EP, possible Tora Tora Tora warning by Stratfor, which, btw, also is still talking out of its hat, thinking the FED is 'independent':
Geopolitical Diary: 'Quantitative Easing' and the Bank of Japan
The Cabinet of Japanese Prime Minister Junichiro Koizumi has dropped its opposition to the Bank of Japan's plans to end a policy of "quantitative easing." The policy essentially involved making as much cash as possible available to banks, empowering them to lend at low interest rates, out of the belief that encouraging lending and spending would help to defeat deflation.
That both the BoJ and, now, the Cabinet are agreed the policy should be changed is, on one hand, a welcome sign of stronger growth in Japan. But at the same time, the statement from the Cabinet raises some awkward questions about how much independence Japan's central bank truly has -- and points up that the entire Japanese system is built, not for growth, but for damage control.
On the positive side, the Koizumi government's change of heart -- a sharp reversal from as recently as four months ago -- is encouraging, at least in one respect. It would appear that officials in Tokyo are reasonably confident that the worst of deflation's eight-year hold on the country is now behind them. And they are probably right: Statistics for November and December 2005 show inflation registered at 0.1 both months -- the first back-to-back increases in eight years -- and early estimates for January indicate that consumer prices likely increased last month as well.
This is no small victory: Deflation has dogged the Japanese economy for the better part of a decade and has continually threatened to spread beyond Japan's borders. But at the same time, there is reason for concern with the government's statement on Monday. In short, the government told the central bank that it was OK to change its policy. But is not the central bank supposed to be independent?
In the United States and some other countries -- namely, Britain and Australia -- the central bank is autonomous from the political process in both name and in practice. Consequently, monetary policy is designed to serve the long-term interests of the economy rather than the short-term interests of politicians. By contrast, in systems where politics and monetary policy are not clearly separated, interest rates are often kept artificially low in order to boost short-term growth and employment.
That comes at a heavy cost. Without the regular corrections brought about by the business cycle, the result can be lower growth in the long-term, as well as higher systemic inflation and unemployment as coddling by the government prevents the business cycle from shaking out the inefficiencies in the system. An independent central bank, in theory at least, helps prevent such problems.
But it is not a cure-all. An independent central bank requires, at the very least, a relatively free capital system; after all, what good is monetary policy if the state broadly dictates how money can be invested?
Japan's "independent" central bank is really nothing of the sort. Since the Japanese bubble burst in 1989-1990, the economy has fallen into recession whenever global growth has not been strong enough to carry Japan along. Tokyo has filled that gap with deficit spending, to the tune of 6 to 7 percent of GDP annually, in order to stimulate domestic demand -- but 15 years on, the system is now addicted to that spending, making a return to debt-free, dynamic growth impossible.
All of which begs the question, where is all of this stimulus money coming from? Japan is now nearly $7 trillion in debt -- the largest debt, in both absolute and per capita terms, in history. In flooding the market with ever more debt, the rate of return on Japanese government bonds approaches zero percent. No wonder only 3 percent of Japanese government bonds are held by foreigners. As to the other 97 percent, Japan has de facto capital controls that force the Japanese people to invest their money in -- well, the government.
The government uses the postal system to harness private savings. The postal system is not only a key source of employment in rural regions, but also doubles as a government-managed financial network with more than $2.1 trillion in savings and insurance assets. And, in order to square its financial circles, the government requires the postal network to invest its funds where Tokyo needs them: in government bonds.
In a system such as this, any truly independent makers of monetary policy would not be particularly useful, as they likely would spend a great deal of time lecturing about misallocation of resources. They could be expected to give rousing speeches condemning the government for, quite literally, spending the country's future.
But then, such lectures are not too likely to be heard in Tokyo: The Bank of Japan is not really independent, and the policy it has been floating for the past several months has just been blessed by the government.
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