12-18-2012, 01:52 AM
Join Date: Oct 2007
Location: Calgary, AB
Shift in Japan could affect value of the Yen
Japan’s incoming Prime Minister Shinzo Abe backed the central bank when it raised interest rates in 2006, a move he now says was a mistake. His shift may signal less tolerance for deflation in the third-largest economy.
Abe, whose party swept to victory in elections for the lower house of Parliament two days ago, will have the chance to reshape the Bank of Japan (8301) next year, when the terms of its governor and two deputies expire. Abe, who met with central bank Governor Masaaki Shirakawa today, said yesterday that he wants a 2 percent inflation target. The BOJ is forecast to boost its asset purchases as soon as Dec. 20.
“This is one of the most important monetary policy events for 2013,” said Bruce Kasman, New-York based chief economist at JPMorgan Chase & Co., the firm ranked by Bloomberg Markets as the No. 1 global economic forecaster. “It could potentially be similar to the major change in U.S. monetary policy after the appointment of Paul Volcker.”
American policy makers by the late 1970s recognized the broader costs of inflation to competitiveness and productivity, and backed then-Federal Reserve Chairman Volcker’s efforts to contain it. Any similar shift by Japan with respect to ending deflation would diminish incentives to save and make it more attractive to borrow, a potential recipe for faster growth.
Shirakawa told reporters that he and Abe didn’t discuss monetary policy today.
The yen weakened 0.1 percent to 83.99 per dollar as of 2:13 p.m. in Tokyo after touching a 20-month low yesterday on the likelihood of more easing. The Nikkei 225 (NKY) Stock Average rose 1.1 percent, heading for its sixth week of gains, while remaining about 74 percent below a 1989 peak during an investment bubble.
Kasman’s colleague Masamichi Adachi in Tokyo said last week that the BOJ may this week adopt a “new style of open-ended asset purchases.”
JPMorgan last week boosted its estimate for Japan’s growth in 2013 to 0.4 percent from zero, accounting for fiscal stimulus pledged by Abe. Seventeen of 21 analysts surveyed by Bloomberg expect the BOJ to ease at a Dec. 19-20 meeting.
While Japan’s entrenched deflation helps retirees preserve wealth, younger generations are hit by falling wages and diminished incentives for borrowing crimp growth. Unemployment among those aged 15-24 was 7.5 percent in October, compared with an unadjusted overall rate of 4.1 percent.
The yen is still stronger than the 100 yen per dollar that Nissan Chief Executive Carlos Ghosn said is the currency’s “neutral range.”
In the U.S., “people began to recognize inflation’s broader cost and we saw a shift away from viewing it as acceptable,” said JPMorgan’s Kasman. “I don’t think we’ve really seen an aggressive and committed effort to get Japan out of deflation. Political pressures are shifting in a way that may produce that fight.”
Austerity measures in Europe and a territorial spat with China are dragging down Japan’s exports, with the nation’s economy shrinking in each of the past two quarters, meeting the textbook definition of a recession. Big manufacturers are the most pessimistic in almost three years. An aging population and the world’s biggest public debt make it harder to drive a sustained recovery.
“We have to get the economy out of deflation, correct the strong yen, create jobs and boost growth,” Abe said yesterday at a press conference. “That’s our mission.”
Abe, 58, made increased cooperation between the government and the central bank a centerpiece of his campaign, saying Nov. 27 that the BOJ “made a mistake” in stopping quantitative easing amid signs of economic recovery in 2006.
The BOJ ended its five-year policy of flooding the lending market with cash in March 2006, when Abe was chief cabinet secretary. Four months later, just before Abe became prime minister, the central bank raised its key lending rate for the first time in almost six years. By the third quarter of 2007, the economy was contracting and Abe’s popularity had slumped. He resigned, citing illness.
“The most important lesson Abe must have learned was that the economy matters for his popularity,” said Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch. “Pushing the central bank may be the easiest solution for now due to the debt burden and because deregulation takes too long to realize.”
Not sure if this counts as specific "car" news, but if the new government gets their way, the Yen could drop drastically. What affect would this have on car prices from Japanese manufacturers? Cheaper? More?
Delete if inappropriate (or too political)