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Yomiuri piece on the Bank of Japan Governor debacle is dead wrong

As everyone who follows Japan’s economy already knows, the Bank of Japan’s top position is currently vacant. The story behind the story is richly complex, and is turning out to be a fascinating saga offering a very helpful glimpse into the current state of Japan’s political machinations. Claus Vistesen recently described the debacle as being “better than Shakespeare.” I like this comparison because it truly is difficult to tell whether we’re watching the unfolding of a tragedy or a comedy. It is the end of the fourth act, and we’re still wondering whether the play will end with everyone dead, the stage covered in blood, or if the curtain closing will bring about some unexpected union of unsuspected soul mates.

With that in mind, today’s Daily Yomiuri printed an article on its front page that we have long been waiting for. This piece, a blatant editorial disguised as analysis placed amongst the news of the day, is so profoundly misguided that we need to break it down and look closely at how the Yomiuri is attempting to manipulate events into its own worldview. Near the opening, the article tells us that the global economy is not currently experiencing the best of times:

…[T]his is a fire of considerable proportions–the dollar has sharply dropped; share prices are hovering at low levels; and crises involving major financial institutions have surfaced in quick succession.

This is all very true. The author, however, seems to be under the illusion that American policymakers have somehow acted laudably in their attempts to fight the “blaze” on the other side of the Pacific:

U.S. financial authorities have started to extinguish the fire in a bare-knuckled fashion, employing both financial and fiscal measures. This was symbolized by U.S. President George W. Bush, who said, “And when need be, we will act decisively,” meaning emergency actions are necessary when an emergency occurs.

On Tuesday, the U.S. Federal Reserve Board cut its federal funds rate for the sixth time since last summer, marking a total reduction of three percentage points.

This is a prime example of “action taken at a time of emergency” and signals the strong U.S. determination and sense of responsibility vital to prevent chain reactions occurring in response to events in the global market.

Yet few pundits in the US agree with this viewpoint. We won’t get into all the reasons for that here, but anyone should recognize that holding up the words of George Bush as an example of solid crisis management is material for the theatre of the absurd.

The author moves on to score easy points by picking the low fruit on the tree: Read more

Reappointing Toshihiko Fukui as Bank of Japan Governor: The last option?

This morning, the Nikkei published an opinion piece entitled “Reappointing Fukui As BOJ Governor Emerges As Option”, which included this passage:

No recent BOJ governor has served a second term. As the nearly two decades of Alan Greenspan’s Federal Reserve chairmanship impressively demonstrated, however, there is nothing wrong with having a long-serving central banker as long as the person has the “right stuff.”

If the government cannot quickly find a good alternative to Muto, who is unlikely to be approved by the opposition camp, it should consider keeping Fukui on for another five years.

Interestingly, the Nikkei’s title includes the phrase, “Emerges as Option,” although no source for this option is cited in the article. Is the Nikkei floating this idea on its own, or is this the brainchild of someone in touch with a Nikkei Press Club member?

A bit more has been written on this issue, and other happenings in the Diet, over at Observing Japan.

Where politics shouldn’t be: Is Muto’s tenure as next BOJ Governor already in danger?

With current Bank of Japan Governor Toshihiko Fukui set to step down next March, talk has been surfacing over who his successor will be. One thing is certain: The appointment of such a position should be above party politics.

We noted back in June that a Bloomberg survey had indicated current BOJ Deputy Governor Toshiro Muto as the most likely successor to Mr Fukui. That, however, was before the July Upper House election, which saw the Democratic Party of Japan take control of that house of Japan’s parliament.

Why is that relevant? An appointee to the position of BOJ Governor must be approved by both houses of the Diet, and the DPJ doesn’t seem to be a big fan of Mr Muto, who previously held the position of Vice Minister of Finance from 2000 to 2002. This is the highest position in the Ministry of Finance that may be held by a bureaucrat.

It’s worth noting that in February, the last time the BOJ voted to increase the nation’s benchmark interest rates, Mr Muto cast the lone dissenting vote in an 8-1 decision. With LDP pressure often put on the Policy Board not to increase interest rates (more so during the Abe administration, perhaps less necessary now), was Mr Muto sending a message that he was still on their team? At the same time, Mr Muto has publicly expressed the same opinion that his boss has - namely, that the BOJ needs to gradually raise interest rates. Read more

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…

Read more

Nikkei to Bank of Japan: Pay attention to consumer sentiment

Last night I wrote a quick piece in which I expressed amazement that the BOJ monthly economic report made no mention of declining consumer prices, consumer confidence, or the disappointing results of the BOJ’s most recent Standard of Living survey.

