Tuesday, August 9, 2011

Insanity: Japanese Government

The Japanese government must be totally out of their minds. Which is worst the US government of the Japanese? Hmmm. Good question:
On August 4th, I wrote a short blog post entitled the Japanese Central Bank Throws Away a Billion Dollars Again. It was another protest over the Japanese government repeating past mistakes by using tax monies to buy dollars to support the yen. I wrote:

This morning when I woke up I checked the financial markets, gold, silver and, of course, the dollar yen rate.

I was somewhat surprised to see the yen at ¥76.9-something to the US dollar. A hour or two later, the yen had dropped to its current ¥78.9 per US dollar. Obviously the Japanese Central Bank intervened and bought a bunch of dollars.

Fools. When will they ever learn? They keep throwing our hard earned tax money down the drain to stop the yen's rise, but it is all in vain as the yen's appreciation continues.

I would later learn that it wasn't a "billion dollars" (of course not!) but $56 billion dollars. I wrote that history would repeat itself and that these types of market interventions never work. Japan has tried this sort of thing over and over and the results are always the same; they may halt, temporarily, the rise of the yen, but they cannot stop the yen from rising as interventions do nothing to change market fundamentals.

Remember, less than one year ago, for the first time in 15 years, in Sept. of 2010 when Japan intervened to stop the yen's rise?

From Bloomberg

Japan intervened in the foreign-exchange market for the first time since 2004 after a surge in the yen to the strongest against the dollar in 15 years threatened to stunt the nation’s economic recovery.

Finance Minister Yoshihiko Noda confirmed the intervention, speaking to reporters today in Tokyo. He said Japan contacted other nations about the step, without specifying that today’s measure was taken unilaterally. Chief Cabinet Secretary Yoshito Sengoku said the ministry considers 82 per dollar to be the line of defense, after it reached a high of 82.88 earlier today.

Japan hadn’t intervened to sell yen in the foreign-exchange market since 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Noda didn’t say how much was used in today’s action, while that figure will be released at a later date.

Japan is now slipping down a very dangerous slope and I fear that the slide is increasing in velocity. This makes for at least three publicly announced interventions in less than one year.

As I wrote, interventions never work. Mish Shedlock sensei! back me up on this one, will you? 

Japan Announces Currency and Stock Market Interventions

Countries are now playing a game of "Top This" to see who can do the dumbest things.... If stocks are ready to go up they will. If not they won't. Intervention will accomplish nothing other than create an environment of suspicion that stocks need to be propped up or they would fall. When intervention starts, investors are deprived of normal market signals and will not know if share prices have really bottomed or not. This silliness by Japan is going to create massive mistrust, and massive mistrust is never good for the markets.

I write over and over until my fingers are bleeding that the government is run by idiots. For over twenty years, the clowns "at the helm" of the Japanese government have been creating debt and trying to manipulate the markets. We have the current situation to show for it: Massive public debt and an economy mired in the mud.

Last year's currency intervention was to stop the yen when it was at about ¥82 to the US dollar. The Japanese Central Bank threw $63 billion dollars at the problem then. 

FIVE DAYS ago, the yen and dollar rate was ¥76.9 yen to one US dollar. The Japanese government threw $56 billion dollars at that. They were patting themselves on the back because the yen quickly shot past ¥80 to the US dollar. That was on August 4, 2011.

As of 6:38 am Aug. 9, 2011

Now, today, it is August 9, 2011 and the yen - dollar rate sits at ¥77.77 to one US dollar. The intervention, after a short five days is shown to be a total failure.

The most laughable part of this is the Japanese Finance Minister Yoda, Noda, whatever his name is actually said:

"It's better to wait for a little while before judging the impact of intervention," he told a news conference.

That's like the big race at the horse track. The results have been made official, the winning horse has already been claimed winner and is already in the winner's circle and Noda is holding a losing ticket. Yet he says, "We'd better wait awhile. There might be a claim!"

Ha! Ha! Ha!

The Dow Jones stock market crashed today 5.55% (-634.76). The Nikkei will follow suit. The yen is almost back to where it was a week ago.

What's the Japanese government solution to the problem?

