News That’s Fit To Punt – 18/Dec/2012

Shinzo Abe Wins In Japan

Predictably, the Democrats lost in Japan to the Liberal Democrats in the election on Sunday. now that the dust has cleared, there’s a lot of talk about how this is a hard move to the right. The DPJ were not only kicked out, they were more decimated to about one sixth of representation. in the landslide, the ‘Restoration Party’ also picked up a bunch of seats in the lower house, putting them at about equal footing with the DPJ, while the Social democrats got smashed to two seats. The end for Prime Minster was more crash-and-burn than going out in style.

What’s got my interest right now more than all this talk of Japan might be turning hard to the right is the notion that Shinzo Abe wants to challenge the Bank of Japan to do the kind of Quantitative Easing in the style of Ben Bernanke and the US Federal Reserve.

Mr Abe’s Liberal Democratic Party (LDP) won a landslide victory on Sunday, securing a two-thirds “super-majority” in the Diet with allies that can override senate vetoes.

Armed with a crushing mandate, Mr Abe said he would “set a policy accord” with the Bank of Japan for a mandatory inflation target of 2 per cent, backed by “unlimited” monetary stimulus.

“It’s very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision,” he said.
The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan’s governing law if it refuses to comply.

“An all-out attack on deflation is on its way,” said Jesper Koll, Japanese equity chief at JPMorgan.

Mr Abe plans to empower an economic council to “spearhead” a shift in fiscal and monetary strategy, eviscerating the central bank’s independence.

The council is to set a 3 per cent growth target for nominal GDP, embracing a theory pushed by a small band of “market monetarists” around the world.

Which, when you think about it is pretty enticing.  It’s certainly a return to Keynsian economic thinking, and something I’ve been wondering for some years now. Japan was actually coming out of the lost decade around  2007 when the GFC kicked in, and since then, asset deflation has hit growth pretty hard. More to the point, if there’s one nation that could have printed more money in the last 20years,it was Japan.

Now, there are reasons the Bank of Japan hasn’t simply printed money, and this is because the property bubble came about because there was so much cash flying around the economy, looking for places to be invested; and under the old hyper regulated markets of Japan, inevitably found their way to real estate which led to the Bubble. Since then of course there’s been a whole lot of deregulation. It may work better now that there has been all this deregulation that has happened since 1990.

This next bit also got my attention:

“Any meaningful sell-off in the JGBs could trigger a serious problem in Japan’s banking system. The holdings of JGBs by Japanese banks account for 900pc of their Tier I capital,” he said. Better the Devil you know.

Professor Richard Werner from Southampton University, author of Princes of the Yen, said the Bank of Japan is to blame for the country’s failure to shake off its financial crisis in the early 1990s and for two Lost Decades of perma-slump that have followed. He accused the bank of dragging its feet at every stage, forcing governments to rely on huge fiscal deficits instead.

This tight-money/loose fiscal mix has pushed public debt to 240 per cent of GDP. The country would have been better served if the bank had stopped the rot immediately by flooding the money supply to kickstart lending. “It has taken 20 years and the Fed’s Ben Bernanke to show them how to do it.”

“Mr Abe has the right intentions but the Bank of Japan knows how to put up a fight. After watching the glacial moves in Japan for over 20 years – often in the wrong direction – I want to see the details before being sure that something really big is happening,” he said.

You can just see the successor to Shirakawa – whoever it’s going to be – would want to put up a big fight with Abe. Now, I don’t know about you, but it seems to me that if one sector in Japan has made lots of money since the Bubble, it’s actually the banks. Banks everywhere seem to thrive a lot better when interest rates are lower, and the banks in Japan have been able to grow steadily in spite of the low growth economy for quite some years now. So, rocking the boat and printing money may actually be something the banks would like. The Bank of Japan claiming it’s been holding off inflation seems to have been way off the mark for most of the time since the Bubble burst.

No More Of Tanaka In Niigata Ward 5

Daughter of former Prime Minister Kakuei Tanaka, Makiko Tanaka lost her seat to Tadayoshi Nagashima of the LDP. The interesting thing about that is that it happened in Niigata where the name of Kakuei Tanaka brings awe (and graft money by the truckload). Some of you might know this but the man who deposed her is the former mayor of Yamakoshi village that suffered greatly from an Earthquake earlier in the decade, and led the recovery of that village for years.

I met Mr. Nagashima when he came out to Sydney for the Japanese Film Festival. He is a career politician in many ways, but he did it from the ground up. He’s not one of those people who come from dynastic families of politicians, unlike Makiko Tanaka, who is the epitome of that problem. Whatever Makiko Tanaka might say, she lost to a man who knew the electorate and understood how to do elections there. Talk about an end of an era that dates back to the mid 1950s.

Good Riddance, I say.



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