Yep, it's the same old story; once again, Japan is just muddling through. Private consumption is weak and inflation is practically non-existent. And inflation could get worse with the latest plunge in oil prices. And with Japan barely slogging through, investors' call for the BoJ to amp its efforts are on the rise.
So what's the problem? In the eyes of the BoJ, the situation isn't really bad enough to require further intervention.
What The BoJ Sees
So why wouldn't the BoJ want to add any more gunpowder to an already aggressive stimulus plan? The answer comes in two parts.
The first part was covered extensively in my last article and thus needs little elaboration. That is the BoJ wants the Abe government to shoulder some of the burden. It needs to fulfill its own side of the bargain and push forward much needed financial reforms.
And the second part? The BoJ wants to hold some gunpowder in its arsenal... just in case things get worse. With the Chinese stock market meltdown radiating across the world, the BoJ wants to make sure it has enough "weapons" to unleash. But so far, in the eyes of the BoJ, it's not yet bad enough to risk the economy.
Let's take a quick look at the latest key data. November's inflation figure (annualized), albeit rather low, still wasn't the textbook definition of deflationary pressures. From a total of 10 various segments, from food to energy to housing, only transportation and energy fell on an annual basis while Housing prices were unchanged at 0%. Despite the dismal numbers, for deflation to be a risk, prices of most items need to fall. And as the chart below shows, that has yet to happen. Continue reading "Bank of Japan To Release More Stimulus?"→
In the early 1990s, two simple words from a genius ad campaign radically transformed the way the U.S. consumer saw it: "Got Milk?"
Suddenly, the narrative changed from an obligatory drink you had to finish as a kid, along with eating your vegetables -- into a sexy, funny, and above all desirable treat for all ages.
In Europe, in 2015, famous celebrities donning milk mustaches no longer light the public's passion for lactose -- as prices for milk have spoiled. Here, a September 8, 2015 CNN Money article captures the curdled state of affairs:
"So much milk is sloshing around the European Union that milk is often cheaper than bottled water. In UK, a liter bottle of water costs around $1.50, a liter of milk $1... Wholesale milk prices have collapsed by 20% this year."
(Idea for a new campaign pitch: "Got (really, really, dirt cheap) Milk?")
Except that, it's not just the price of milk that's gone sour. According to data from April 2015, "supermarket prices in the UK have fallen at the steepest rate in eight years," including meat, milk, cheese, and vegetables. (The Telegraph) Continue reading "Europe in Deflation: Got (cheap) Milk?"→
On June 2, the postman rang once -- and, boy, did he ring.
That day, the Wall Street Journal published a strongly worded letter titled, "Grand Central: A Letter to Stingy American Consumers," which included these notable passages:
"Dear American Consumer,
"This is the Wall Street Journal. We're writing to ask if something is bothering you. The sun shined in April and you didn't spend much money. The Commerce Department here in Washington says your spending didn't increase at all, adjusted for inflation last month, compared to March.
"You've been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What's up?
"Fed officials want to start raising the cost of your borrowing because they worry they've been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can't figure you out."
When 2015 began, the mainstream financial experts were certain of one thing: Even if the United States economy were sliding into deflation (which, they said, was open to discussion) that particular kind of Glinda the Good deflation, characterized by plunging energy and food prices, was going to be a boon for consumer spending:
"Good deflation a tax cut for working families," affirmed a February 2 Huffington Post. "Cheaper gas means more flying, more driving, more hotel occupancy, more use of restaurants and leisure facilities. In short, deflation driven by the rapid decline in oil prices is good news for America."
More and more of the world's central banks are moving into negative interest rates and/or Quantitative Easing; the Bank of Japan has a massive ¥80 trillion in QE (per year), the European Central Bank with its estimated €1.1 trillion QE and negative deposit rates, the Swiss National Bank recently moving deep into negative territory, setting interest rates at -0.75% and now the Riksbanken, Sweden's central bank, following suit with interest rates set at -0.1%. And as this process escalates, two words dominate the commentaries: currency war. That word combination, so frequently bandied about by economists, financial analysts and media pundits, embodies the attempt by nations to devalue their currencies in order to increase exports and inflate demand. Yet despite headlines outlining how the currency war between nations can escalate inflation, in almost all major economies, inflation continues to plunge. The question is why? The answer might not only surprise you but put a question mark on the so called "currency war."
US and China Already Stopped "Playing"
One of the biggest facts that economists seem to ignore when warning of a currency war is that the world's two main players, the US and China – the two largest economies and arguably the two which started this so-called "war" – have long been out of the game. The US Federal Reserve Bank halted its massive QE program in October and allowed the US dollar to appreciate since then by more than 14% against the Euro and more than 10% against the Yen. Moreover, the Fed is seen as the only central bank that is seriously considering a rate hike, the total opposite of devaluation. China, meanwhile, perhaps the most aggressive currency manipulator in the world (with the US a close second), has not only stopped devaluating its currency but in fact has allowed its currency to appreciate so much that the Yuan has been the best performing currency in the world after the US dollar. The Yuan appreciated more than 8.5% against the Yen and roughly 12% against the Euro since October.
Although both countries aggressively manipulated their currency, their tools were somewhat different. The Federal Reserve used Quantitative Easing, which is essentially ballooning its balance sheet with printed money, a form of currency manipulation by any and all means. The People's Bank of China used to artificially lower the Yuan by purchasing dollars, which of course allowed its foreign reserves to balloon. Those were two very different methodologies, but the outcome was the same: the devaluation of the respective currency. Yet, as seen in the two charts below, China's foreign reserves have plunged by $105.5Bln from its peak and the balance sheet of the Federal Reserve has remained more or less stable, revolving around $4.4 trillion.
Chart courtesy of Tradingeconomics
Chart courtesy of the Federal Reserve
Why the War Ended
While the sense of an escalating currency war is looming in fact this war has aggressively de-escalated. Since 2007, the aggregate amount that the US and China injected into their respective economies amounted to a whopping $6.614 Trillion (not including other PBoC programs), an amount that dwarfs the current liquidity injections of the ECB, the BOJ and all the other central banks. One must wonder what is behind this dramatic change of heart which put an end to currency manipulation by the two biggest players. China, the more aggressive manipulator of the two, made a strategic decision; it no longer wants to be known as the "factory" to the rest of the world but rather it wants to become the world's largest consumer. Thus China allowed its currency to strengthen while lowering interest rates to encourage local consumption. In the US, the case was rather simple; the US has always been a consumer-oriented economy, and while it was hoped that US exports would eventually take the lead, it was actually the return of the American consumer that ended the need for devaluing the US currency.
What Could Trigger Another War?
PBoC Governor Zhou Xiaochuan has reiterated that they see no need to devalue the Yuan. As one might expect, it is inflation, yet again. While inflation in the US is stable in China it's taking a plunge, falling to 0.8% as of late. Although with interest rates at 5.35% the PBoC still has plenty of room to maneuver, one thing is clear and that is if things turn ugly in China and inflation turns into deflation, even after a rate cut, then China might go back to the good old tried and tested method of manipulating the currency. With China experiencing a prolonged deleveraging cycle, this risk exists. But until then, while the headlines may scream currency war, understand that it's a scare tactic. If anything, the currency war has dramatically de-escalated and if things don't deteriorate from here, it could mean that the currency war that everyone is busy screaming about has essentially ended.
Disclosure: This article is the opinion of the contributor themselves. The contributor does have an interest in the USD/ILS rising as of the date of publication. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.