Opinion

Felix Salmon

When the finance minister targets stock prices

Felix Salmon
Feb 11, 2013 15:55 UTC

Japan’s economy has been far too stagnant for far too long: everybody can agree on that. The aging population, now used to deflation, prefers saving to spending — an entirely reasonable stance if prices will be lower tomorrow than they are today. So the government has long been facing a very tough task: to change the psychology of a nation, basically. You can’t do that — as Japan learned the hard way — with old-fashioned public-works spending. Instead, you have to target expectations.

The Bank of Japan started on this road last month, formally adopting a 2% inflation target. That was the BoJ’s way of saying “start spending now, because your yen won’t be worth as much tomorrow as they are today”. And now the finance minister is doing his part to get the party started as well, in a highly unorthodox manner. In a speech on Saturday, he said that he wants to see the Japanese stock market rise 17% to 13,000 by the end of March.

It was a national holiday in Japan today, so the stock market was closed, but we’ll see tomorrow what effect Amari-san’s words will have: my guess is that they’ll give the market a pretty impressive boost. That’s certainly the intention. The Japanese stock market has been on fire of late, rising more than 30% since mid-November. The clear risk is that the rally will lose steam, and that people will start taking profits; the finance minister, with his speech, is basically trying to extend the rally as much as possible.

There’s no particular reason why the Nikkei shouldn’t continue to rise through the end of March, even reaching 13,000. Momentum is a powerful force, in the stock market, which is why central banks know that FX intervention is much more likely to work if you’re acting broadly with the market rather than broadly against it. Amari’s announcement is a canny way of anchoring expectations: the Nikkei might reach 13,000, or it might not, but for the next few weeks at least the perennial stock-market question is going to be reframed. Rather than “how far are we from where we closed yesterday”, it’s going to be “how far are we from 13,000″. The idea is that with stocks, just like with cars, you generally drive in the direction you’re looking.

I like this move: it shows imagination, and the upside is much bigger than the downside. The worst that can happen is that it doesn’t work, and the stock market ends up doing what the stock market would have done anyway; the best that can happen is that it helps accelerate the broad recovery that everybody in Japan is hoping for this year.

What’s more, Amari is not the first policymaker to talk about targeting asset prices. Minneapolis Fed president Narayana Kocherlakota, for instance, said quite clearly in 2011 that stock prices “are really going to be a central ingredient in the recovery process”, adding:

In this kind of post financial crisis, post net worth driven recession, it makes sense to be thinking about asset value as a way to try to generate more stimulus than you do in a typical recession.

In other words, don’t look to government spending for stimulus: Japan, of course, has learned that lesson the hard way. Instead, simply goose the stock market instead.

There are risks to this approach: if it works too well, you create a bubble — and when a bubble bursts, that can hurt confidence much more than a rising stock market helped it. But for the time being, the Japanese stock market still looks cheap, both on an absolute basis and in terms of its p/e ratio. Now’s no time to worry about overheating. Instead, Japan’s fiscal and monetary policymakers are working together to try to make the country as bullish and successful as possible. I’d do the same thing, if I were them.

(h/t BI)

COMMENT

The (oft-repeated) view in the first paragraph is based on a dated view of Japanese households that is no longer accurate.

Japan’s household savings rate has fallen steadily from from well over 10% of disposable income in the mid-1990s down to around 2-3% of disposable income for the past several years.

http://www.oecd-ilibrary.org/sites/factb ook-2011-en/03/02/03/03-02-03-g1.html?co ntentType=&itemId=/content/chapter/factb ook-2011-22-en&containerItemId=/content/ serial/18147364&accessItemIds=&mimeType= text/html

and

http://www.gfmag.com/tools/global-databa se/economic-data/12065-household-saving- rates.html#axzz2KcPoI59k

Posted by realist50 | Report as abusive

The problem of Japan’s household savings

Felix Salmon
Aug 2, 2012 14:50 UTC

Almost two years ago, in September 2010, the Japanese currency reached an all-time high of just 83 yen to the dollar. The Bank of Japan, shocked into action, brought out the big guns: a massive intervention in the fx market, which immediately sent the currency down more than 3%. And I responded with a blog post headlined “Why Japan’s FX intervention might actually work”: the intervention was unsterilized, which meant that the Bank of Japan was essentially printing money. If a central bank prints enough money, the currency will, eventually, fall.

Of course, that didn’t happen. A commenter, gpowell, looked into the details of what was going on and discovered that the intervention was only technically unsterilized: in reality, the Ministry of Finance ended up issuing new debt within days to repay the central bank. And so the inevitable happened, and the yen kept on strengthening. It’s now hitting new all-time highs around 78 yen to the dollar: the Japanese wish it were back at the 83 level which seemed so unacceptable two years ago. The Bank of Japan’s actions are barely making a dent in deflation, let alone weakening the yen.

Now Martin Fackler has a good piece on the psychology and politics behind the central bank’s actions. The politics are simple: Japan’s politically-powerful elder generation is living on fixed incomes and loves deflation and cheap imports. But it’s the psychology which fascinates me.

Critics say the central bank’s entrenched bureaucrats have resisted doing something similar in recent years out of an outdated fear of rekindling the rampant inflation in the value of real estate and other assets of the 1980s bubble economy. But the bank argues that it makes little sense to intervene without longer-range economic fixes, like deregulating protected domestic industries to spur competition.

The thing which jumps out at me here is the central bank’s perceived fear, not of price inflation (which they actually want), but rather of asset price inflation. In the US, everybody’s asking what the Fed can do to support home prices; in Japan, by contrast, people are genuinely worried that central bank actions might make houses more expensive.

One of the big differences is that Japan is a nation of bond investors, while the US is a nation of stock investors. In the US, the daily gyrations of the stock market are reported in every newspaper and on every newscast, nearly always in a context of “rising prices good, falling prices bad”. Americans feel personally invested, quite literally, in the fortunes of the stock market, and love to cheer it on from the sidelines.

Bond investors, by contrast, are a very different breed. They make no money when stocks go up; they just lose money when there’s inflation. And if stocks go up — which would happen, if the central bank started printing money, causing the yen to fall and inflation to rise — Mrs Watanabe, the apocryphal Japanese bond investor, would not be happy.

It seems to me that what Japan really needs is some kind of massive debt-to-equity conversion, which would help to align incentives a lot more. I have no idea how such a thing could be done. But it looks a bit as though there are actually two ways that debt can cripple an economy. If it gets big, then that eventually weighs on the debtor sovereign, as we saw most spectacularly in Greece. But it can also cause unhelpful incentives among the creditors, too, if the creditors are national households. They should be excited about growth. But all too often, they end up getting excited about deflation.

COMMENT

GPIF started buying emerging markets stock, so Mrs Watanabe will have money in something other then bonds.
http://www.bloomberg.com/news/2012-07-25  /world-s-biggest-pension-fund-sells-jgb s-to-cover-payouts.html

Posted by traian | Report as abusive
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