placed against the falling yen were planting the seeds of their own destruction. With Japan’s struggling economy paying the lowest interest rates in the world, global investors had piled into the so-called yen carry trade. They borrowed cheaply in yen and invested the proceeds in higher-yielding currencies such as the Thai baht and Russian ruble. But when the crisis unfolded and investors closed out those positions, they had to buy back the yen to repay their loans. In October 1998, after Wall Street banks bailed out Long-Term Capital Management and unwound its global portfolio of risky bets, these periodic “short-covering” rallies morphed into one all-encompassing stampede.

 

Is Japan now setting up a similar global disruption? Its central bank is about to unleash an unprecedented wave of money into the global system and traders, anticipating its effect, have driven the yen down 22% since its peak in September.

[henry1000 10]

Hello Henry,

 

Thanks a lot for your contribution. In this thread, we are discussing the advantages to Japan due to QE. Japan is facing a problem of deflation for the past couple of years. They are also facing ageing population problem. Bank of Japan recently announced the printing of more money just to increase the inflation. Is it going to help them in the short term or long term ? What do you think ?

 

 

Hello Larry:

 

Printing money hurts the people on fixed income, the people who save money, and the poor who see the price of the basic necessities of life going up. Printing money helps the central bankers and the rich. The Japanese stock market (Nikkei index) keeps going higher and higher breaking all records so the rich see their portfolios going up while the poor see their standard of living go down.

 

So the question is more like who is it helping in the short term. The answer is the rich people, the central banks and the people in government who want to keep their jobs. Long term the economy will just get worse and worse since more and money is being spent on speculative investments like the stock market and real estate which cannot sustain their parabolic rise in prices.

 

Once an injection of money has run its course the market seeks equilibrium, meaning that the market will try and reestablish the relative value of goods and services based on real supply and demand. But if the government sees a market sector or companies failing again and it decides it needs to be bailed out again it will take a larger injection of money to get the same effect. The short term result is more jobs for the people in those targeted businesses and less jobs in areas where there is real demand.

 

See The Wealth of Nations by Adam Smith and his reference to the invisible hand and how the market adjusts it self to become more efficient. An efficient market is ostensibly what all of the economists say they want, but printing money does the exact opposite because it artificially creates demand for goods and services that are not wanted by the free market. People vote with their dollars/yen, but when the government just prints money the normal signals of the free market are distorted and unwanted businesses get propped up at the expense of businesses that are wanted. So the end result is less goods and services that people would have gotten if there was a free market. And since the supply is less prices are higher which is why the standard of living will continue to fall. Simple supply and demand price action principles at work which seems to escape some so called economists who think printing money creates prosperity.

 

I am just amazed that intelligent educated people in the developed world believe in this magical fantasy world where the government can just wave a magic wand and instantly create wealth and prosperity. In this case the magic wand is a computer keyboard because that is how they create money. And the wizards are the men in power who instead of wearing elaborate robes wear nice business suits and spout authoritative words like quantitative easing instead of magical incantations.

 

You might ask your self why don't the central banks just come out and say in order to fix the economy we are going to print money instead of saying we will do quantitative easing to fix the economy. Why doesn't our Federal Reserve have a more accurate name like the Private Reserve. The Federal Reserve is not a part of the government it is in fact run by private banks for their benefit. Blood suckers would be a better name for them. All of the names the central banks come up with for their practices are intended to deceive not to inform.

 

Follow the money is a good rule to follow to see who gets helped by any monetary policy.

 

I believe it will all end very badly for Japan. When of course is the big question.

 

Henry1000

[Patuca 13]

Henry is right. it will only facilitate more wealth for the wealthy..in the long run it is ALWAYS a disaster and can led to nothing good. it is a mechanism whereby the general population will be made poorer....and their wealth transfered to the already wealthy...besides blowing up a currency bubble that will have to go kaboom one day. QE is what is driving Usa equities now...when it stops ...kaboom. ..or if it doesn't stop bydesign then it will stop by madness as the bubble gets bigger and bigger ...the louder the kaboom...the more people hurt...

[Larry1234 10]

Everybody loves a free lunch, myself included, and many in Japan would like free sushi too. Despite the short term boost in Japanese exports and Nikkei stock prices, there are no long-term free lunches (or free sushi) when it comes to global financial markets.

 

Following in the footsteps of the U.S. Federal Reserve, the Bank of Japan (BOJ) has embarked on an ambitious plan of doubling its monetary base in two years and increasing inflation to a 2% annual rate. By the BOJ’s estimate, it will take a $1.4 trillion injection into economy to achieve this goal by the end of 2014. Lunch is tasty right now, as evidenced by a tasty appetizer of +3.5 % Japanese first quarter GDP and this year’s +46% spike in the value of the Nikkei. Japan is hopeful that its mix of monetary, fiscal, and structural policies will spur demand and increase the appetite for Japanese exports, however, we know fresh sushi can turn stale quickly.

