October 19, 2017

Bank of Japan Sets Deflation Turnaround Target Date

HONG KONG — Deflation remains firmly entrenched in Japan, figures showed Friday, as the central bank projected that its targeted level for inflation was still some years off, underscoring that there are no quick fixes for one of the world’s largest economies.

Prime Minister Shinzo Abe, who took office last December, has made the fight against deflation — the damaging fall in prices, profits and wages that has dogged Japan for most of the past 15 years — a main part of his economic policy. He pressed the central bank to commit to a target of 2 percent annual inflation, considered by many economists a healthy level.

On Friday, the central bank, the Bank of Japan, under the leadership of its new governor, Haruhiko Kuroda, put a date on that target: 2015 or early 2016.

“Various indicators are showing signs that inflation expectations are heightening as a trend,” Mr. Kuroda said in a news conference Friday, Reuters reported. “Business and household sentiment is improving.”

On Friday, the central bank raised its growth forecasts for this year and next. The bank said the economy would gradually accelerate to 1.6 percent growth in the fiscal year that ends in March 2016. That is up from the bank’s projection of 1 percent growth in the year that ended in March 2013.

“Japan’s economy has stopped weakening and has shown some signs of picking up,” the Bank of Japan said in its economic report. “Looking ahead, it is expected to return to a moderate recovery path around mid-2013.” The bank cited a likely improvement in domestic demand as the increased money supply and other economic measures announced so far take effect.

However, worse-than-expected inflation data for March, released by the statistics bureau Friday, underlined the challenges ahead. Core consumer prices, which exclude food, fell 0.5 percent compared with March 2012, the fifth consecutive month of year-on-year declines.

The figure “offered another reminder that deflationary pressures remain strong,” Izumi Devalier, Japan economist at HSBC, wrote in a research note. Although a gradual escape from deflation is expected, thanks in part to higher energy prices, “the pace of inflation is unlikely to match” the Bank of Japan’s “optimistic projections,” Ms. Devalier added.

Although various factors will ultimately cause inflation to pick up, the hurdle for reaching the inflation target is “getting higher,” Miwako Nakamura, an economist at J.P. Morgan, wrote in a research note.

Under Mr. Kuroda, the central bank announced unexpectedly bold steps this month aimed at reinvigorating economic and price growth.

These included plans for the central bank to buy longer-term bonds aggressively and double its holdings of government bonds in two years. Mr. Kuroda described the program as “monetary easing in an entirely new dimension” that would make a change from incremental steps of the kind that had been pursued by his predecessors.

The financial markets have welcomed Mr. Abe’s and Mr. Kuroda’s joint efforts: The Nikkei 225-stock index has risen 30 percent since the start of the year, while the yen has fallen 14 percent against the U.S. dollar — much to the relief of Japanese exporters, for whom a weaker yen is welcome as it makes their goods cheaper for consumers abroad.

Several Japanese corporate giants, including Honda, Toyota and Canon, have cited the weaker yen as a reason for improved earnings and outlooks in recent days.

On Friday, Honda said its net profit for the financial year that ended in March was up 73.6 percent at ¥367.15 billion, or $3.72 billion, according to Reuters. Mazda made a yearly net profit of ¥34.3 billion, after a ¥107.7 billion loss in the previous year.

Many analysts, however, have cautioned that structural overhauls aimed at promoting foreign direct investment and bringing more women to the country’s aging and shrinking work force are needed if the turnaround in Japan’s economic fortunes is to be sustained.

Growth strategies aimed at stimulating private investment are the most important of the policy arrows in Mr. Abe’s quiver, Kunihiko Sugio, chief investment officer at Invesco Japan, said in a recent research note.

This “arrow,” he added, “is still in Abe’s hand waiting to be fired.”

Article source: http://www.nytimes.com/2013/04/27/business/global/27iht-yen27.html?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: Accounting for a $1 Trillion Platinum Coin

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Washington had been buzzing about the idea of minting a $1 trillion platinum coin in the event that Republicans block an increase in the debt limit (as they did in 2011), until the Treasury and the Federal Reserve rejected the idea.

Today’s Economist

Perspectives from expert contributors.

But whether or not creating a $1 trillion coin to avoid defaulting on the debt was reasonable, in accounting terms it would have been no big deal — simply a larger scale of what the Treasury and the Fed do every day.

