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Ron Paul on consumer prices and artificially low interest rates

One is forced to wonder what the congressman would have to say about recent comments made by the Bank of Japan’s Policy Board, which asserts that interest rates must be risen in order to prevent a bubble from forming, and that the subprime crisis was a result of artificially low interest rates.

One thing is for sure - BOJ Policy Board members must love listening to someone who thinks that consumer price levels ought to be ignored.

BOJ Roundup: Interest rates, GDP and inflation projections, and corporate versus household recovery

The first item in this roundup is pretty much a non-item: The Bank of Japan policy board voted 8-1 today to keep the uncollateralized overnight call rate at 0.5%.

The bank, however, did release a slew of other information. In its Outlook for Economic Activity and Prices report, the BOJ starts off by sticking to the opinion that “Japan’s economy is expanding moderately” despite the fact that, “The pace of improvement in the household sector, however, has remained slow relative to the strength in the corporate sector.”

The corporate sector, however, has been unusually strong; stronger that it has been in 16 years. On Monday, the National Tax Agency announced that income at Japan’s corporations totaled 57.08 trillion yen in the 12 months to June 30 of this year. That figure was 13.3% higher than last year, and surpassed the previous record of 53.12 trillion yen, which was set in the 1990 tax year.

Granted, there are more workers in the economy now than there were in 1990, and we would assume that they’re making at least as much per head - more on this to come in another post. What struck us about the NTA’s numbers, however, was that only 32.4% of those firms were operating in the black. Getting to the other end of the BOJ’s statement, the NTA says that wages fell for the ninth straight year in fiscal 2006.

More on that report will have to come in a future post. For now, it’s back to the BOJ. After the above statement, the bank says that although expansion is expected to continue, “there are uncertainties regarding overseas economies and global financial markets.” How this is ever true…

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BOJ Holds Rates Steady, as Expected

A few short months ago, we regularly laid odds on whether or not the Bank of Japan would vote to increase interest rates at its monthly policy meetings. For the past few months, however, the bank’s meetings have been virtual non-events, with everyone assured that there would be no chance that the BOJ would vote in a rate hike in the wake of the US subprime mortgage crisis.

At the close of its Policy Board meeting yesterday, the BOJ’s governors announced that they had voted 8-1 to keep interest rates as they are, with the uncollateralized overnight call rate to remain around 0.5%. This was the ninth consecutive month that the BOJ has voted to hold rates steady.

A few hours later, the bank released its Monthly Report of Recent Economic and Financial Developments for October, which begins with the line, “Japan’s economy is expanding moderately.” This, of course, is in the face of GDP having been down 0.3% in the April-June quarter. Generally, though, the BOJ’s statement seems valid, as other economic indicators seem to point that GDP will head back into positive territory for the July-September quarter, though just barely. Preliminary GDP figures for the July-September quarter should be published around November 13.

The BOJ’s report follows the above statement with: Read more

BOJ to finally call the bluff in August?

I’ve been saying for a bit now that my odds on a rate hike in August are 60 percent. According to the Nikkei, the Cabinet Office’s Economic Planning Association polled 32 private sector economists and says that 70% of them believe that such a move will be taken by the Bank of Japan next month.

The poll found that April-June and July-September quarter CPI projections were negative. The October-December quarter was projected at a 0.13% rise.

Anyone want to talk about a rise in the consumption tax yet? Better get this rate hike in now, then. I’m moving up to 65 percent.

BOJ Leaves Interest rates at 0.5% - Monthly Economic Assessment Unchanged

Earlier this afternoon, the Bank of Japan announced that its policy board had voted 8-1 in favor of keeping its benchmark interest rate (the unsecured overnight call rate) at 0.5 percent, as was widely expected. Later in the afternoon, it published its “Monthly Report of Recent Economic and Financial Developments” for July, which also remained unchanged from the previous month.

