Japan Winning A Race Seoul Doesn’t Want It To Finish

28 May

Japan's First LapHere’s a neat metaphor – all allowances made for the limits of that rhetorical device – for understanding Abenomics: “Ultimately, the BoJ’s asset-purchase program is a bit like throwing giant quantities of damp wood on a fire and hoping that the fire can set the wood alight before the wood smothers the fire.” The Bank of Japan is divided about how to proceed.

Minutes released by the Bank of Japan highlighted a split among policy makers over achieving 2 percent inflation and mixed views on bond market turbulence after Governor Haruhiko Kuroda cited signs the economy is picking up.

“A few” policy makers said that it’s “highly uncertain whether changes in inflation expectations would lead to a rise in the actual rate of inflation,” according to a record of an April 26 meeting, released today in Tokyo. One member said the bond market may become unstable again, while another said rising rates may point to an economic upturn.

Divisions in the board add to communication challenges for Kuroda, 68, as volatility in the stock and bond markets threatens to undermine business and consumer confidence. Kuroda said yesterday that the economy has clearly started picking up and there are no signs investors have “excessively bullish” expectations. He also cited a report indicating interest rates could rise by between one and three percentage points in an improving economy without causing financial instability.

“Kuroda should have explained why the market is volatile now and why he thinks it’s going to be okay, rather than just saying he doesn’t see any major problem,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. (ACA) in Tokyo. “Kuroda hasn’t yet learned how to communicate well with the market.

‘‘A few’’ BOJ board members said that swings in financial markets had been triggered by perceptions that the BOJ had conflicting goals — trying to push down interest rates while pursuing inflation, the minutes showed. According to JPMorgan Chase & Co., the BOJ uses the term ‘‘a few’’ to mean two.

Seoul wants to keep dumping water on the cinders.

“Abenomics,” the aggressive quantitative easing monetary policy of the Shinzo Abe administration in Japan, is heightening risks to the South Korean economy.

In particular, the periodic inflows and outflows of short-term foreign-denominated funds are fanning financial market uncertainty, while the rapidly weakening yen is complicating South Korea’s recovery as exports continue to slump. The Korea Center for International Finance (KCIF) released a May 26 compilation of reports from major overseas investment banks. The findings showed the side effects from the Abenomics approach of massive quantitative easing to be fanning uncertainty in financial markets across Asia, including in South Korea.

Based on Japan’s trade structure, the investment-banking firm Goldman Sachs predicted that the impact of the Abe administration’s approach on Asian trade would be limited. But it also said the result would likely be upward pressure on currency values, due to the heavy influence on capital flows, including increased movements of yen-denominated funds.

“Unless there’s a recovery in the global economy, Japan’s exports to other Asian countries are unlikely to improve just because of the weak yen,” the Goldman Sachs report said.

“But because Asian financial institutions are so dependent on Japanese loans and so volatile, there is certain to be growing appreciation pressure on their currencies as the yen released through Abenomics flows rapidly into surrounding countries,” it added.

Britain’s HSBC also mentioned the appreciation pressure on South Korea and other major Asian economies, predicting that governments and monetary authorities would respond with policies to control excessive foreign-denominated capital flows.

South Korean research institutions expressed concern about the continued decline in the yen’s value and rise in the won’s, with potentially dire implications for the real economy. In a May 26 report titled “The Plummeting Yen and Its Effect on the South Korean Economy,” the Hyundai Research Institute said the weak yen could undermine government policies to buoy the economy by hurting the trade and tourism balances, lowering the gross domestic product growth rate by 0.2 percentage points. The report predicted that South Korean exports would drop by 2.6% if the average annual exchange rate hits 100 yen to the dollar – down 20% from last year – with the balances of trade and tourism falling by US$1.5 billion and US$1 billion, respectively.

And, South Korean firms are quick to blame Abenomics for falling profits.

Japan’s low-yen policy exposes the lie, that the region’s economies and products have any intrinsic value, but are only as good as the artificial crutches national banks use to sell them. Seoul should stop whining. States around the world are pragmatic, but their strategies are different. China is considering curbing spending; the US and the EU are pushing austerity; both Seoul and Tokyo are playing currency games. Is Seoul angry because of the perceived shenanigans Japan is playing, or because its own games will be revealed for the pale, opportunistic imitations of what other states are trying to do with more skill?

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One Response to “Japan Winning A Race Seoul Doesn’t Want It To Finish”


  1. South Korea Demands “International Action” Against “Negative Impact” Of Abenomics | sambhalkezabaan - 3 June 2013

    […] Japan Winning A Race Seoul Doesn’t Want It To Finish (humesbastard.wordpress.com) […]

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