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Thursday, February 08, 2007

BoJ: No Hurry To Raise Rates

Bank of Japan policy board member Hidehiko Haru has underlined what most Bonobo readers should already know, that internal consumption in Japan is week and that there's no threat that rising prices will cripple economic growth. Conclusion: there's no hurry to raise rates:

``Given that there's no evidence of any inflationary risk, there's no need to rush,'' Haru, 69, said today in a speech to business executives in Shizuoka city, Japan. ``Gradual adjustments will be needed and will be made based on improvements in the economy and prices.''

Governor Toshihiko Fukui and his policy board colleagues last month held the key overnight lending rate at 0.25 percent in a 6-3 vote, with most members saying they need more evidence prices will keep rising and consumer spending will improve. Fukui described data released since the decision as mixed, as exports and industrial production both surged to records while inflation slowed and household spending fell more than expected.

``Haru is basically saying there's no sense of urgency on policy,'' Katsunori Kitakura, chief treasury dealer at Chuo Mitsui Trust & Banking Co. in Tokyo. ``I don't think the BOJ will raise rates this month.''

Meantime he still doesn't seem to have gotten the full picture that this may be an ongoing structural issue with an ageing population, and he continues to hope for a 'turnaround' at some point:

``While the improvement in the household sector has been delayed, it is highly likely conditions will improve going forward,'' Haru said. ``Rising pressure on wages will steadily increase as labor shortages intensify.''

Wages fell 0.6 percent in December, the biggest drop in 16 months, the labor ministry said last month. Salaries increased only 0.2 percent last year, or about 5,500 yen ($45).

Time Delays In Argentina

Marcelo Rinesi had a rather interesting post on Global Economy Matters recently, where he raised the question of whether some of the planet's 'laggard' economies - like Argentina and Venezuela - might not be getting some growth-positive backdraft from the strong growth which is ocurring in places like China and India - (via the impact on commodity prices) whilst at the same time remaining in some significant way trapped in the past.

Marcelo proposed the term "Time-Delay Fields" to describe this phenomenon. The delay is basically reflected in the way in which the institutional structure fails to avail itself of the new opportunities presented, and gets itself stuck in the semi-vicious circle of deploying one outdated trick after another. As Marcelo puts it:

Of course, long-term alarmism over the prospects of Argentina and Venezuela is at this point unwarranted; neither Chavez nor Kirchner have had yet time to radically affect the societal and economic makeup of their countries (the former not for lack of trying). But it's also true that, were commodity prices to drop tomorrow, neither Argentina nor Venezuela would find themselves with better tools (in technology, infrastructure or management) that they had six or seven years ago.

Interestingly another example of just such a time delay process can be found in the pages of Bloomberg today:

Argentine economists and unions may begin tracking inflation on their own after President Nestor Kirchner replaced the official in charge of calculating consumer prices, shaking confidence in the government's statistics.

So the point would be that whilst some countries are taking advantage of the relatively favourable headwind to implement necessary reforms (Brazil, Chile) others are manifestly either not doing this at all (Venezuela) or to a far lesser extent than they should (Argentina). Thinking about how and why they have the luxury to do this offers an interesting sideview on the current global conjuncture, and does reveal another hidden dimension to those dashed global imbalances.

Incidentally, GEM blogger Artim made a similar point vis-a-vis Ecuador and Thailand in a separate earlier post.

Wednesday, February 07, 2007

G7: Why All the Pressure on Japan?

The Group of Seven industrialized nations is meeting in Essen, Germany, later this week, and despite the fact that there are a lot of people trying hard to suggest otherwise, it appears that the topic of global liquidity will be high on the agenda.

Now what I think it is interesting for people to think about is why this is. Why does the yen loom so large in people's thoughts (even though there is no evidence whatsoever of Japanese intervention in currency markets)? Why is the Yen at such low levels? And why does the BoJ find it so difficult to raise interest rates. If you can answer these questions you will be a long way along the road towards understanding the current global economic conjuncture, IMHO.

Just to help you out, of course, Claus Vistesen had a couple of pointers on the GEM blog (and here).

Basically Japanese economic growth looks extremely shaky right now. Yesterday Bloomberg reported that the leading index (which offers a broad based reading of future economic activity) fell for the second month running, and by a significant amount to a reading of only 25%. This does not look good. And at the same time unemployment continues to run at an extremely low level, in part for demographic reasons.

So what I can't understand is why people want to keep putting pressure on Japan (well I can understand, the carry trade and all that), but I can't understand why more people are not able to think about this situation, about why it is happening, and about what the long term implications are.

Simply pushing for the BoJ to raise interest rates is only going to push Japan back into deflation, and why anyone would want that outcome is beyond me.