QQE Pandering Goes Global
Japan is undoubtedly now quite the mess, but that is starting to spill-over into general view in what has to be a most unwelcome and even embarrassing occurrence for its practitioners. The problem, however, is much deeper now than just an economy seemingly forever doomed to the recesses of some kind of economic hell. For a quadrillion yen, the Bank of Japan and various constructions of the country’s government have tried “everything” (save actual free markets) yet are finding new ways to plumb financial depths.
The latest devaluation in the yen is a dangerous occurrence because it is tied to nothing but debasement hints and promises, if they could even be called that, aligned with what may be severe economic attrition (and in more than one respect; both current levels of activity and the productive capacity of the Japanese economy).
To that end, Prime Minister Abe has moved toward more aggressive “reassurances” that everything is going to plan, or at least hasn’t completely shut down and reversed. In a rather strange oped in the Wall Street Journal last week, the head of the Japanese government was reduced to pandering, using what were clearly cherry-picked stats. You could hear the orthodox economists on this side of the Pacific nodding in agreement with the optimism expressed, as it has been the settled position of orthodox economists in the rational expectations era that you never, ever admit defeat.
Staying on message has meant dragging up the apparently highly relevant fact that 12% more companies listed on the Tokyo Stock Exchange have appointed outside directors, and that there has been a 4% increase in labor participation of Japanese women. The prime minister also made note of how more jobs are now “regular” than “irregular”, though, tellingly, he had to go back all the way to three years (long before his yen debasement “arrow” began, which wasn’t stated) to find a “pleasing” round number of one million (in a country of 128 million people).
In July total payroll increased by more than 3% year on year. During the second quarter of 2014, even though it was a period of negative growth, the number of irregular employees without the security of salaried positions declined while the number of regular salaried employees rose.
That certainly understates what has transpired recently in Japan, as negative growth was, without inventory and the second derivative nature of GDP accounting almost -15% (annual rate) in Q2, not only halting all seeming advance but retrenching it all the way back to the level at which QQE began. But it is the payroll allusion that is most misleading as it is the actual condition away from the merely nominal that is dooming any chance of Japan finding what it seeks, a flaw in the theory that is both unsurprising and devastating.
The nasty side of currency intrusion, which Abe was careful to avoid, was spelled out over the weekend by a former BoJ official, Kazumasa Iwata. In what was “unexpected” to most financial media, Iwata had the sense to see what was clearly at stake with the yen on its latest downdraft. Recognizing that wages are not keeping up with prices, further devaluation would place Japan on the path, possibly, toward yet another recession.
“The current yen weakness is slightly excessive,” Kazumasa Iwata, the deputy from 2003-2008, said in an interview on Sept. 19 in Tokyo. “Abenomics entails the risk of ‘beggar thyself’ consequences and signs are already emerging.”
With weakness in activity already far below what was expected of the second quarter and on into the third, and exports (and the entire trade balance, really) never behaving even close to what was intended, these are not the trivializations Abe’s preening completely ignored.
Current Governor of the BoJ, Haruhiko Kuroda, added his own “sense” of the current bout of currency instability, also strangely resorting to misdirected function.
“It’s important for foreign-exchange rates to move in a stable manner by reflecting economic fundamentals,” he [Kuroda] said. “It’s natural for it to move in accordance with changes in economic fundamentals.”
That statement on its own is a bland platitude about intervention and policy expectations, but it is as much anachronistic. Currency reflections of economic fundamentals are a feature of sound and stable money, a gold standard for instance, and not at all what we have come to see of the floating fiat world. The constant and perpetual monetarism of the past three and four decades (even a cursory reflection about 1985’s Plaza Accord and its relation to Bank of Japan policy and the massive asset bubble is enough evidence to see this in action) has flipped the independent variable in what should take precedence. Monetarism sees it backwards, with currency levels driving economic activity in the Keynesian “tradition” of generic activity for the sake of generic activity (pump priming).
Iwata also raised that issue, though it doesn’t seem as if he fully grasped the significance, or was rather carefully avoiding his place in it.
Japan risks “secular stagnation” if it fails to boost productivity through its growth strategy, and fiscal collapse if investors turn away from its bonds, he said.
If Japan is just now risking “secular stagnation”, how does the last quarter century qualify? That is the particular problem with a debasing currency predicated against the weak economy and the accumulation of so many prior episodes of “stimulus.” The infatuation now with “secular stagnation” seems very much like I believed it would run, as a means to cover all previous failures under some “mysterious” source of scourge not at all related to repeated policy. It’s not as if, as it appears by his statement, stagnation is a new phenomenon of only recent vintage. If anything, Japan has been pioneering secular stagnation for thirty years, and all of these factors are relevant not only to analysis of Japan but to the eyes and ears of the public regarding Janet Yellen, Mario Draghi and their global band of merry debasers.
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