With today also being the official start to campaigning for the Upper House election on the 29th of this month, it seemed politically impossible for the bank to raise rates at this time. The existence of a dissenting vote (cast by Policy Board member Atsushi Mizuno) seems to make the case for a rate hike next month a bit stronger.

Perhaps more telling were comments made by BOJ Governor Toshihiko Fukui at a press conference after the announcement:

The majority of the nine (policy) board members agreed that they need to watch more economic data and more evidence that the economy and prices will continue moving as they expected in April…I firmly believe that the on-year change in the core CPI will rise gradually, judging from the positive GDP gap.

Fukui also alluded that the bank would have to watch how the economy would react to results from the upcoming election, which, unlike most of Japan’s parliamentary elections, does not have a clearly predictable outcome.

Two things must worry the bank at this point. First, despite Fukui’s comments on prices, the Consumer Price Index has fallen four consecutive months to May, and in spite of Fukui’s incessant claims that it will rise once last year’s high oil prices have been flushed out, that will most likely still leave CPI flat (if not falling) if fuel prices are stripped out of the current rate (although fresh food prices are stripped out in determining core CPI in Japan, fuel and energy costs are not).

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Bank of International Settlements: Yen’s Value is ‘Anomalous’

In its annual report, the Bank of International Settlements expressed the opinion that the yen’s weakness is out of line with where it should be, stating, “There is clearly something anomalous in the ongoing decline in the external value of the yen.” The BIS recommended that the Bank of Japan tighten its monetary policy.

The problem, according to the BIS, and reported this morning by the Nikkei, appears to be that investors see no sign that the yen will be allowed to appreciate in value any time soon. At a news conference this morning, Finance Minister Koji Omi told reporters, “Exchange rates should reflect economic fundamentals and the Japanese economy remains in good shape on a recovery track.”

That’s not the first time we’ve heard this line. After giving his standard line, Omi was asked whether or not the yen’s current rate reflects economic fundamentals, but refused to comment.

How much of the carry trade seems to be psychological? This interesting tidbit was buried in the BIS report:

Given that Japanese retail investors hold the bulk of their wealth in yen, they are not as sensitive to the risk of a sudden rise in the value of the yen as leveraged investors who short the currency. They are therefore less likely to unwind their foreign currency investments during episodes of exchange rate volatility. Indeed, market commentary suggests that Japanese retail investors took advantage of the yen appreciation associated with the most recent rise in volatility to increase their exposure to high-yielding overseas assets. - Chapter 5, page 6

In other words, despite comments from Bank of Japan Governor Toshihiko Fukui that the bank may raise interest rates even when consumer prices show no rise, investors still don’t see interest rates, and by extension, exchange rates, moving much any time soon. They’re buying on discount, thinking the stronger yen is a better buy point because it can only get weaker. They’re catching on.

BOJ Rate Hike Timing Projections Revisved

On Tuesday an extension to the current Diet session was agreed upon in principle, and that was cemented today. Because the extension will be for 12 days, the Upper House election has been pushed back a week, from July 22 to July 29. This means the official campaign period for the election will begin on July 12.

The Bank of Japan’s July Monthly Policy Meeting concludes on that same day, which pretty much rules out the chance for a rate hike in July. I’m lowering my projection from 30% to 5% in July and raising my August projection from 50% to 60% - in other words, I’m off the fence.

Morgan Stanley’s Takehiro Sato rightfully places much emphasis on the BOJ’s June Tankan survey in determining whether a rate hike will come in August, writing, “The June Tankan Survey should be an important milestone of whether the BoJ continues its aggressive normalization campaign” at the Morgan Stanley Global Economic Forum.

Back in March I thought it could have turned into an aggressive campaign, but now I think I would have worded the above sentence as, “The June Tankan Survey should be an important milestone of whether the BOJ resumes its interrupted desire to embark upon an aggressive normalization campaign.”

