METI to BOJ: Back off on rate hikes

6 Responses to “METI to BOJ: Back off on rate hikes”

1. D Cooper on July 7th, 2007 10:46 pm

   Seems everyone’s got an opinion on this one. What’s the deal with METI setting up a group to ‘work with’ the BOJ on rates? Sounds like a violation of the bank’s independence to me - though I know it’s BS anyway.

   They need to raise the rates once more this year, or else the yen will slide below 130 by Jan 1.

2. Contrarian on July 8th, 2007 3:54 am

   I’m curious: Are Japanese incomes rising fast enough to match the deterioration of the currency, or are Japanese people just losing buying power like Americans? I posted a transcript of an interview with Eisuke Sakakibara on my blog recently and he seemed pretty upset with the weak yen and kept calling for rate hikes and intervention from both the U.S. government and Japanese government.

   The big question asked of him was, “Can the Japanese economy handle the interruption in easy money?” I think so. The key issue with easy money is that people have to be willing to take the free money in order for it to provide stimulus. I suspect that this is why the easy money failed all throught the 1990s to reinvigorate the economy.

   The Japanese economy has strengthened in recent years, but I suspect that easy money had little to do with it. Even 100 basis points won’t have much of an impact on the economy (IMO). It will have an effect on the currency, which is the idea.

3. Ken Worsley on July 8th, 2007 4:20 am

   I think your last paragraph brings up a lot of the heavy issues. But first: the percentage of non-regular employees as part of the workforce is increasing, and is now over 30%. This means that no, average wages are not increasing. Earnings, Contractual cash earnings, and scheduled cash earnings have all been down so far this year. The average number of hours worked is up. The real wage index was down 0.7% in April. Last year, annual wages increased an average of $50 per worker, but in the ten years leading to that, they decreased by over 10%. Corporate profits were up 15.5% last year.

   That said, of course the Japanese economy can handle rate increases. Bank loans have been on the fall as well. You said, “people have to be willing to take the free money in order for it to provide stimulus.” Excellent point - that never actually happened when the benchmark rates were at 0, since banks were denying loans to people starting businesses in order to write off bad loans and boost productivity.

   One thing that has to be noted about Japan is that bank loans for start-ups still require personal guarantors. In other words, a person needs to sign off and be liable as an individual. Great risk management for the banks, bad for start-ups and innovation. On September 29, 2006, the Prime Minister told the Diet that he would urge banks to do away with this in order to encourage entrepreneurship, but nothing has actually happened.

   Getting to your last paragraph, the economy has strengthened on capex and exports (thanks, weak yen!). Consumer spending is 55% of GDP but still not showing strength, as savings rates continue to increase. I think you’re very right about a 100 basis point increase, but the government is now worried that too many Japanese investors are betting against the yen, leading to huge retail outflows, and that a raise in rates would cause a cancellation on positions that could bankrupt households.

4. Ivan Kitov on July 9th, 2007 3:37 am

   Japan is hardly to recover very soon from the deflationary period
   as measured by GDP deflator. As in any other developed country
   the Japanese inflation is driven by the change rate of the level
   of labor force. This economic variable shous a constant decrease since the
   end of 1990s. Corresponding linear relationship between the variables
   is as follows
   INF(t)=1.77dLF(t)/LF(t)-0.0035

   So, zero or negative growth in labor force level induces deflation.
   One has to focus all available means on the increase of labor force level,
   possible through the growth in unemployments rate.

   I cannot present corresponding figures here. I would like to invite
   interested readers to my blog with more many figures, details and other
   countries’ analysis.
   http://inflationusa.blogspot.com/2007/07/will-us-repeat-japanese-history-of.html

5. Ken Worsley on July 9th, 2007 6:22 pm

   Ivan, interesting stuff. I wonder how you’ve controlled for the demographic differences between the US and Japan. While it is true that Japan’s labor force is declining as a percentage of the total population, unemployment is still very low, and over 20% of the population is beyond the official retirement age.

6. Ivan Kitov on July 9th, 2007 8:56 pm

   Ken,

   I have never been seriously looking into demographic processes - only used corresponding data sets. My guess, which stopped me from any deeper research of demographics as itself was very simple - too many driving forces, which can not be inserted into a unifying quantitative model. I made some statistical estimates of the quality (uncertainty) of the demographic data I used, although. Thus, I can not explain why labor force trends (participation rates) in the USA and Japan are different.
   In the sense of statistical estimates and trends of the US and Japanese populations I did some qualitative comparison in prediction of the future evolution of inflation and real GDP.
   There is one problem, which I still have to resolve for Japan - prediction of unemployment as a linear function of labor force change rate. In other developed countries such relationships predict a decreasing unemployment rate with decreasing change rate of the labor force level, as you can find in my blog. For example, in the USA unemployment rate is described by the following relationship:

   UE(t)=2.2dLF(t-5)/LF(t-5) 0.021

   Where LF(t-5) is the level of labor force five years before, i.e. the unemployment lags by five years behind labor force change. In Japan, there is not lag between the labor force change and inflation.

   For Japan, the problem consists in a very short time of quality data. Definitions of unemployment rate have been changes too severely and often, as far as I can remember from my two-year old study. I’ll revisit this issue in near future when edit the part of my book related to Japan.
   In any case, there is a good news for Japan - any downward process meets some bottom and regains an upward trend. In the long run only a depopulating country deviates strongly from long-term economic trend.

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