Crisis in slow motion

Crisis in slow motion

Let's comment on a policy of Japan bank.
The BoJ’s current three-pronged strategy—involving policy rate cuts, measures to ensure the stability of financial markets, and steps to facilitate corporate financing—has provided monetary policy support to the economy and helped ease credit conditions in a number of markets. The funding situation for some borrowers, however, remains tight, especially for SMEs and low-rated corporates.
Under our baseline scenario, monetary policy should remain accommodative, especially in light of the significant widening of the output gap and downward pressures on prices. With the monetary transmission mechanism still functional and fiscal policy expansionary, the current accommodative stance should provide meaningful support to growth during the downturn.
Ensuring the stability of financial markets and facilitating corporate financing. Should the outlook deteriorate and financial stresses re-emerge, the BoJ could expand its operations to support growth and stabilize markets. In such circumstances, the BoJ could consider relaxing the eligibility criteria for commercial paper and corporate bond purchases to reduce spreads for low-rated borrowers. Another alternative would be for the BoJ to extend the maturity of its operations for corporate financing and its FX swap facility to help reduce the cost of longer-term funding. The BoJ could also increase its JGB purchases to facilitate money market operations. At the same time, the BoJ should continue to minimize risks to its balance sheet, while mapping out the exit strategy for unwinding these policies.
The second, more immediate problem is deflation. Falling prices may have helped the government by providing its bondholders with invisible gains, but in other ways deflation is a menace.
Japan has a history of struggling with deflation. The 1990s are often referred to as Japan's "lost decade" because of its 10-year struggle with falling prices.
It followed a collapse in prices in the housing market and the stock market at the end of the 1980s.
"Deflation is a bad thing. People don't want to spend money, that is the big problem," says Masaaki Kanno, a former senior official of the Bank of Japan, currently chief economist at JP Morgan in Tokyo. "Now deflation and the economy are affecting each other. It's not easy to see what is the egg and what is the chicken. Without ending deflation, the government's target of 3% growth is impossible."
The Japanese economy grew by 0.9% in the final three months of last year, or 3.8% on an annualized basis.
"Deflation corrodes the health of your economy long term," says Richard Jerram, head of Asian economics for Macquarie Capital Securities in Tokyo. "Non-manufacturing companies are more pessimistic than they were a year ago. Deflation means it's impossible to fix the fiscal problems in the economy without some nominal growth. If you have persistent deflation for the next five to 10 years, public finances are going to crash."
The central bank was criticised for not acting fast enough to cut interest rates.
Third, despite the recent pick-up in global economic activity, Japan cannot count on foreign demand being strong enough for it to sustain export-led growth, as it did in the past decade.
And, finally, last article considered by us: «Apocalypse, not now».
In it it is a question of the future financial position of the country.
. The Japanese government still enjoys the lowest borrowing costs in the world, with 20-year bonds still yielding just 2.1% and two-year bonds a remarkable 0.15%.
Why? Crucially, Japan has not been dependent on foreigners for finance. Just 4% of its bonds are owned by non-residents. Measly as those yields may be, they are still positive in real terms because of the country’s long record of deflation. Given that cash yields virtually nothing, and that the Tokyo stockmarket is around 75% below its 1989 peak, Japanese domestic investors have clearly felt that bonds were the best of a bad lot.
Further it is said that the worst fears can come true. Debt servicing already uses up some 35% of government revenues. A fair chunk of Japanese debt is owned by government agencies, a financing pyramid that will eventually collapse. Historically countries with very high levels of government debt have defaulted or, more usually, inflated the problem away.
The budget deficit is forecast to be 7.8% of GDP this year. The IMF reckons that Japan would need to tighten its structural deficit by 13.4% of GDP between now and 2020 in order to bring its debt-to-GDP ratio down to 80% by 2030. That is a bigger adjustment than would be required of any other country, even allowing for the fact that the IMF set other nations a target debt-to-GDP ratio of 60%.
The crisis will surely arise when Japan becomes dependent on foreigners for finance, or if a sharp rise in inflation or a sudden slump in the currency causes domestic private investors to take fright. But since the country is still running a current-account surplus, the yen is trading at 90 to the dollar (compared with 124 in June 2007) and deflation is forecast for the rest of the year, the apocalypse seems unlikely to occur in 2010.
So, we will sum up.
Faced with a free fall in production. The export-led expansion that began in 2002 ran out of steam in late 2007 in the context of slowing world trade. Output began to contract from the second quarter of 2008, even before the global financial crisis intensified in September. Although Japan was not at the epicentre of the crisis, its export-dependent economy was vulnerable to the collapse in world trade, which resulted in its most severe recession of the post-war era. Exports and industrial production each fell by around a third in volume terms between September 2008 and February 2009, leading to a rise in unemployment to unprecedented levels by mid-2009 and to a decline in wages. Financial market conditions deteriorated as credit conditions tightened and the capitalisation of the Tokyo Stock Exchange fell by half. By March 2009, the confidence of large manufacturing firms had plummeted to its lowest level since 1975, causing a major retrenchment in their investment plans. Headline inflation has turned negative and by mid-2009 prices were down around 2% year-on-year. Output is projected to drop by around 6% in 2009, following a 0.7% decline in 2008.
The authorities implemented a wide range of financial, monetary and fiscal policies. The authorities responded quickly to the crisis. In the financial sector, policies are aimed at sustaining credit flows and stabilising markets. The government revived a scheme to inject public capital in depository institutions, encouraged lending to small and medium-sized enterprises (SMEs), took steps to stabilise the stock market and launched a programme to provide emergency loans to firms. Additional support was provided by the Bank of Japan, which launched a major scheme to facilitate corporate financing, increased purchases of government bonds and started buying commercial paper and corporate bonds. Both the central bank and the government resumed purchases of equities from banks to support their capital base. In addition, the Bank lowered the policy interest rate from 0.5% to 0.1% by the end of 2008. These measures have improved credit conditions and have flattened the yield curve. On the fiscal front, the government has launched four crisis-driven stimulus plans since August 2008, amounting to 4.7% of 2008 GDP, above the average of 3.9% for OECD countries adopting stimulus programmes. Increased spending, at 4.2% of GDP, accounted for the bulk of the stimulus in Japan. As a result of the stimulus and the severe recession, the government budget deficit is projected to reach 10% in 2010.