(Off Topic) BOJ and Greenspan dilemma
Those of you looking for what is causing NOVL to tank might want to look closely at the upcoming meeting of the G7 this weekend. The topic of that meeting is the yen. We are all interested in what strategy Larry Summers has for dealing with the $$$ and the trade deficit and the yen given his comments about wanting a strong $$$.
As you can see from the article I have quoted here from the WSJ, the Bank of Japan isn't going to print more money. That only leaves the "co-ordinated" currency approach favored by strong yen advocates in Japan. These are the folks that want to end the post WWII dollar hegemony and go to a tripartite Yen/Euro/$$$ world.
The bottom line --- that only leaves Greenspan and another rate increase to prop up the $$$, or conversely allowing the market to establish a lower $$$ value. This latter approach would likely cause a narrower trade gap if Detroit doesn't eat the weaker dollar in higher auto prices. We may actually get the worst of everything --- a weaker $$$, Detroit induced auto price inflation, and a rate increase.
Not good.
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Bank of Japan Resists Pressure
To Loosen Monetary Policy
By BILL SPINDLE
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Japan's central bank, resisting pressure to try to contain the
yen's rise and buoy the nation's fragile recovery, Tuesday opted instead to
assert its newfound independence by refusing to loosen monetary policy
further.
The Bank of Japan's policy board, while
expressing concern that a stronger yen could
hurt the economy, concluded one of the most
closely watched meetings in the bank's history by declaring that it already
had done enough for growth by lowering short-term interest rates to zero
in recent months. In an unusually blunt statement, the nine-member board
said that easing monetary policy by aggressively pouring money into the
banking system in hopes of "reflating" the economy, as some politicians
have urged, could actually hurt Japan in the long run.
The yen, which had weakened in the days before the meeting as
expectations grew that the BOJ would loosen policy, climbed some 2.50
yen against the dollar right after the announcement, growing as strong as
104.25 yen per dollar in Tokyo trading. It was trading at 104.92 yen late
Tuesday in New York. The BOJ's announcement came after the close of
the stock and bond markets in Japan. At the close of Wednesday's
morning session, the Nikkei was down 3.1%, while the dollar was trading
at 104.91 yen at midday.
Show of Independence
The decision to stand pat means the central bank, which gained full
independence from the Ministry of Finance just last year, is bucking a
chorus of Japanese politicians, bureaucrats and business leaders. The
move ultimately may enhance the BOJ's reputation for independence, but
could also backfire on the world's second-largest economy.
Many argue that the central bank must act boldly -- as the U.S. Federal
Reserve did last year in loosening monetary policy in the face of world
financial turmoil-by increasing the supply of yen in circulation, which would
suppress the yen's value and hence blunt any damage to Japan's exporters,
whose profits fall as the yen rises. Should the yen's recent rise undermine
Japan's nascent economic recovery, the BOJ and its strong-willed
governor, Masaru Hayami, will bear much of the blame.
Already, high-profile critics are shining the klieg lights on the bank.
Massachusetts Institute of Technology economist Paul Krugman was in
Japan on the eve of the BOJ meeting to deliver a speech to hundreds of
business leaders, and he used the podium to criticize the bank for not
loosening monetary policy earlier. Tuesday, a politician who is a key
adviser to Prime Minister Keizo Obuchi called the bank "way too
stubborn."
In Washington, the official U.S. reaction to the Bank of Japan's nonmove
was no comment. Treasury Secretary Lawrence Summers repeated the
Clinton administration's litany -- that a "strong dollar is very much in the
national interest," and declined to comment further. Privately, though, U.S.
officials said they were disappointed. U.S. officials have advised the
Japanese to try to contain the yen through a looser monetary policy.
Policy Battle
The pressure being brought to bear on Mr. Hayami highlights the frailty of
Japan's economic turnaround and the lack of proven policy options
available to the BOJ after a decade of sluggish economic growth and
several years of deflation, or falling prices. Tuesday's decision by the
bank's board brought to a head a policy battle that has been simmering
since February, when the bank played its final traditional policy card by
dropping short-term interest rates to zero.
The pressure is likely to mount. Despite showing unexpected strength this
year, Japan's economy has serious problems. Overall, prices continue to
fall. The government announced on Monday, for example, that property
prices have tumbled at a faster rate so far this year than last.
Meanwhile, the country's banking system -- while no longer near collapse
-- has shown little sign of returning to the traditional role lenders play when
a central bank eases monetary policy: As official rates fall, banks normally
expand lending to companies. But bank lending is shrinking each month
--and will probably continue to shrink -- because banks are cutting off
weak borrowers, and strong borrowers are paying down debt. Notes
Marshall Gittler, an economist with the Bank of America: "Japanese
companies are still dreadfully overleveraged."
Loose Policy of 1980s
This debt hangover is due to overborrowing encouraged by Japan's loose
monetary policy of the 1980s -- a policy forced on the BOJ by its former
Finance Ministry masters to help exporters cope with a strong yen. The
central bank alluded to these errors Tuesday, showing how the mistakes of
the past haunt policy makers Wednesday.
Gov. Hayami has argued the central bank can do no more if the surplus
funds it is already leaving in the banking system each day don't flow into
the economy. Despite essentially offering banks free money in the overnight
lending markets since last February, the BOJ has watched the growth of
the money supply slip in recent months.
Some business leaders agree, even ones whose companies are being hurt
by the strong yen. "Monetary policy is already quite loose in Japan," says
Yuzaburo Mogi, president of soy-sauce maker Kikkoman Corp. "I'm not
sure whether extra money will have an effect." In recent days, many
politicians argued it is crucial for the Bank of Japan to pull out the stops to
fight deflation and keep the recovery going, including such unorthodox
means as aggressively purchasing bonds to pump up the money supply.
But the BOJ rejected those calls in uncharacteristically sharp terms. "The
effect of such steps wouldn't be long-lasting," the bank said. "We can't
take policy steps for which we can't explain the purpose or the effect. |