Intervene to support the yen! Reuters reports "Japan signals readiness to intervene again":

Economics Minister Kaoru Yosano warned markets on Friday that they should not assume that Tokyo is done with stepping into the market, while stressing again the need for Japan, Europe and the United States to adopt common policies to contain the pessimism about the global economy. 

Insanity: Doing the same thing over and over again and expecting different results... - Albert Einstein


Anonymous said...

The effectiveness of the policy indeed may be temporary and impotent, but its not quite as "stupid" as you make out - they aren't throwing away tax dollars as such - they are printing money to purchase American dollars (which are still an asset, and may even appreciate at some point in the future (one would hope). So by printing money they are reducing the value of assets and debts in the Japanese economy (as well as the value of the yen against other currencies) - AKA inflation. Most economies would refrain from this kind of activity because a) worsening inflation usually runs up against central banks' main monetary policy and would force them to raise interest rates ie not popular b) It really annoys other countries if done without tacit permission and c) does distort market signals.

But in Japan's case deflation is more the problem, not inflation, so the moves has some positive aspects. Also while it looks temporary on paper (ie as you point out, it doesn't necessarily change market beahviour all that much in the long term) it does have an actual impact - floating market rates are ultimately decided by demand and supply for that currency (either by exporters/importers or speculators) - if there is insufficient supply then the value of the yen will be stronger. While it is bad now, imagine if there was $xx billions of dollars less Yen available if the two interventions had not of taken place - the Yen could potentially be even stronger than now.

But ultimately I agree that too much focus on the yen is inappropriate - Japan needs to learn to live with a high yen and importantly a high currency has some economic benefits if you design your market around this expectation. In fact an economy that thrives on a high currency (like the US used to) is usually a more resilient and high value economy.

mike in tokyo rogers said...

Sigma1 Thanks so much for an intelligent reply!

May I suggest that you read Henry Hazlitt's seminal work, "Economics in One Lesson" to investigate if your idea about printing money not being debt is correct or not? No matter what, that printing must be repaid someday and that must be repaid by taxation.

I would strongly disagree with your idea, as would any Austrian economist. Someday, someone has to repay those debts (printing money). Those are taxpayers.

Money doesn't appear out of nowhere.

Anonymous said...

Thanks for the response!

True, true, but much of whether it is simply throwing money away as opposed to making an imperfect intervention depends on the time value of money related to interests rates, relative exchange rates, and asset appreciation/depreciation(in this case US dollars purchased).

I'm sure the Austrians wouldn't agree with much of what I would say and vice-versa, although to be sure I am not exactly Keynesian either (or any kind of orthodoxy, really). Different economic cycles and economic conditions require different types of interventions and somehow we seem to have got them all back to front IMHO!

But as I said I don't ultimately disagree with the impotence of the move and I think the high yen should be looked upon by Japanese businesses as an opportunity. I understand some are although not sure of the degree.

Joe said...

Mike, good write up, I believe you should pound the table a bit harder, that people start liquidate fiat paper money to hard assets like gold and silver. I've purchased from sellers at yahoo japan, and www.gold-ichiba.com it seems that the yen is closer to depreciating than many realize, and the race to the bottom, with competitive devaluations, the beggar they neighbor fiscal and monetary policies are about to crash around them. Give us more practical suggestions if you have them, thank you.

Murasaki Shikibu said...

Speaking of insanity - London is burning. Here is a good map of assessing how widespread the rioting is now: http://www.telegraph.co.uk/news/uknews/law-and-order/8689355/London-riots-all-incidents-mapped-in-London-and-around-the-UK.html

The Sony warehouse/lab facilities in Enfield have been razed to the ground: http://www.youtube.com/watch?v=XcNnTAC6BvQ

Stock markets continue to plunge and it appears the Euro is 109 JPY to a euro now. 126 JPY = 1 GBP. 77 JPY=1 USD.

Anonymous said...


Talk about double tripping, I remember hearing this 30 years ago or so, minus the bit at the end, "We talk about important things"

Add in some double meaning (for those who are paying attention) and this was quite the audio. I'm starting to feel like I'm in a Stephen King novel... it's always been this way, hasn't it?

I do hope the People I made friends with in Japan are noticing this too, in fact I hope Everyone I've made friends with everywhere are noticing,... my fear is, they are not, all is Dreamtime?

- clark, keeping the bricks out of the windshield.

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