Japanese Interest Rates Briefly Fall Below Zero

Japan's continuing economic problems took the world of economic data into new and previously uncharted territory on Friday as overnight call rates fell below zero for the first time in the country's history.The overnight call rate on Y15bn of funds traded between foreign banks fell to minus 0.01 per cent. Because of the negative rate, borrowers are in effect being paid for borrowing funds because they will have to pay back less than they were lent. however much of a technical one-off this may be, it does serve to attention to the copmplex character of Japan's difficulties in a particularly novel way. Of rather more significance is the continuing fall in long term interest rates. Rates up to ten years are now virtually horizontal, and the curve up to thirty years is now showing signs of flattening out. It appears the expectation of continuing deflation is really setting in long-term

With long-term interest rates already virtually nil under the Bank of Japan's "quantitative easing" policy, bankers said on Friday the move into negative territory was more a symbol of the country's decade-long economic malaise rather than an indicator of future financial chaos. Critics say that the BoJ's ongoing zero interest rate policy and it decision to flood the market with liquidity has been ineffective in stimulating the economy.

"In terms of monetary policy, the BoJ is not doing enough," said Hisashi Sitow, director at Credit Suisse First Boston in Tokyo. "It has to buy more JGBs or foreign bonds to affect the market. Monetary policy is clearly ineffective, as base money is increasing but growth in the money supply is stagnant." Current record low yields on Japanese government bonds indicate that investors are not betting on an economic rebound anytime soon. The 10-year JGB has been skirting new four-year lows for some weeks, while the yield on the five-year bond fell to a record low on Friday."This is all part and parcel of a growing loss of faith in Japan's future," said Marshall Gittler, strategist at Deutsche Bank in Tokyo. "JGB movements are telling a story that deflation is set to continue indefinitely."
Source: Financial Times
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Too Much Saving in Japan?

This piece raises a question which is very much to the point, is there too much saving in Japan? Secondly, if there is, is this structurally related to the demographics of contemporary Japan. This question is very much to the point since most of the current enthusiasm for the appointment of an 'inflation targeting' governor at the Bank of Japan results from a diagnosis that the deflationary savings excess/lack of demand growth is due to a 'bad' IS/LM equilibrium associated with the zero interest bound. Now if the problem went deeper, then logically the solution wouldn't work. Unfortunately the article ultimately backs off, concluding that: "Immigration is not a practical solution today when unemployment is high". Of course if the unemployment is high BECAUSE there has been no immigration (and consequently the slope of the labour supply curve is not steep enough in more technical terms) then we are caught in a vicious circle. Things aren't always as they appear, remember we used to think the sun went round the earth. It's my bet that the injection of a large quantity of cheap immigrant labour at the bottom end of the Japanese labour market would do a lot more to help get things going than any of the other proposals currently on the table.

Japan's economic problems have attracted a lot of attention over the years. They have also exposed a lot of erroneous thinking. Today is no exception. As politicians and academics continue to flounder, they ignore one vital fact: the Japanese economy has a structural savings surplus, and a change in economic policy is needed to deal with it.An unusually high proportion of Japan's population is in its 30s and 50s, when savings for retirement are high. There are still relatively few who are retired and spending their past savings. As a result, the national savings rate is high. At the same time, there are few people under 20, so the workforce is shrinking. This means growth is bound to be slower than in countries such as the US, which has a lot of immigrants and a growing workforce. Even if it is optimistically assumed that labour productivity will rise to US levels, the difference in demographics means Japan can only grow at half the US rate. Japan must either change its population structure by massive immigration or export its capital surplus with a much bigger current-account surplus. The trouble is that the first option is unpopular in Tokyo while the second is unpopular in Washington. Faced with unpalatable choices, the typical reaction has been denial.
Source: Financial Times
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Unfortunately apart from the connection made with demography and growth the article really has little new to offer. Even the association of saving with those in their 30's and 50's is an oversimplification of what is probably a rather complicated picture (and one which I'm still trying to sort out myself). The range of policy proposals appears to be a complete rag-bag including virtually everything except my grandad's old nightshirt, but he is surely wrong that internal monetary easing is likely to be more effective than yen value reduction in provoking short term inflation. But as I said, if the diagnosis is bad, in all probability the medicine won't work in either case.

Japanese Banks Get Nervous about their Capital Adequacy Ratios

The plan announced Wednesday by Sumitomo Mitsui Financial Group to issue 150 billion yen worth of convertible preferred shares to Goldman Sachs is expected to lead to similar moves by other Japanese banks seeking to raise capital before the fiscal year ends March 31. According to Japanese sources, banking groups including Mizuho Holdings, UFJ Holdings and Resona Holdings are all considering jumping on the capital-raising bandwagon, with their plans to raise capital expected to be announced as early as the end of this month. The Goldman Sachs deal, widely interpreted in European and American news media as an indication of renewed confidence in the Japanese banking sector seems to have more to do with paying an increased risk premium to secure a cash injection and avoid government control. With banks, and many of their non-performing loans being back by goverment guarantees Goldman Sachs in fact seem to be risking little.

As SMFG President Yoshifumi Nishikawa explained during Wednesday's press conference, the current harsh domestic business environment prompted the group to "rely not on (our) clients, but to improve our capital base independently," with help from a major U.S. investment bank. The sluggish domestic stock market was a major factor in SMFG's decision not to issue shares to Mitsui and Sumitomo group companies as well as to other clients, the sources said.

Ageing Society: Time to Recognise the Consequences

Many western economists still stubbornly fail to recognise that the move to the "ageing society" marks a sea change for our economic systems, with important deflationary consequences. This latest round of debate in Japan over the consumption tax and social security subsidies should serve as a timely reminder to all of us of what is waiting, just round the corner.

Debate over a hike in the consumption tax rate is heating up in the government, ruling coalition parties and business sector as the nation's low birthrate and rapidly graying society are expected to make an increase in the tax rate inevitable to cover the rising cost of the social security system. The government's Tax Commission will begin discussing on Friday what form mid- and long-term tax systems should take, but as the government, ruling coalitionparties and business sector hold differing views on the issue, a conclusion is unlikely to be reached soon. Concerns over a consumption tax hike have mounted since the government spelled out pension system reforms that included raising the portion of basic pension covered by public funding from the current one-third to half. The government must compile a reform plan, including measures to secure financial resources, this year. Consumption tax, therefore, is being considered as a source of revenue. With tax revenues accounting for only about 60 percent of annual revenues, the government has been mired in a financial deficit. To raise funds to cover increasing social security costs, the government will have to rely on the consumption tax, the burden of which is spread widely and thinly over the public.
Source: Daily Ymiuri
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