The Yen for Dollars

© 2006 Donlon

Everyone knows the story. Japan’s economy was going great guns and then hit some sort of wall. It seemed sluggish and lethargic for years, in spite of sometimes raffish attempts to kick start it. Now, things seem to be on the upswing. The central bank, this enormous monstrosity, in an effort to quell inflation, has been steadily pulling cash out of its money markets. One result has been a bit of a global market pullback. In some ways right now it’s the Bank of Japan that’s calling the shots in terms of the World’s equity markets.

Forbes and The Economist magazines, among others, have run articles detailing the results of the tax re-writes in the United States under the Bush regime, with the very rich receiving access to enormous windfall investment capital. Of course, this was exported from the US and a lot of it went to China. Much of that went to bricks-and-mortar construction of factories with the resultant surge in demand for electricity and the predictable spike in energy costs – seen most vividly in America at the gas pump. Pundits truthfully tell American consumers that the price of oil goes up reflecting the demand. Less truthfully, by omission they often don’t mention that the demand was actively created by that extraordinary building spurt financed by the “gift” of a 9 trillion dollar US debt. It was the combination of spending like teens with dad’s credit card and the evisceration of the revenue stream that did the trick. Then, in mid-May the Dow Jones tumbled a couple hundred points with big worries of US inflation going on a roller coaster ride. If the inflation index the Federal Reserve keeps its eye on goes too high, they may adjust interest rates. Woof!

The Bank of Japan has been vacuuming up enormous amounts of cash from the world’s markets. In the past, the Bank had been valiantly flowing billions into Japan’s general economy (conduited through the banking system according to the BBC), trying to re-inflate the flaccid thing. Now the flow direction has changed.

In one article, financial writer Jim Jubak claimed that, “in the last two months, the bank [of Japan] has taken almost 16 trillion yen, or about $140 billion, in cash deposits out of the country's banks. The country's money supply has fallen by almost 10%. The Bank of Japan isn't finished pumping out the liquidity that it had pumped in. That should take a few more months. And when it is finished, the Bank of Japan is expected to start raising short-term interest rates.”

Right on the web site for the bank that noble institution explains what “The Bank of Japan's missions are.” And they are two fold. Both involve keeping things on an even keel. Or, as the web site puts it, “to maintain price stability and to ensure the stability of the financial system, thereby laying the foundations for sound economic development.”

The paternalistic tone of the Bank of Japan’s text is unmistakable:

“What if the prices of your daily necessities and food were to rise continuously? You would need to spend more money to buy the same basket of goods. In other words, the purchasing power of your money would go down. If the prices of various goods rose, people would naturally have a harder time making a living.

On the other hand, what if the prices of goods were to decline continuously? A decline in prices appears to be favorable to consumers as they can buy the same basket of goods more cheaply. But if prices were to decline continuously, both the sales and profits of firms that produce or sell goods would decrease. As a result, the salaries of workers at those firms would decrease and the number of unemployed persons might increase.

A continuous rise in the prices of goods and services is generally referred to as ‘inflation,’ and a continuous decline in prices is referred to as ‘, deflation.’ As you can see from the above, both inflation and deflation are a threat to our daily lives.

When the economy enters a period of inflation in which the purchasing power of money is gradually eroded, people's confidence in money will diminish. If many people considered that the prices of goods and services would continue to rise in the future, they would rush to buy goods and services before prices rose even further. This would create upward pressure on prices, thus increasing the likelihood that the anticipated rise in prices would actually take place. In contrast, if people considered that prices would continue to decline in the future, they would wait to make their purchases until prices had declined further. Thus, they would spend less and save more and economic activity might eventually be across the economy, and disrupt financial transactions, which involve the lending or borrowing of money.

The Bank of Japan's mission is to pursue price stability, in other words to maintain an economic environment in which there is neither inflation nor deflation.”

Now, you gotta love it. That may have been the Bank’s intentions, but thuggish speculators made out like bandits borrowing cheap money in Japan at about 1%, rolling and leveraging to turn 1 dollar into 2 or 3 or 4 dollars of borrowed cash, according to economic reportage from the likes of Jubak. Weep for them, Argentina, only making 12 or 15 percent on the almost riskless turnaround. With that kind of sweet heart deal and in the US Bush trimming back the tax burden for his golf buddies, it’s easy to see why America’s richest 10% is in its highest clover in 60 years.

Anyway, all that effort by the Bank of Japan does indeed seem to be having that stabilizing effect and the cheap money may not be so available – at least from the Japanese font. As May came to a close speculators rushed to find the best harbor for their resources and widespread adjustment took place – ranging from me doing my laundry to the Bank of Iceland changing its prime interest rate.

Japan had, as you may recall, experienced spectacular growth at the end of the last century. But that meteoric economic activity flattened out and for a decade business was in the doldrums. So these last few pages are only like lines in a long chapter of a big book.

Japan entered the last century like a lion, fighting and winning a war with Russia including the now-famous fleet action when Tojo engaged his heroic “J” maneuver. Many historians point to this as the turning point: world powers ganged up on the winner, refusing proper spoils to Japan and setting the stage for its later Imperial expansion and ultimately the Second World War.

When Japan did surrender after WW II in August 1945 the archipelago was occupied with the purpose of demilitarization and democratization. Hoping to reduce the political problems of the transition, the US opted to maintain some Japanese social institutions such as the emperor (who was, none the less, no longer considered divine). Other measures, such as dissolution of the so-called “zaibatsu” (or financial combines) and the granting of women’s suffrage were taken. Generally, attempts were made to decentralize structures which were seen to grant too much power to government, such as education and the police. At first, building the Japanese economy was not a great concern of the American occupying forces.

However, with the beginning of the Cold War, cooler heads did not prevail. The Nationalists failed in their bid for control of China. By the late forties the Communists Chinese were in total control and American capitalists were virtually insane with fear that their privileged positions would be in jeopardy. This lead to a fundamental reversal of policy in Japan.

It was lawful to be a Communist in Japan—the place was a democracy -- yet the Americans pushed for a crackdown. They reversed policy in regards to the zaibatsu (seen as the bag men for the military) and returned support for a strong centralized police force. All this was driven by fear of the specter of communism. In addition, the US government relinquished their claim to war reparations – and with that, of course, any pay back to American tax payers. Rather than pay war reparations to Britain and most Asian countries, American agents began to hustle to arrange commercial treaties linking Japan with countries like the Philippines.

To avoid a fertile Communist breeding ground, the US committed to the economy of Japan. A trio of draconian measures were engaged to help bring prosperity about: the budget would be balanced, state loans to industry would be fundamentally suspended, and a de facto and general abolition of state subsidies would be followed, at least for the time being. These harsh guidelines, with their predictably tremendous stress, almost drew the nation into a depression.

“Luckily” some might say, “right on schedule” a more callus and cynical historian could also put it, at that point the opening of the Korean War flooded Japan with cash. Not only was the enormous surge in military procurement orders to Japanese industry an economic Godsend—cash flow in this category from the US between 1951 and 1953 was in the neighborhood of two billion dollars—it was a huge overall portion (60% of its exports) and involved a high ratio of heavy industry. This boon, of course, positioned Japan to excel in automobile manufacturing at the expense of US competitors as this factory power came on line. All because of the fear of communism. It’s a fitting irony that decades later George Bush Jr.’s tax give away to the very rich – which as mentioned flowed to Communist China to finance a staggering array of factories with the predictable huge increase in demand for electricity and the just as predictable rise in cost of gas at the pump in the US blablabla—has similar pebble in the pond ripples in the water effects.

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