Sunday, May 19, 2013

A More Serious Slapping Around of Abenomics Cheerleading

Edward Hugh has a sharp review of the negative view of Abenomics, or perhaps more properly the dismissive-as-irrelevant-and-possibly-quite-harmful view of Abenomics:

The Real Experiment That Is Being Carried Out In Japan

Particularly thought-provoking are the quotations from Keynes, showing both the incredible brilliance of the man and the continuing validity of the old saw, "There is nothing new under the sun."

I agree with almost everything in the post, particularly with the quotations from the speeches of former Bank of Japan governor Shirakawa Masaaki, whom the Kool Kids in this blessed land's business and media elites all feel free to disdain and revile. Shirakawa is revealed to be who he is and what he always was: a central banker blessed with intelligence, humility and a conscience.

With all that is good (and there is a lot of it) I think Hugh does himself a disfavor with the cheap shot at the what may be the most important goal of the creation of inflationary expectations: pressing savers to convert their assets in to real goods or put them into higher risk/higher return investments. A critic would point out that "Uh, that's sort of the point of the program. Duh."

The demographic angle of the story is that while there is a vast pool of cash that could be deployed in lifting the economy to a higher level of activity, almost all of it is in the hands of persons over 60 years of age. Seniors are very, very conservative about their assets and cash, clinging to low-or-negative return real estate or money kept in bank accounts...or in the safe at home.

The government is trying some direct methods to get older citizens to turn over their savings to younger citizens, the most famous/infamous being the tax free accounts for the education of grandchildren (a plan which has been widely derided as just a tax avoidance scheme for the extremely wealthy). Increased taxation of the assets of retirees would be the one, absolutely effective, politically lethal (those damn retirees vote, a lot) solution.

Debasing the currency and creating the desire to convert cash into something that is meaningful and useful is an actual, non-ridiculous goal of induced inflation...the caveat being "but what if instead of increased consumption and domestic investment the result of debasing of the yen is capital flight, with savers sheltering the current value of their money in overseas accounts and assets?"

I guess we have to keep an eye on the yen. I am sure if someone popped an inquiry into Richard Katz's mailbox he would have something to say about what the yen level should be, using trade-adjusted figures.

Later - Richard Katz responds in comments. He corrects my incautious claim that he would know at what level the yen should be.

No one knows this, save, supposedly Mr. Market.

What Richard Katz can tell you is what the long-term average real exchange rate has been, and whether or not the Abe governments disengenuous program to crush the "high yen" has firm intellectual roots.

Nota Bene: All comments to Shisaku are moderated, except my own.


Troy said...

The government is trying some direct methods to get older citizens to turn over their savings to younger citizens

yeah, how the 1 quadrillion yen national debt is going to be monetized by taxpayers (instead of Kuroda) is the interesting bit.

In the 1990s the LDP cut taxes and called it savings, essentially.

Now these savers want to beat the money out of the generation coming up, making the young pay the taxes the old collectively shirked.

fooey on that.

But as for competitive devaluation, I think the MOF can just point to the Plaza Accord, and that the average yen was 144, 1986-1990.

Seems like a fair target. A large part of Japan's mfg challenge is that Japan's hourly wage is still China's daily wage, more or less.

One topic that never gets its due is land valuations. They are still stratospheric in Japan, but I'm hoping that some good depopulation will reduce that particular rent suck on working people.

Anonymous said...

Sorry, Michael, I cannot say what the yen value "should" be. But I can say this: when it comes to competitiveness of Japanese exporters, what counts is not the nominal yen/$ ratio that you read about in the newspapers. What counts is the REAL, OR PRICE-ADJUSTED value vis-a-vis all trading partners. Because Japan has deflation, while its trading partners have inflation, the nominal value of the yen has to rise just to keep the real value the same. The Bank of Japan puts out a monthly series on the yen's real value (deflated by the consumer price index relative to major trading partners. If we take the average value of the yen from 1986 to 2013 as 100, then in 2012, the nominal value of the yen reached a NOMINAL level of 141 in 2012, but the highest that the REAL yen got in 2012 was 96.4. In other words, in real terms, the yen was never overvalued in terms of historical comparisons for the past quarter century. It was below the quarter-century average. As of the end of April, the REAL value was 73.1, i.e. 27% BELOW its quarter-century average and the lowest level since 1982! It's around the same level that it was just after the March 1973 Smithsonian agreement. Recall that, at the end of April, the yen was around Y98/$. At Y102/$, the real yen is even cheaper.

Richard Katz

Richard Katz said...

If we take the real (price-adjusted) value of the yen during 1986-2013 as 100, the real yen as the end of April was 73.1, the lowest level since 1982. At its highest in 2012, it was around 96. The "overvalue" of the yen is a myth. Yes, the nominal value was high, but, from the standpoint of Japanese exporers's competitiveness, what counts is the real yen. And that is affected by the fact that Japan has deflation whereas its trading partners have inflation.

Troy said...

hmm, good point about comparative inflation!

Since Plaza the dollar has been devalued 50% in purchasing power, while vending machines in Japan still charge ¥100 (+ tax) I suppose.

But I think so much of Japan's "deflation" has simply been the effects of Japan's massively increased buying power post-Plaza.

In the 80 yen regime, a 12oz can of coke ~should~ be costing the consumer ¥20, tops!