Home > Causes of Inflation, Europe, Japan > What Have You Done For Us Lately?

What Have You Done For Us Lately?


So the EU laid down the law last week: Greece had to prove that it was serious about austerity measures. It had to get all political parties who might win in elections this year to agree to maintain the austerity measures, and they did. It had to pass a bill detailing the austerity measures through parliament, and it did. The government and the major political parties went further, and sacked anyone who voted against the measure – displaying a fairly hair-raising resolve to ditch democracy if that was necessary to make a buck. And it had to find a few more hundred million in austerity measures, which it was working on.

Then a group of Euro finance ministers was to meet on Wednesday, sign off on the deal, and move the process forward so that the March bond payment would be covered (assuming a few other things, like the IIF agreement, moved forward as well).

Well, that meeting has been canceled. It is being replaced with a conference call. Jean-Claude Juncker said that they had not received “assurances” from Greek leaders about the cuts. You may read between the lines here with some ease: it is hard to imagine how greater assurances could have been given than sacking all of the dissenters and passing a law despite protestors outside threatening to burn the ancient city down.

The Euro ministers may have been surprised by the report that Greece’s economy contracted by 7% (annualized) in the latest quarter, but although that was larger-than-expected it wasn’t so different that it should completely change the EU’s perspective. To me, Juncker’s downgrading of the meeting looks like a fairly clear indication that the EU is not at all united about whether Greece should be saved, allowed to default while remaining in the EZ, or kicked summarily out of the EZ (or even the EU). It sounds like an excuse. It is hard to see how Greece could have done more than they did this weekend. I don’t believe Greece can be prevented from defaulting, and I have said that now for a very long time. I think that enough in the EU have come to the same conclusion that the default is going to happen, probably in March – and the way the EU has gone about it, frankly, is going to cause bad blood in Athens for a generation.

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Meanwhile, in Japan the Bank of Japan overnight added ¥10 trillion (about $130bln) to their version of QE, and declared that it now has an inflation target of 1%. The BoJ didn’t state over what period inflation is to return to 1%. I will say that it’s about time – the country that has had the most need of QE, the most reason to weaken its currency, has for the last couple of decades refused to apply meaningful monetary stimulus to its deflation problem. I’m fond of saying that the BoJ correctly diagnosed the disease (deflation) and correctly prescribed the treatment (more money) but completely blew the dosage. “The body economic has cancer: radiation is prescribed. Here is a prescription for one hour in a tanning bed.” With this action, they are finally starting to increase the dosage.

I showed a couple weeks ago that core inflation in Japan, just as in Europe, the UK, and the US, has been rising (in Japan’s case, rather fitfully) for several years. But that is mainly from global factors – the rising money tide raises all prices, no matter its source. The quickest way for Japan to increase its own inflation is for it to intentionally weaken its currency. That they’ve never done this is hard to understand, and must be tied to a sense of national honor and pride in the currency. A weaker Yen would help growth and raise inflation. It boggles why a more-aggressive monetary policy hasn’t been pursued before now.

If Japan is serious, then currency-hedged Nikkei is going to finally be an interesting investment. Since 1989, the only way you wouldn’t get smoked being long the Nikkei was because you were usually buying Japanese stocks with cheaper yen than when you went to sell. While the Nikkei in Yen terms has lost about 77% over the last quarter-century, in dollar terms it has only lost about 57%, thanks to the ever-appreciating currency. If the BoJ is really going to print, and has the guts to outprint the U.S., then the Nikkei may appreciate while the currency actually weakens.

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The economic news in the U.S. continues to be okay, but not great. Today’s Retail Sales report was better-than-expected as core Retail Sales was +0.7% versus expectations for +0.5%, but December’s numbers were revised lower and essentially offset the weakness. These are not depression numbers, but they aren’t also robust expansion numbers. We continue to stumble forward economically…but at least we’re stumbling forward.

On Wednesday, the pace picks up a little further. In addition to finding out what comes out of the conference call of the EU ministers, the February Empire Manufacturing report (Consensus: 15.00 from 13.48), January Industrial Production (Consensus: +0.7%) and Capacity Utilization (Consensus: 78.6% vs 78.1%), and the minutes of the latest FOMC meeting will be released. This last will be carefully scrutinized for details about how to interpret the new communications from the Fed, but I actually don’t expect we will learn much new: the FOMC went out of its way to tell us exactly what they wanted us to understand from the new approach.

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  1. Jim H.
    February 15, 2012 at 12:07 pm

    ‘The quickest way for Japan to increase its own inflation is for it to intentionally weaken its currency.’

    In 1998 I was running a small business importing specialty metals from Japan. During three days, from the 6th to 8th of October, the J-yen popped by 25% against the USD, wiping out an unhedged $250,000 gross profit on a million-dollar order. I was fit to be shrink-wrapped and sedated.

    By comparison, our aggressive Chinese competitors had the benefit of a tightly-managed dirty float on the renminbi … and still do.

    Earlier, in the 1980s, I watched from inside as two major, publicly-traded Japanese companies (names you would recognize) got absolutely smoked by the J-yen’s relentless surge after the Plaza Hotel accord in 1985. They were completely unhedged as the J-yen doubled against the USD from 1985 from 1988, with multi-hundred-million-dollar government contracts outstanding in the US. If MITI was coaching big Japanese companies about impending forex moves, they failed to get the memo.

    Never did I detect any particular sense of honor and pride in the currency. My impression was more of haughtiness — Planet Japan moves in its own orbit, thank you very much. How foreign currencies move against the yen is a gaijin problem, went the thinking. Japan’s governing bureaucracy is so incredibly hidebound that even after twenty years of getting their pimply heinies comprehensive whaled by China, they still can’t get their act together. They’re also so paternalistic that Japanese individuals aren’t allowed to own JGB linkers (JGBi) — only banks and foreign institutions can.

    The ‘Japan rules the world’ meme of the late Eighties was one of the great fades of all time — nothing but monetary illusion on a galactic scale. At least Japan still rules in manga, anime and hentai!

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