(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)
"Straight from the shoulder " by Toshio Masuda August 15, 2014
( Free of charge to the people I met)
Straight Talk on Current Events
Japan/US Monetary Policies Headed in Opposite Directions
The central banks of developed countries around the world, excluding Japan, introduced competitive devaluations termed monetary easing after the asset bubble collapse of 2008, which was symbolized by the subsequent Lehman Shock. These devaluations lasted until April 2013. Bank of Japan Governor Shirakawa stood alone in obstinate protection of the BOJ Banknote Rule (no easing of the monetary base above M2), and maintained that bank’s assets at around 10% of GDP (gross domestic product). However, on April 4, 2013, Shirakawa was replaced by the incoming Governor Kuroda, who announced a 2-year program of quantitative easing to approximately twice the previous end-of-year monetary base value of 138 trillion yen to 270 trillion yen, hailing it as “a new dimension of monetary easing.”
Compared to the amount of monetary easing by the FRB (Federal Reserve Board), ECB (European Central Bank) and BOE (Bank of England), all at around 25% of GDP, the amount of Governor Kuroda's new-dimensional easing is approximately 60% of GDP. This is less a new dimension than it is an abnormal dimension.
In May, one month after the Bank of Japan's shift in policy and the introduction of this extremely large-scale easing, FRB Chair Bernanke gave congressional testimony to the effect that plans were in place to reduce QE-3 at the appropriate time.
As the US reduces monetary easing and Japan initiates and advances easing, it becomes clear that the monetary policies of the two countries are headed in opposite directions.
The statements of FRB Chair Yellen and other heads of federal banks indicated plans for a 1st quarter 2015 policy shift toward fiscal tightening (through the raising of interest rates), after the previous policies that nearly brought about the end of monetary easing.
The Bank of Japan: Against the Grain of Japanese Economic Policy
Be it fiscal policy or monetary policy, all economic policy must align its guidelines with current economic conditions and future direction of the nation.
Japanese companies, holding more than 200 trillion yen in surplus funds and facing slumping domestic demand and progressing deflation, have come to seek the escape route of direct foreign investment, a route that includes M&A (buyouts of firms).
The volume of Japanese companies’ M&A in the US in the first six months of this year totals 2.5 trillion yen at +870% (YOY), 156 billion yen (+60%) in Europe, 700 billion (+37%) in Asia, and the list goes on. The overall total hits 3.4 trillion yen (+260%) from January to June, 2014.
For these past 10 years now, direct foreign investment has become standard practice for Japanese firms.
So, how exactly should the Bank of Japan’s monetary policy look in order to support Japanese companies?
Is this new dimension monetary easing policy, with 3 times the amount of easing compared to the US proportionate to GDP, really appropriate for Japanese industry practices?
QE3 has seen the concentration of worldwide capital in the US while driving asset prices (stocks/real estate) sky-high, resulting in NY stock prices seeing new highs on a consecutive daily basis.
The US must be wondering why the BOJ is waiting to embark on a policy of large-scale easing, instead of the opposite, namely winding down easing and launching future policies of belt-tightening.
The reason is a crafty one.
The FRB will induce future crashing in NY markets through rising (sky-high) interest rates brought about by policies of economic restraint and consumer price inflation that are themselves the result of the declining purchasing power of the dollar.
According to the zero-sum principle, losses of overseas assets due to heavy losses in NY markets equal US gains.
Japanese businesses are the most important partner the BOJ has, but with a weak yen and strong dollar that result from its policies of extensive easing, the purchasing power of the yen falls, and when compared to the US, domestic businesses are put at a disadvantage in competition for direct foreign investment.
As the US turns the losses of foreign investors caused by NY markets in decline into gains for itself, a strengthened dollar resulting from a shift toward policies of economic restraint will allow for direct investment, pushing Japanese businesses from a center of growth that has become inexpensive due to crashing stock prices.
The FRB's actions have multiple effects: repeating the formation of the bubble-economy and the consequent bursting of the bubble at the same time as US companies and its economy on the whole are strengthened.
Does the BOJ not understand the ABCs of international economics, or is it merely a sycophant to the FRB?
The answer must be yes to both.
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Written by Toshio Masuda