In today’s Nikkei, this headline appeared: INSIDE VIEW: BOJ Must Pay More Attention To Consumer Sentiment

I’ll have to run through the server logs to see whose job I’m making easier…just kidding. What I think this shows is the obvious hugeness of the blinders that BOJ governors are wearing. The fact that the Nikkei is reporting on it adds quite a bit of legitimacy to the idea that the BOJ’s approach - focusing on sentiment at large manufacturers in the belief that there will be a ‘trickle down’ effect - is deeply flawed. As the Nikkei presciently put it:

[T]he economic outlook grows darker when consumer sentiment weakens. The index of leading indicators for major industrial economies, calculated by the Organization for Economic Cooperation and Development, is used to analyze cyclical changes in economic activity. It shows that the Japanese economy began to weaken in April 2006, or one month after the BOJ ended its quantitative easy money policy.

Would that not be historically in line with what one might expect?

Nikkei nosedives, overnight call rate up, Bank of Japan injects one trillion yen into the financial system

On Thursday, Credit Suisse’s study of market interest rates placed the likelihood of a rate hike coming from this month’s Bank of Japan Policy Board meeting at 64 percent. Then, today happened: The Nikkei fell 406.51 points, the overnight call rate went from 0.50% to 0.55%, and the Bank of Japan injected one trillion yen into the nation’s financial system (which helped bring that rate back down to 0.49%).

Today, Credit Suisse’s study rated the possibility of an August rate hike at 26 percent.

I’m still holding steady at 65% - let’s see what Monday looks like…there’s still plenty of time for re-evaluation, especially if it’s true that 60% of the value of a rate hike has already been figured into prices.

This Week’s BOJ Watch…

There has been quite a bit of economic news coming out of Japan over the past few days, but precious little time to write about it during the run up to O-Bon, when things just get a little busy. So here’s a quick roundup of what’s going on with the Bank of Japan:

One thing that caught my eye this week was a quote from LDP Secretary-General Hidenao Nakagawa, who is set to step down from his job soon and seems to be looking for anyone to blame for the ruling party’s embarrassing defeat in last month’s Upper House election. On Wednesday, Nakagawa told reporters, “[The defeat] because we have not been able to achieve our target for nominal gross domestic product growth, and the BOJ’s monetary policy may be responsible for that.”

This is coming from the guy who was seen on TV in January, leaving the bank on the final day of its Policy Board meeting with a big smile on his face and later saying, with a straight face, that politicians do not pressure the BOJ. Uh-huh…

Slightly further down the food chain, Economic and Fiscal Policy Minister Hiroko Ota is still holding the opinion that the BOJ should not raise the interest rate at its meeting this month. BOJ Governor Toshihiko Fukui told reporters on Tuesday, “It’s true that the upward pressure on prices is weak, despite the tightening of the supply-demand balance…A further slowing down of adjustments to interest rate levels would cause a distortion in the allocation of resources.”

Those two sentences may not seem to make much sense together, but they were the best I could do to patch two sentences from one press conference together. Just send Mr Fukui a picture of yourself standing on your toes and he’ll be happy, it seems.

The Economic Planning Association released a poll on Tuesday saying that 70% of economists who responded believe that the rate will be hiked in August, despite lackluster GDP data in the first quarter of financial 2007. The Association believes that 60% of the impact of a rate hike has already been figured into market pricing.

From December, the Bank of Japan’s Corporate Services Price Index will be updated, with a bit more weight given to internet technologies services. The bank postulates that the newly weighted index will come in slightly lower than the current system.

Tomorrow we’ll take a look at this week’s economic reports…

Increased tax burdens, consumer pessimism, excessively low interest rates, and the BOJ’s June Standard of Living Survey

Shockingly few English language media pieces have touched upon the impact that increased local taxes have had in Japan since the new rates went into effect from April 1. This could be because we haven’t yet seen the effects in terms of statistical regurgitation, or it could be the distance between the English language media on Japan and the average person living and working in Japan (they don’t tend to speak a common language).

The truth is that despite widespread claims to the contrary, national income taxes will not really be reduced for most people, since the income tax cuts initiated during the Koizumi administration have been very, very quietly rolled back in two steps: one on January 1, 2006 and the second on January 1, 2007. Since New Years tends to be such a huge holiday in Japan, the National Tax Agency could hand out news releases to their press club members the day before New Years and be pretty much assured that not many people would notice the following day. And not many did.

However, people did notice when their local taxes jumped, often between 60% and 80%, in their tax bills for this fiscal year. For those of us who own businesses or those who are self-employed, the local tax office sends them out in April, and the tax rate is based upon the previous year’s earnings. Full-time company employees see the local tax deducted from their paycheck, which is why May’s pay packets opened so many eyes.

The worry is starting to set in. On July 27, the Ministry of Trade, Economy and Industry is set to release the most recent retail sales data, and on July 31, the Ministry of Internal Affairs and Communications will release household spending data. With many households nervous over future prospects, a potential rise in the consumption tax, sluggish (if negative when normalized) gains in wages and decreased consumer confidence in June, economy watchers should now be worrying whether these two reports might prove to be a nail in the coffin of an August interest rate hike by the Bank of Japan.

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.

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