Thursday, September 20, 2012

The Bank of Japan's Action

First, let's start with the BOJ's opinion about the economy:

The pick-up in Japan's economic activity has come to a pause.

Exports and industrial production have been relatively weak as overseas economies have moved somewhat deeper into a deceleration phase. On the other hand, domestic demand has been resilient, mainly supported by reconstruction related demand. Specifically, public investment has continued to increase.  Business fixed investment has been on a moderate increasing trend with improvement in corporate profits. Private consumption has been resilient with the employment situation on an improving trend. Housing investment has generally been picking up.

With regard to the outlook, Japan's economy is expected to level off more or less for the time being, and thereafter, it will return to a moderate recovery path as domestic demand remains resilient and overseas economies gradually emerge from the deceleration phase.

The analysis starts with a simple sentence: the economy has come to a pause.  From a central bank writing perspective, that's a bold statement, and one that is remarkably blunt.  However, it's also accurate.

After the 1.9% bump four quarters ago, Japan has stalled, which is of obvious concern to the BOJ.

Also note the bank focuses on the inter-relationship between Japan and the rest of the world.  Remember -- Asia has built its economy through exports; when the rest of the world slows down, Asia gets a cold.  That is clearly happening now.  As exports have slowed, industrial production has also decreased.

Domestically, things are fair; we see that demand is moderate and business investment is OK.  But growth is clearly not going gangbusters.  It's also dependent (still) on reconstruction related efforts, not intrinsic growth and the resultant demand.

Also consider this analysis of the possible policy outcomes:

Regarding risks, there remains a high degree of uncertainty about the global economy, including the prospects for the European debt problem, the momentum toward recovery for the U.S. economy, and the likelihood of emerging and commodity-exporting economies simultaneously achieving price stability and economic growth. Furthermore, attention should be paid to the effects of financial and foreign exchange market developments on economic activity and prices.

While we know full well about the EU and US situation, consider the points the bank is making about the emerging, export-oriented economies.  As the world economy heats up, two things happen simultaneously: these economies grow from the increase in export orders and prices increase as commodity prices rise due to increased demand.  Hence the inherent problem facing these economies of "price stability and growth."  

From a policy perspective, other central banks have started to increase their monetary easing.  This, by definition, should lower the value of their respective currencies in relation to the yen.  Hence, the real need to the BOJ to announce this:

The Bank decided to increase the total size of the Program by about 10 trillion yen, from about 70 trillion yen to about 80 trillion yen. The increase in the size of the Program corresponds with the size of additional purchases of treasury discount bills (T-Bills) by about 5 trillion yen and Japanese government bonds (JGBs) by about 5 trillion yen.