Sunday, May 02, 2010
Alert: Central Bank Becoming Development Bank?
Hard to believe, but there you are: Asahi, Mainichi, Yomiuri, and Nikkei. It was the page one headline article in the Yomiuri and Nikkeii. It must have been the same in the other national dailies. So I guess my question is: Is Japan becoming another BRIC, or is it…
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5 comments:
I'm glad that you are paying attention to this issue, because central banking to me is the pivotal issue in the current financial turmoil affecting most nations.
I don't quite understand you point, however.
I guess you want to say that if the central bank engaged in a policy of weakening its own currency to foster growth at home (targeted inflation), this would be a BRIC like policy?
I expect we're going to continue to see problems around the world like Greece, and that eventually within ten to twenty years -- probably a lot sooner -- we'll see a debt crisis in America. When it finally comes about, hindsight will make it look as if it had been inevitable. (There'll be a lot of "what were we thinking.")
But if the dollar were to suddenly drop in value (as it will in a debt crisis), this would surely have to have a major effect in Japan -- and it would surely reduce the value of the yen significantly (though relative to the dollar it would gain a great deal.)
Many people predict Japan could be the next Greece, but I find this difficult to imagine, because it would involve a host of senior citizens rushing to their postal accounts to withdraw cash presumably to hide it under their futons (or to buy gold) ... nevertheless, as seniors begin to dip into their savings a slow motion crisis will form here too, and the only answer will be to print money to cover the difference. I mean, how else will Japan be able to make up the difference?
So inflation seems sort of inevitable. So long as the government continues to apply deficit spending, the inevitability of there being a short fall in terms of who will buy the debt remains. So whether the central bank likes it or not, eventually they will have to step in to create a market for Japanese bonds.
Could you please tell me who are the Japanese politicians that are talking about honest to goodness fiscal responsibility (and not just offering gimmicks)?
In my dream world there would be someone who advocates:
-- massive reductions in government spending.
-- No more US bond purchases.
-- A Japan first, Asian centric policy that realizes free trade is the best means to prosperity.
-- Return to a gold standard of some sort. (Or even better legalization of competitive currencies.)
-- An open border policy encouraging immigration ...
Okay, I've gone from the sublime to the absurd ... I'd best stop.
Sorry, Matt. I shouldn’t put anything out there without any explanations, and I’m not an economist anyway. But I was astonished that BOJ would prioritize certain activities in the real economy over others with favorable lending terms, so I wanted to issue an alert to people such as you who could read the Japanese articles. That’s industrial policy, and central banks have enough to do minding inflation—disinflation in Japan’s case—employment, and the growth rate without playing the (implicit) targeted subsidy game. If BOJ does what the administration wants it to do, it’ll erode public trust in its independence. If it doesn’t, it’ll come into conflict with the administration in an area of economic policy reserved for development banks, unnecessarily politicizing BOJ among other things. I said BRIC, but better—or bad, depending on how you want to put it—examples of this phenomenon will be found in less promising LDCs and emerging market economies.
As for the points that you are making here, I don’t understand the economics to have much of an opinion on them. And even if I did, to fill out credible scenarios for the unwinding of the huge imbalances in the Japanese economy, I’d have to have a handle on the mystifying (to me) patience of the Japanese public—and I include myself here—that leaves so much money in low-yielding fixed-income yen assets. As for the politicians, I think that the DPJ and LDP need to regain coherence if they don’t want to leave the field open to other political parties that come up with serious, lucid, exit strategies. But will any of the start-ups shape up? A post-Ozayama DPJ administration? Or will the LDP defy all expectations and pull itself together?
I’ll try to work my way through previous comments on this blog over the rest of the Golden Week holidays.
Jun,
It does seem really very bizarre to use the BoJ rather than the policy bank(s) to do this, as you point out. Any insight as to why this came about?
According to the BOJ, deflation will end next year. And they expect median growth this year to be about 1.8% this year.
For them that's not bad. So things are okay for them.
However, the DPJ is making lots of ludicrous requests. It's hard to check financial news these days without hearing about Kan or Kamei making some kind of weird outrageous statement about the values of inflation via buying government debt and printing cash. (This is called the inflation tax.) They want targeted inflation … and so on.
So the BOJ is under a lot of pressure these days. They know this is absurd and bad for Japan. So I guess this program is a way of dealing with that pressure in some way. It's kind of like saying, look this is what you *should* be doing yourselves, dummies. There's an election coming up, and even the BOJ isn't immune to the pressure.
By the way, institutionally I would guess central banking almost always favors the current power structure which is usually the large corporate banks. So while I can imagine central bankers have numerous Keynesian (and monetarist) theories that supposedly guide their behavior that they can point to, in the end their independence has about as much truth value as the Catholic idea of transubstantiation.
So long as their is a central bank, it should be run by the the representatives of the people … or else what purpose is their to democracy at all?
Central bankers support the status quo, which is usually the elite. Centralized banking, for better or worse, is a form of socialism. It was even part of the Communist Manifesto. But ultimately in our society, what it has becomes is a kind of socialism for the rich.
In a sense I have sympathy with both Kan and Kamei for wanting to take on the BOJ. But I bristle at their ideas.
The best introductory book you can read on any of this is probably Murray Rothbard's _The Mystery of Banking_:
http://mises.org/books/mysteryofbanking.pdf
When I studied banking at college, I managed to get a good grade as I regurgitated all I was told in class. But I was left completely bewildered as nothing I'd been told made sense. It was really refreshing when I found Rothbard's book and he explained why.
He's a polemist to be sure, but that doesn't diminish the credence of his arguments.
Anon is right; it’s something best left to development banks, if not totally left to the private sector—as Matt, I’m sure, would prefer. I agree with Matt; I can find no other explanation for it. But it really crosses the line. It looks more like something that would happen between the Kirchners or Hugo Chaves and their central banks. I’m surprised that mainstream economic writers aren’t up in arms about it. Golden Week, maybe? BOJ can’t just drop the idea, so we’re bound to hear more about it as we go along.
Anon is right; it’s something best left to development banks, if not totally left to the private sector—as Matt, I’m sure, would prefer. I agree with Matt; I can find no other explanation for it. But it really crosses the line. It looks more like something that would happen between the Kirchners or Hugo Chaves and their central banks. I’m surprised that mainstream economic writers aren’t up in arms about it. Golden Week, maybe? BOJ can’t just drop the idea, so we’re bound to hear more about it as we go along.
Thanks for the url, Matt. I can’t promise that I’ll read it in its entirety, but most of what little I know about US banking comes from Martin Mayer’s The Bankers, and I could benefit from a different perspective.
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