Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Tuesday, December 20, 2005

This Seems To Be Important

The Japanese finance ministry seems set to unveil plans to cut new government bond issuance by more than 10 per cent - to below Y30,000bn ($258bn) - in the year to April 2007. The Financial Times has the story. They had better hope they are reading the situation aright, since if they aren't they are heading straight back into recession. This is what all the battle with the BOJ is about. 2007 is rapidly getting pencilled into my diary as an economic annus horribilis.

Mr Koizumi considers that the economic recovery, about to enter its fifth year, is robust enough to withstand a mild fiscal contraction, although he on Monday came out against a consumption tax increase for at least two years.

Sadakazu Tanigaki, the finance minister, said: “I think we can break down the barrier of Y30,000bn.”

Japan has been running a budget deficit of about 6 per cent of gross domestic product, including interest payments on public debt of about 150 per cent of GDP. Mr Tanigaki is keen to accelerate the process of regaining primary fiscal balance, before interest payments, by the first years of the next decade.

The finance ministry will make cuts by, among other things, trimming payments made to doctors and further bearing down on public works spending, which has fallen by a quarter since Mr Koizumi took office in 2001.

Right Royal Row Over the BOJ

Things down at the Bank of Japan are hardly calm these days. On one version of events (see yesterdays Tankan) Japan is about - finally - to emerge from deflation, and the BoJ naturally enough wants to 'normalise' monetary policy. The politicians however are non-too clear about this:

"Japan’s ruling Liberal Democratic party will on Thursday urge the Bank of Japan to tie its monetary policy to nominal gross domestic product in an effort to lock in the central bank’s ultra-loose monetary stance for as long as possible."

"The proposal, which marks an escalation in tension between Japan’s politicians and the independent central bank, aims to stimulate above-trend economic growth for up to five years."

Friday, December 09, 2005

Japanese Third Quarter Growth

Well here it is, all coming home to daddy. The Japanese data I mean. Third quarter annual growth in Japan has just been revised down from 1.7 to 1%. This is coming home to daddy, since I continue to believe that - for demographic reasons - we will not see a self-sustaining Japanese recovery. Japan will continue to be dependent for growth on China, the US and Europe. Hence weaker than expected data should hardly be surprising.



Gross domestic product was up only 0.2 per cent on the quarter in real terms, with an annualised rate of 1 per cent. The new figures show that growth has been slower than expected, and significantly lags behind the pace in the first half of the year. The government had previously estimated quarterly growth of 0.4 per cent in the three months to September and 1.7 per cent growth on an annualised basis.

Monday, December 05, 2005

Japan and the US Yield Curve

Understand why the US yield curve may be about to invert and you've understood a lot IMHO.

Brad Setser picks up on the FTs Steve Johnson, and earlier here.

Johnson makes one extremely revealing point:

"The chief problem for the yen is that the flattening of the US yield curve has made it uneconomical for Japanese investors to hedge their ongoing purchases of US Treasuries, but a falling yen encourages overseas investors to hedge their purchases of Japanese equities - negating the value of these latter flows in currency terms."

Obviously what we have is asymmetric hedging. This begins to solve what had long been a mystery for me: who was really buying into the sustained Japanese recovery argument. Obviously many of the Japanese themselves aren't (sensible them). But OPEC members are. Really they should sack all their financial consultants :). The big issue, of course, is the US yield curve. The chain normally cracks at its weakest point, so this is a must to watch. Also, I wonder how much asymmetric hedging is taking place in Germany?

Basically the growth imbalance between the US, Germany and Japan, and the inability of these latter two economies to 'normalise' interest rates is producing a significant distortion in the global financial system. The US can have interest rates in the 4 to 5% range and still grow faster than either of the other two.

Co-indidentally cross this with a petro-dollar surplus arising from the changing terms of trade, and you have all the ingredients for some kind of problem. Now let's wait and see what happens next. I'm fascinated.