The True Story of Japan

[Beet]

First, I'll say that I wouldn't count on their being that much money outside of Japan to repatriate. In a normal economy, sure. Japan isn't normal though. Do you have any idea how hard it is for Japanese money to get out of their country?...

Fascinating but unconvincing. First of all, if withdrawing money from the country is as hard as you say, then it would tend to protect their economy from capital flight, which would definitely help them in a crisis, not vice-versa.

Secondly, Japan had a positive net asset position of 250 trillion yen (about $3 trillion) at the end of 2010, and it is relatively stable.

Thirdly, the Tsunami showed that the Japanese are definitely willing to rapidly repatriate funds when needed in the case of an emergency. In case of a true crisis, they're not going to be thinking about how to get the money back out again, just how to get it home and safe, or put to use.

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However, let me just say that you may be correct. Not for any reason you've argued, except that their net asset position is only a fraction of the size of the JGB bond market, so if there was a true crisis in the JGB bond market, net asset repatration would only be able to cover a fraction of it.

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I'll play taciturn to your verbose.

1. The quantity theory of money is valid in the long run, but not the short term, where monetary transmission is like pushing on a string in a bad economy.

2. Academic papers have concluded that the US Federal Reserve's quantitative easing program reduced real interest rates.

[Wonkish1]

First, I'll say that I wouldn't count on their being that much money outside of Japan to repatriate. In a normal economy, sure. Japan isn't normal though. Do you have any idea how hard it is for Japanese money to get out of their country?...

Fascinating but unconvincing. First of all, if withdrawing money from the country is as hard as you say, then it would tend to protect their economy from capital flight, which would definitely help them in a crisis, not vice-versa.

Secondly, Japan had a positive net asset position of 250 trillion yen (about $3 trillion) at the end of 2010, and it is relatively stable.

Thirdly, the Tsunami showed that the Japanese are definitely willing to rapidly repatriate funds when needed in the case of an emergency. In case of a true crisis, they're not going to be thinking about how to get the money back out again, just how to get it home and safe, or put to use.

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I'll play taciturn to your verbose.

1. The quantity theory of money is valid in the long run, but not the short term, where monetary transmission is like pushing on a string in a bad economy.

2. Academic papers have concluded that the US Federal Reserve's quantitative easing program reduced real interest rates.

Tis true that capital flight will be harder to happen in Japan, but I mentioned my comments in regards to repatriation not in regards to capital flight. So your talking about a separate issue.

Question how much of Tsunami do you think was repatriation and how much do you think was a huge influx of charitable money into the country?

I'm not saying that no repatriation will happen in Japan, but instead relative to most countries they probably have much less foreign cash that wants to find its way home especially if they have a Chinese situation where money wants to get out and the state is doing everything in their power to prevent it from moving out.


1. Interesting to see you agreeing with quantity theory over the long term. Just like in the short term a stock price can reflect something very different than its fundamental value so to is the case of the money supply and prices. But I've never heard of someone at a company taking the position that its a good idea to destroy the fundamentals of their company in some stupid attempt to boost the stock price. Plus its doubtful that their strategy would work. So I don't get the idea of destroying the long term fundamentals of the money supply(and therefore the economy itself) in the attempt to try to improve things over the short term and rarely are they ever successful in getting the desired short outcome anyway.

2. First, I'll dispute the notion that its as cut and dry as any "academic paper" claims. If you pull up a graph of all treasury durations and the announcements of QE you see two things. A) Is that short term rates fall right after the announcement. Seems like a great success right? Well... B) Long term rates spike immediately after the announcement and continue to stay higher. So the one thing the Fed has been the most successful at is steepening the yield curve. That is of course until they announced Operation Twist(of which I was a supporter of because given all the short duration QEs it probably moved things back in the direction towards normal).

Beyond that I'd say of course a small amount of sovereign debt monetization can lower the yields over the short term. I mean its another buyer for the debt. Buts it also the buying of debt with money created out of thin air. And that is a pressure the other way. Like in a lot of decisions in finance the making of one can often have conflicting pressures. I mean what is the effect of inflation on housing? Well it boosts income and real assets, but also raises interest rates so those are pressures that duel against each other. These counter pressures are often referred to as financial paradoxes(as weird as the term sounds it actually has a useful meaning).

But the ultimate point here is that when it comes down to these situations economists, financiers, investors, etc. understand the dominant pressure over the long haul. And in this case there is no avoiding that pressure at one point or another. And that is if they monetize a chunk because their cost of capital has risen it will exacerbate the rise in their cost of capital causing the requirement to do more monetizations. And this will happen quite quick as evidenced by Italy recently. I mean a year ago Italy was sacrosanct. They were one of the solid nations that would be among the bailing out nations not among the ones being bailed out. 100 basis pt increase in their cost of capital over a couple days and they are in full crisis mode. The history of market corrections usually is not one of a slow correction. Its of everything going along fine and then a violent split happens slapping them across the face. Which gets back to the "financial paradox" thing I described before. Japan could start monetizing a very, very small stream today and probably everything would seem fine for a while. The issue is that one day and you don't know what would do it an inflation data report comes out or news of a sovereign default in Greece or something and it just violently turns against you and then each an every attempt to monetize only exacerbates the downfall of the JGB when prior to that black swan event every attempt to monetize made things a little easier on the Japanese economy.

Looking out over the medium to long term armed with that information I don't see any way possible that Japan hasn't monetized or defaulted on at least 80% of its debt. There is just no way. And today the Japan's finance ministers are just trying to thread the needle by not making any big announcements or anything so they can skate along without risking anything that might cause a rise in JGB rates. That is their strategy.

[dead0man]

The Hoover Dam, that iconic project of the Depression, required negotiations among seven states but somehow it was built — and it provided jobs for 16,000 people in the process. Nothing is stopping similar progress now — nothing, except political bickering."

There is no way in hell you could get the Hoover Dam built today, the Environuts would never EVER allow it.  There could be no compromise.  (and to be honest, they may be right about things like dams)

As for Japan, I love 'em.  They are a bit racist/xenophobic though and they have some age issues to deal with and I have a love/hate thing with how they've twisted American/western culture, but on the whole, I love the place and the people (but mostly their cars).

[Beet]

Uh oh....

Japanese Debt Concerns Rise

"...In recent weeks, the cost of insuring against default on Japanese government bonds—a measure of perceived credit risk—has increased sharply, nearing the historic peak at the height of the Greek debt crisis in October. The price for default insurance, through derivatives known as credit-default swaps, exceeds levels seen last March, immediately after natural disasters and a nuclear crisis..."

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I'm not currently seeing this reflected in the Markit data, which shows a decline in CDS spreads for all of the G7 over the past week and month. Here's what they are below.

UK 80
France 170
Japan 130
Germany 87
Italy 421
US 43 (lol S&P)

But the WSJ is looking at a different data set. It's a real concern. As I understand it, Prime Minister Noda is attempting an increase in the consumption tax. If this fails to pass, it could be the trigger of something serious.

[opebo]

The BOJ should head this off at the pass by tapering off 'private' bond sales and simply roll over the debt into the banks hands using fiat currency creation.  Problem solved, and maybe even putting a dent in the merciless deflation and currency appreciation as well.

[Beet]

The BOJ should head this off at the pass by tapering off 'private' bond sales and simply roll over the debt into the banks hands using fiat currency creation.  Problem solved, and maybe even putting a dent in the merciless deflation and currency appreciation as well.

Perhaps the point of the above post is to bet against the yen

The only risk I see there is if the euro truly collapses, it could send the yen temporarily soaring, but based on the fundamentals of Japan alone, I don't see any further upside for the currency.