This confirming much of what’s been previous discussed.

The remaining question whether there already has been direct intervention, as evidenced by rising fx reserves.

Interestingly, with floating fx it’s operationally easy for Central Banks to offset each other’s intervention. For example, if the BOJ buys dollars the Fed could simply buy the yen. Each CB would have a deposit on the other’s books and the (global) economy wouldn’t know the difference.

Also interestingly, all governments currently miss the point that exports are real (real vs nominal) costs and imports are real benefits.

So the CB that weakens its currency is in fact gifting the world superior real terms of trade via lower export prices via lower domestic real wages, etc. as it reduces its own real terms of trade.

Japan Rebuke to G-20 Nations May Signal More Moves to Weaken Yen

By Eunkyung Seo and Masaki Kondo

December 31 (Bloomberg) — Japanese purchases of foreign bonds to weaken the yen may become more likely as the nation rejects trading partners’ rights to criticize its currency policies.

“Foreign countries have no right to lecture us,” Finance Minister Taro Aso told reporters at a briefing in Tokyo on Dec. 28. He said that the U.S. should have a stronger dollar and questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Japan’s new Prime Minister Shinzo Abe may accept trade friction as a cost of spurring growth and countering deflation through a looser monetary policy and weaker yen. The currency is set to complete its biggest annual decline in seven years after Abe’s Liberal Democratic Party secured a landslide victory in this month’s lower-house election. During his campaign, Abe said foreign-bond purchases were a possible monetary tool.

“The LDP wants to boost stock prices before the upper- house election in July next year, and the easiest option for them is to weaken the currency,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “The explicit policy to weaken the yen is likely to upset the U.S. and China.”

The yen was at 86.08 per dollar as of 7:30 a.m. in London after touching 86.64 on Dec. 28, the weakest since August 2010. It traded at 113.53 per euro.

Currency Promises

The currency has dropped more than 10 percent versus the greenback since the end of 2011, set to complete the biggest annual slump since 2005. At the same time, the yen remains about 30 percent higher than it was five years ago.

In his Dec. 28 comments, Aso, a former prime minister, said that Japan and other countries made “a promise not to resort to competitive currency devaluations” at a G-20 meeting in 2009. “How many countries have kept the promise? The U.S. should have a stronger dollar. What about the euro?” he asked. “Foreign countries have no right to lecture us” as Japan is the only major economy to keep the pledge, Aso said.

The U.S. criticized Japan for undertaking unilateral sales of the yen in August and October last year, after Group of Seven economies earlier jointly intervened to weaken the currency in the aftermath of an earthquake and tsunami.

“Rather than reacting to domestic ‘strong yen’ concerns by intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy,” the Treasury Department said in a report in December last year.

Shrinking Economy

The Liberal Democratic Party faces the task of reviving growth after the economy contracted for the past two quarters, meeting the textbook definition of a recession. The nation’s industrial output tumbled more than forecast in November to the lowest level since the aftermath of last year’s record quake.

At the same time, stock prices are climbing, with Toyota Motor Corp. at a more than two-year high, as a weaker yen and prospects for central-bank easing brighten the outlook for exporters. Such improvements may cause concern for some of Japan’s Asian neighbors.

“South Korea is one of the countries most vulnerable to the weak yen policy as many export items are in direct competition, such as cars and electronic goods,” said Lee Sang Jae, a Seoul-based economist at Hyundai Securities Co. “Japan will try whatever it can to stop the deflation and to weaken the yen for export growth.”

Shirakawa’s Caution

After a Dec. 28 call with U.S. Treasury Secretary Timothy F. Geithner, Aso said he had told Geithner that the yen was making some corrections from one-sided moves and Aso would keep monitoring changes in the currency.

Bank of Japan (8301) Governor Masaaki Shirakawa, whose five-year term ends in April, has rejected suggestions that the bank buy foreign bonds and called for respect for the BOJ’s independence. Such a policy would amount to currency intervention, which is the responsibility of the finance minister, he says.

At the same time, the Nikkei newspaper on Dec. 29 cited Shirakawa as saying that central bank and government must work together to overcome deflation. Abe is pressing for the Bank of Japan to adopt a 2 percent inflation target, compared with a current goal of 1 percent. Consumer prices excluding fresh food fell 0.1 percent in November from a year earlier, showing the central bank is struggling to fulfil even the lesser ambition.

The LDP proposed in its campaign manifesto establishing a joint BOJ, Ministry of Finance and private sector fund to buy foreign bonds. Takatoshi Ito, a former finance ministry official and a possible contender to become central-bank governor, said in a Dec. 6 interview that the BOJ “can and should buy foreign bonds,” adding that such a move is possible if the finance minister publicly declares support for it.

In a note this month, Australia and New Zealand Banking Group Ltd. said that foreign bond purchases are contrary to the legislation governing the BOJ. At the same time, it’s possible that the government may cajole the central bank into putting money into a proposed private-public vehicle for investment in foreign asssets, the lender said.

44 Responses

  1. Interesting that the Japanese have realised that targetting the Euro is the best way to weaken the Yen – given that you can be pretty certain that the ECB is so tied up in red tape that it won’t respond.

    The Swiss certainly showed the way for those misguided countries still pursuing ‘export led growth’.

  2. Warren,

    Would you please explain this comment ?

    “So the CB that weakens its currency is in fact gifting the world superior real terms of trade via lower export prices via lower domestic real wages, etc. as it reduces its own real terms of trade.”

    I understand the first part, “gifting the world superior terms….”. but i don’t understand why this comes from lower domestic real wages.


  3. yes but can the central bankers playing accounting games with fiat currency really considered a “purchase” in any economic sense?

    how about you MMT folks look up the economic definition of a “purchase” ?