 

In my opinion, even though the Japanese economy and stock market have rebounded handsomely in the short-run, there is never a free lunch over the long-term. Unchecked policies of money printing, deficits, and debt expansion won’t lead to boundless prosperity. Eventually a spate of irresponsible actions will result in inflation, defaults, recessions, and/or higher unemployment rates. Unsustainable monetary and fiscal stimulus may lead to a tasty free lunch now, but if investors overstay their welcome, the sushi may turn bad.

[Larry1234 10]

Mr. Kuroda announced that he will double Japan's monetary base. Investors have been buying stocks enthusiastically ever since. Which is why our Trade of the Decade - Buy Japanese Stocks, Sell Japanese Bonds - looks so good.

 

Stocks have gone up. Bonds have gone down. Does this mean that Japan's troubles are behind it? Not at all. It only means that, when you've got a reckless central banker, stocks are a better buy than bonds. Stocks will rise with inflation, sometimes ahead of it...sometimes behind it. Bonds will always go in one direction - down.

 

Japan's real crisis is still ahead. That's what yesterday's big sell off signals - trouble. And there's more trouble is coming for the UK, the US and Europe too. Most likely, they'll want to follow Japan as it heads for disaster.

 

The new head of the Bank of England, Mark Carney, has just proposed that his bank imitate the rapid money-printing policies of the Bank of Japan.

[MCM 10]

Interesting topic - especially in light of the Nikkei dropping 7% in one day this week. Much larger brains than my own grey matter have attacked this from various angles. We tend to listen to the ones that jive internally with our own thoughts.

 

Christine Hughes recently kicked out a video:

[ame=http://www.youtube.com/watch?v=AR3TyfKTeNE]OtterWood Observations on Japan, May 2013 - YouTube[/ame]

Kyle Bass - been talking about Japan for a long time

[ame=http://www.youtube.com/watch?v=ZY6IEpKRA7Y]Kyle Bass March 14 2013 - YouTube[/ame]

 

The quote most memorable to me - came from one of Mauldin's old books (and Bass used the same phrase in the vid above) - monetary policy wise - Japan is a bug in search of a windshield.

 

Does it help my trading? Nope. Timing is the problem when it comes to these things. I don't have enough government largesse behind me to stay liquid while making the big bet. Hopefully it brings on the volatility - that is good for us traders. Otherwise it is mental masturbation which ultimately feels good - but doesnt do anything to improve my daily life. I will sometimes play one of these talking heads in the background while I take apart price action on a chart. That is what improves my daily P&L.

 

A Nod to all the Veterans out there - this weekend is to remember your service. Cheers.

[Larry1234 10]

Interesting topic - especially in light of the Nikkei dropping 7% in one day this week.

 

A Nod to all the Veterans out there - this weekend is to remember your service. Cheers.

 

Appreciate your response to this thread.

 

IMO with more Yen in the market, there is a high probability that Yen Carry Trade can be expected in near future.

[Larry1234 10]

BoJ reportedly aims to stabilize government-bond market

 

Worried about sudden spikes in Japan's government-bond yields, the Bank of Japan is seriously considering measures to bring down market volatility. The Bank of Japan will consider taking further steps next week to curb volatility in the government bond market as sudden spikes in yields threaten to undermine the bank's objective to drag the economy out of two decades of deflation.

 

BOJ may consider offering two-year funds to stem market volatility | Reuters

[exbryan 10]

The quantitative easing program, recently announced by the new governor of the Bank of Japan, Haruhiko Kuroda, is for a cash infusion of $1.4 trillion by the end of 2014.it help the Japanese economy recover

[Larry1234 10]

The quantitative easing program, recently announced by the new governor of the Bank of Japan, Haruhiko Kuroda, is for a cash infusion of $1.4 trillion by the end of 2014.it help the Japanese economy recover

 

I agree with your thought that it will help the Japanese economy but I feel that it will take another 3 to 5 years for the recovery, but in the short run, we have seen that the JPY has depreciated significantly against USD.

 

How do they deal with the currency depreciation ?

[henry1000 10]

I agree with your thought that it will help the Japanese economy but I feel that it will take another 3 to 5 years for the recovery, but in the short run, we have seen that the JPY has depreciated significantly against USD.

 

How do they deal with the currency depreciation ?

 

 

Hello Larry1234:

 

Can you explain how this quantitative easing will help the Japanese economy ?

 

Henry1000

[Larry1234 10]

Hello Larry1234:

 

Can you explain how this quantitative easing will help the Japanese economy ?

 

Henry1000

 

Hello Henry,

 

The problem Japan is facing now is deflation and at the same time their population is also ageing.

 

QE by BOJ will help them in creating inflation in their economy and at the same time, it would lead to depreciation of their currency, which means that their exports will be more competitive compared to other Asian and export oriented countries.

 

More profits on exports will lead to more production in the economy, which in turn creates more job. So QE by BoJ will help in recovering Japanese economy.

[tradingwizzard 10]

if you think they are running a QE program two times as large as the one in the United States but it is applied on an economy that is three times smaller, then you should have the dimensions of these move........jpy has no chance from my point of view on the larger horizon.......as well as the usd