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from Breakingviews:

A how-to guide for Japan to escape deflation

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japan has a real chance of ending deflation. But the authorities need to act boldly. It will be hard for the Bank of Japan to dispel a decade of accumulated pessimism by merely adopting a formal inflation target. The goal of the central bank and the finance ministry should be to make people believe that price gains that didn’t occur in the past 10 years will now take place. A de facto currency peg may be the way to engineer those expectations.

Nurturing the green shoots of inflation expectations is crucial for Japan. Even with nominal rates at zero, real interest rates have been positive because of expectations of deflation. Once people start anticipating inflation, real interest rates will turn negative, stimulating investment.

At its two-day monetary policy meeting starting Jan. 21, the central bank is expected to debate the merits of entering into an accord with the government. Such a deal, which Japan’s new Prime Minister Shinzo Abe is pushing for, will specify a formal inflation target of 2 percent and may even include a commitment to job growth.

from MacroScope:

Japan finally takes Bernanke-san’s advice – 10 years later

This post was based on reporting by Leika Kihara in Tokyo

Japan has crossed the monetary rubicon: the government is actively intervening in the affairs of the central bank, pressuring it to more aggressively tackle a prolonged bout of deflation and economic stagnation. The Bank of Japan is expected to discuss raising its inflation target from the current 1 percent level during its next rate decision on January 21-22.

Overnight, a Japanese newspaper reported the finance ministry and the central bank were considering signing a policy accord that would set as a common goal not just achieving 2 percent inflation but also steady job growth.

from Global Investing:

A yen for emerging markets

Global Investing has written several times about Japanese mom-and-pop investors'  adventures in emerging markets. Most recently, we discussed how the new government's plan to prod the Bank of Japan into unlimited monetary easing could turn more Japanese into intrepid yield hunters.  Here's an update.

JP Morgan analysts calculate that EM-dedicated Japanese investment trusts, known as toshin, have seen inflows of $7 billion ever since the U.S. Fed announced its plan to embark on open-ended $40-billion-a-month money printing.  That's taken their assets under management to $67 billion. And in the week ended Jan 2, Japanese flows to emerging markets amounted to $234 million, they reckon. This should pick up once the yen debasement really gets going -- many are expecting a 100 yen per dollar exchange rate by end-2013  (it's currently at 88).

from Global Investing:

The Watanabes are coming

With Shinzo Abe's new government intent on prodding the Bank of Japan into unlimited monetary easing, it is hardly surprising that the yen has slumped to two-year lows against the dollar. This could lead to even more flows into overseas markets from Japanese investors seeking higher-yield homes for their money.

Japanese mom-and-pop investors -- known collectively as Mrs Watanabe -  have for years been canny players of currency and interest rate arbitrage. In recent years they have stepped away from old favourites, New Zealand and Australia, in favour of emerging markets such as Brazil, South Africa and Turkey. (See here  to read Global Investing's take on Mrs Watanabe's foray into Turkey). Flows from Japan stalled somewhat in the wake of the 2010 earthquake but EM-dedicated Japanese investment trusts, known as toshin, remain a mighty force, with estimated assets of over $64 billion.  Analysts at JP Morgan noted back in October that with the U.S. Fed's QE3 in full swing, more Japanese cash had started to flow out.

from Ian Bremmer:

In a year of big elections, Japan’s was Godzilla

Entering 2012, we were staring at a host of critical elections and transitions in countries that represent about half the world’s gross domestic product. You would think those elections and political handovers would have been some of the most important events of 2012. Yet they were largely red herrings.

In China, the consensus view is that even with a change of leadership, China is largely the same as it was; if anything, the Chinese leadership has doubled down on the approaches of its former government. In Russia, Vladimir Putin went from running the country as prime minister to running the country as president. In France, Nicolas Sarkozy was voted out and a socialist, François Hollande, voted in, but that hasn’t changed France’s stance toward the European Union, its most important relationship. And in the U.S., Barack Obama swatted aside Mitt Romney while Congress remained divided, making four more years of the status quo likely.

from Anatole Kaletsky:

Is Japan set to lead after 20 years of torpor?

As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled. As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.

In Japan, economic and business conditions remain as dull as ever, but politics and monetary policy are suddenly exciting. And while the world has largely lost interest in Japan, the gestalt shift  in the world’s third-largest economy could have big implications for global business and for the way voters think about governments and central banks.

from Breakingviews:

Abe era will herald a three-digit yen

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Shinzo Abe era will herald a spectacular decline in the yen. The promise by Japan’s newly elected prime minister to end the country’s chronic deflation spells curtains for the half-hearted quantitative easing that has been the Bank of Japan’s hallmark for more than a decade. At some point in 2013, one U.S. dollar will buy 100 yen or more.

from Breakingviews:

Japan’s elections: A guide for the perplexed

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For once, the outcome of a Japanese election may actually matter. The country’s politicians have proved largely powerless to reverse two decades of economic stagnation. Now voters, dismayed by the centre-left, may hand power back to the conservative Liberal Democratic Party. But patience with cosmetic change is running thin.

from Breakingviews:

BOJ must shed freedom but keep the printing press

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The esoteric subject of central bank independence is becoming a polarizing election issue in Japan. Both Prime Minister Yoshihiko Noda and his rival, the Liberal Democratic Party leader Shinzo Abe, want the Bank of Japan to do more to end deflation. Yet while Noda’s ideas are outmoded, his rival’s are risky.

from Breakingviews:

Japan shuns fiscal cliff, won’t escape growth funk

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japan has avoided fiscal harakiri. The decision by the country’s opposition parties to stop blocking the government’s deficit-spending plans is a big relief for an economy that shrank by an annualised 3.5 percent in three months through Sept. 30, and is likely to contract again in the current quarter. Exports are stumbling amid weak global demand and a boycott of Japanese-made goods in China. Amidst this, government spending worth 8 percent of GDP was in jeopardy because of the parliamentary stalemate, according to Fitch.

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