Splitting hairs over words aside, I’m thinking anything over 2% annualized GDP growth in the second quarter of 2007 will seal the deal. The Tankan will no doubt be important, and given that the most recent monthly Reuters Tankan was decidedly mixed - with sentiment amongst manufacturers at a five-month high in June and sentiment in services at a 15 month low - the BOJ’s upcoming quartery Tankan is tough to call.

Sato is cautiously bullish on the upcoming Tankan, writing:

The manufacturing environment is not particularly healthy, with declining automobile exports and high inventories for IT products, but a firm headline result is likely to bolster investor confidence in the sustainability of economic growth. We currently think this could happen.

So do I. The main issue is whether the lack of increase in the CPI may get in the way or if the low sentiment in the service sector indicates that household spending may be slowing. Either could provide a stumbling block, and to raise rates in such a climate, the BOJ would have to explain itself very, very clearly to the outside world…

…and we know how skilled it is in doing that.

Bank of Japan decided to leave interest rates at 0.5% - for one more month?

As Hisane Masaki points out in a piece at the Asia Times published tomorrow (?!?), most Bank of Japan watchers expect to see an interest rate increase come in August, if not July. We are in that camp as well.

That call looked just a bit more on today, as the Bank of Japan ended it’s June policy board meeting with the unanimous decision not to raise the nation’s benchmark interest rates. Ever vague, Fukui told reporters, “(the nine board members) have unanimously agreed that we must examine a number of factors before changing our policy.”

The Bank’s report said that the economy continues to expand moderately, is expected to continue to do so, and that future increases will happen gradually, in line with economic growth and (hopefully) price increases. The bank expects exports to continue to rise and household spending to rise as well, claiming that there is a “moderate rise in household incomes”.

All data thus far show that there is no solid basis for a claim that there has been a rise yet in household incomes.

Ever more puzzling, Fukui had this to say to the media: “It can’t simply be said that the yen’s weakness is a risk factor.”

Click the “read more” link below for the full text of the BOJ’s statement.

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Bank of Japan Governor Toshihiko Fukui Stays Talkative

Toshihiko Fukui could not avoid the microphones on Tuesday: First, he told reporters that the BOJ will not raise interest rates based on a single economic indicator, which I suspect we all suspected. To give some context, this was in response to a Diet member who asked Fukui about Monday’s report showing capital spending at an all time high. The Nikkei continues to hold the (my?) line that an interest rate hike will not come until after the Upper House elections in July, though the Nikkei still holds on to the August prediction while I’m up to 50-50 on July or August (Link updated to English translation version).

Then, as news hit that the yen’s real effective exchange rate had slipped to it’s lowest level since the signing of the Plaza Accord in September of 1985, and that the New Zealand and Aussie Dollars had reached 15 year highs against the yen, Fukui warned that the sudden unwinding of the carry trade could have severe effects: “Because there is a bias in the risk, the real economy is likely to be adversely impacted in the future if there is a sharp unwinding [of the carry trade.]”

Has another central banker had exchange rates so forced into his monetary policy decisions before? Last year (and the year before) I thought, “That guy has the easiest job in the country.” Now I’d rather come after him and clean up his mess.

OECD-IMF Report: Japan should not raise interest rates just yet

On May 21, the OECD released a report stating:

Low yields result from excess global saving and liquidity. They risk pushing leverage and equity prices in parts of the corporate sector to excessive levels…Two major prices in the world economy worth noting in this respect are the near zero interest rates in Japan and the fixed exchange rate for the reminbi.

In other words, Japan’s low interest rates are a bad thing, as they feed the carry trade and the massive overload of leverage that currently exists in the global economy. Ok…So, were they just kidding? Today, a very different story emerged…

In its “Economic Outlook” report released this afternoon, the OECD had this to say:

The Bank of Japan should not raise the short-term policy interest rate further until inflation is firmly positive and the risk of renewed deflation becomes negligible.

The OECD believes that Japan will finally defeat deflation in 2008, when consumer prices are forecast to increase by 0.3%, after being expected to decrease by 0.3% this year.

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