The United States Mint, a division of the Treasury, would have had to create a $1 trillion coin of platinum — though it would not have had to contain $1 trillion of platinum — to meet the letter of the law, and the Fed would have taken ownership.

The Fed would then have credited the Treasury’s account with $1 trillion of cash that could be used to make payments authorized by the Treasury. The Fed is, in effect, the Treasury’s bank, accepting deposits and clearing payments on a daily basis.

While some people worried aloud that the creation of $1 trillion of cash would be dangerously inflationary, this is nonsense. The coin would not affect monetary policy. The Treasury and Fed constantly coordinate their actions so that tax receipts don’t reduce the money supply and Treasury payments don’t lead to an increase.

If Treasury payments threatened to raise the money supply more than the Fed would like, it would simply sell bonds from its portfolio to absorb the excess liquidity. Possessing close to $3 trillion of Treasury securities, the Fed could easily offset all the cash created by the platinum coin.

In effect, rather than the Treasury selling securities to the public to pay for spending in excess of revenues, the Fed would do so. Bonds in the Fed’s portfolio already count against the debt limit, so that is not a constraint.

Nor would the creation of a $1 trillion coin have led to higher spending. The Treasury could still spend only what has been authorized by Congress.

As a matter of accounting, the Treasury would book the $1 trillion paid by the Fed as “seigniorage.” Technically, that is the difference between the cost of creating coins and their face value. When the Fed obtains coins from the mint to distribute through the banking system, it pays the face value of the coins. According to Table 6-2 in the Analytical Perspectives volume of the 2013 budget, the mint breaks even on coinage, providing no net seigniorage to the government.

In reality, the Treasury gets a lot of revenue from seigniorage, but it shows up in a different part of the budget. Although the Fed pays the face value for coins, that is not the case with bills. The Fed pays the Treasury 5.2 cents a bill for dollar bills to 12.7 cents for $100 bills because they require more security. In 2012, the Fed paid the Treasury $747 million for currency production by the Bureau of Engraving and Printing, which approximately offset its costs of operation.

The difference between the cost of bills and their face value is also seigniorage, but the profit accrues to the Fed. It also gets revenue from the Treasury on its vast holdings of Treasury securities. These securities are a byproduct of monetary policy; when the Fed buys them on the open market – it is prohibited by law from buying them directly from the Treasury – it expands the money supply, and when it sells securities the money supply shrinks.

The Fed makes an enormous profit from interest paid to it by the Treasury, from seigniorage on currency and other services for which it charges banks. By law, the Fed subtracts its costs of operation and, annually, gives the rest back to the Treasury. On Jan. 10, the Fed made its annual payment to the Treasury, of $88.9 billion.

As the chart indicates, this is two or three times the revenue historically received by the Treasury from the Fed. But the Fed’s unprecedented actions, in coping with the financial crisis that began in 2008, led to a vast expansion of its portfolio, which generates much additional interest income.

Data for 2003-11 from annual report of the Board of Governors of the Federal Reserve System

This accounting raises some interesting issues of which even economists are generally unaware. For example, although it is part of the federal government, the Fed is treated as a private bank for the purposes of calculating the gross domestic product. The data can be found in Table 6.16D of the national income and product accounts. They show that in 2011, the Fed generated a profit of $75.9 billion – 18.6 percent of all the profits generated by the financial sector of the United States economy and 5.6 percent of the total profits of all domestic industries.

Since the Fed’s profits come primarily from interest on Treasury securities, its payment to the Treasury in effect offsets much of the net interest portion of the budget. In 2013, net interest is expected to be $229 billion. But actually it is $89 billion less than that because of the Fed payment. It would make more sense, as a matter of accounting, to treat the Fed payment as an “offsetting receipt” that would lower the net interest outlay, rather than as a “miscellaneous receipt” in the budget. This has implications for calculating the burden of the national debt.

With the idea now off the table, we may never be able to assess how the coin would have played out. But most likely it would have been business as usual between the Treasury and the Fed.

Article source: http://economix.blogs.nytimes.com/2013/01/15/accounting-for-a-1-trillion-platinum-coin/?partner=rss&emc=rss

Japanese Finance Minister Seeks to Firm Up Position on Inflation Targets

TOKYO — Taro Aso, the newly appointed finance minister of Japan, said Friday that he wants the government to firm up its position on an accord with the central bank on an inflation target in January, before the bank’s next policy meeting, to attack the country’s entrenched deflation.

Mr. Aso also said the Japanese authorities stood ready to act against speculators’ driving the yen up or down excessively, saying that such activity could cause difficulties for the economy.

Prime Minister Shinzo Abe’s government is pursuing a policy of aggressive monetary easing — manipulation of interest rates and money supply — and heavy spending to beat deflation and weaken the yen and calling on the Bank of Japan to adopt an inflation target of 2 percent, double the current target.

Asked about the timing of a policy accord on the inflation target, Mr. Aso, a former prime minister, said it could come in January after the government mapped out an extra stimulus budget, shortly compiling requests Jan. 7 and before the Bank of Japan holds its next policy meeting Jan. 21.

The Bank of Japan eased monetary policy last week and has promised to debate setting a new price target at the January meeting.

The yen fell to its lowest level in more than two years versus the dollar Friday, to 86.64, under pressure from expectations that the new Japanese government would push the central bank into more aggressive easing. The yen strengthened in later trading.

“If excessive rises or falls in the yen due to speculation cause trouble for a lot of people, intervention would be a powerful tool, so there’s no reason why we would not use it,” Mr. Aso said.

“Under the current situation, where movements are gradual, I think it should basically be left to market mechanisms and fundamentals,” he added.

Asked whether Japan’s efforts to ease monetary policy and weaken the yen might lead to competitive currency devaluations, Mr. Aso said: “It’s wrong to say Japan is intervening unreasonably.”

Potentially adding more pressure on the Bank of Japan was the release of data Friday showing that Japanese factory output had fallen 1.7 percent in November, more than triple the median market forecast for a 0.5 percent drop. That followed a 1.6 percent gain in October, the first rise in four months.

Japanese manufacturing activity also put in a bleak performance in the Markit/JMMA Japan manufacturing purchasing managers index for December, released Friday, which declined at its fastest pace in more than three years.

Separate data released Friday showed Japan’s core consumer prices, which exclude volatile fresh food prices, edged down 0.1 percent in November from the level of a year earlier, in line with the median market forecast.

“If you look at data closely, there are also signs the economy will probably be bottoming out, so the data could simply offer the government a pretext to use its stimulus plan to support the recovery,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Many economists warn that Mr. Abe’s emphasis on stimulus might have only short-term effects.

Article source: http://www.nytimes.com/2012/12/29/business/global/japanese-finance-minister-seeks-to-firm-up-position-on-inflation-targets.html?partner=rss&emc=rss

China Orders Banks to Raise Reserves to Combat Inflation

SHANGHAI — In China’s latest move to fight inflation, the government said Sunday that Chinese banks would be required to set aside larger cash reserves.

China’s central bank said that effective Monday, large banks here would have to set aside 20.5 percent of their cash, an increase of half a percentage point. The move essentially reduces the amount of cash available for loans.

It was the fourth time this year that the Central Bank has raised the required reserve ratio.

The decision came just days after China said inflation rose at its fastest pace in more than two and a half years. In March, the consumer price index climbed to 5.4 percent, even though economic growth moderated slightly.

China is worried that some of the highest levels of inflation in years could disrupt a booming economy that is being fueled in part by heavy bank lending.

Food prices have been soaring in China, but wages, housing prices and raw material prices are also rising.

On Saturday, Zhou Xiaochuan, the governor of China’s central bank, said that government tightening — efforts to slow the economy and restrict the banking system — would continue for “some time.”

Patrick Chovanec, who teaches at Tsinghua University in Beijing, said high inflation is the result of the government’s stimulus packages, which began in early 2009, when economists here worried that the global financial crisis would undermine China’s boom.

“China has achieved very high GDP numbers by boosting the money supply. China had its own huge version of quantitative easing,” he said referring to the Federal Reserve’s effort in the United States to inject more money into the economy to bolster growth. “They had a monetary stimulus.”

Before Friday’s economic data reports showing that the Chinese economy grew by 9.7 percent in the first quarter of this year and that inflation reached its highest level in years, many economists were expecting that the government’s efforts to slow the economy were coming to an end.

But a number of economists now expect the government to raise interest rates and place more restrictions on lending.

Chinese Prime Minister Wen Jiabao has made clear that fighting inflation is the government’s No. 1 economic priority this year.

Article source: http://www.nytimes.com/2011/04/18/business/global/18yuan.html?partner=rss&emc=rss