    The Japan bonds were NOT purchased in any economic sense, central banking fiat cartel books are simply re-arranged to hide the greatest ponzi scheme in human history.

  4. A purchase in the economic sense would require some human productivity, transferred to some form of currency (fiat or not) and then exchange for Japanese government bonds.

    The printing of more fiat currency, and then using the printing fiat to “purchase” printed debt of a partner banking cartel member has nothing to do with an “economic purchase”

  5. Off-topic, but have been reading soft currency economics, and the deficit spending point has been a bit tricky for me to understand.. the order and some specifics may be off here.

    So the government is required to borrow the money to make up any spending that wasn’t covered by taxation. Also, if it did not borrow the money from the banks, it would be driving down the fed funds rate when it spent the money. So, it sells treasuries to the banks, draining reserves, then spends this money back into the economy.. creating those reserves again (assuming amounts are the same). The spending goes into the economy, the banks get the treasuries, reserves remain the same, fed funds rate stays the same.

    I guess my question is.. what is the difference between holding reserves and holding treasuries from the bank perspective, and the economy as a whole. It seems like you’re still taking money from one place (the banks) and spending it somewhere else (social security, Iraq, whatever). How are you adding anything to the economy if reserves are still the same – the banks now have the IOU which will get paid out eventually?

    1. @jerry, When a banks buys a Treasury it “sends” reserves to the government’s account at the Fed (in reality the Fed just debits the bank’s reserve account and those reserves cease to exist). They are not stored in any sense to be used for funding expenditures. When the Treasury is redeemed at maturity digits are again altered at the Fed account of the bank which bought the bond: it is credited with the original reserves used to purchase the Treasury plus the yield.

      There is no purpose in a bank holding reserves in excess of what it requires for its operations. Currently all those excess reserves just sit in their Fed accounts earning 0.25%. The banks and the private sector as a whole would get better returns and more income from Treasurys and other interest bearing financial assets than from large reserve balances. So from the perspective of a bank they want to have precisely the quantity of reserves needed for each business day and no more, while more high quality bonds are desirable because they generate greater interest income.

    2. right, reserves and tsy secs are both just dollar accounts at the same fed.

      and think of govt spending first, and then borrowing or getting tax payments.

      even when the tsy is required to tax or borrow first, the fed none the less as to do some kind of reserve add for
      the economy to make the payments to the govt. that can be repo, buying secs outright, etc.

      1. @WARREN MOSLER, Got it. As far as reserves go as an asset class though, the banks could only exchange them with the Fed or lend them to other banks? It’s hard to visualize the accounting of this.. it seems to me like the banks could just go out and buy the Yankees or something with all the excess reserves?

      2. @jerry, I don’t believe rules have been relaxed by Congress sufficiently to allow banks to buy baseball teams, or invest in same.

        Banks do lend to other banks. One of Warren’s Narrow Banking draft proposals is to eliminate Interbank lending, and just let the Fed do that, as Interbank lending and the work required to keep that running does not serve any “public purpose” for banking (banking is nearly a kind of govt operations).

        Warren also proposed the elimination of issuance of T-Securities, for the same reason. No useful public purpose. Mostly because of the paranoia about the word “debt”.

        I may be mistaken on this (run on sentence warning):

        The argument that T-bills are corporate welfare, and that Congress *knows* this because it created these rules via the original Federal Reserve Act and has kept these rules —- similar to how Bush’s Medicare Reform Part D forbids Medicare from negotiating bulk pricing from pharma corps, then they complain about Medicare spending — is that Congress forbids the Treasury from spending by running a temp or perm overdraft at the Fed, but private (zombie) banks are permitted to run an overdraft at the Fed when they purchase Treasury Securities.

  6. For example, if the BOJ buys dollars the Fed could simply buy the yen. Each CB would have a deposit on the other’s books and the (global) economy wouldn’t know the difference.

    I disagree, as previously discussed.

    If the CBs want to lower the exchange rate the they must sell their currency in the market. If two CBs try to do it at the same time buying the other CB currency then they end up pumping money into the market.

    For instance if the BOJ buys 1 dollars at 90 yens, and the Fed buys 80 yens for one dollar, then you can get as many dollars or yens for nothing as the Fed and the BOJ are willing to give you. Eventually the real economy will notice the difference.

    Happy fiscal cliff everybody!

      1. @MamMoTh, Just because the central banks buy foreign currency doesn’t mean the currency units they buy with enter circulation.

      2. @MamMoTh,

        I have read your post. It’s nonsense.

        The central bank buys currency and buries it. It never sees the light of day again. It is a hostage in a currency war.

        The stock of each currency may go up, but the circulating portion of that stock remains the same.

        Eventually the central banks will call a truce and swap hostages – eliminating the surplus stock.

      3. @MamMoTh,

        What’s nonsense is to keep insisting the economy wouldn’t know the difference, when both CBs keep adding NFAs to the economy. After all MMT used to consider that important.

      4. @MamMoTh,

        “What’s nonsense is to keep insisting the economy wouldn’t know the difference, when both CBs keep adding NFAs to the economy.”

        You might want to read the bit about net savings again. I’m not sure you’ve understood it.

      5. @Neil Wilson,

        You might want to read the bit about net savings again. I’m not sure you’ve understood it.

        I’m sure I have, don’t worry about me.

      6. @MamMoTh,

        If you had understood it you wouldn’t be suggesting what you are suggesting.

        The foreign CB has just ‘saved’ which turns that chunk of domestic liabilities into a stock reducing the amount of domestic liabilities in circulation.

        One of the key arguments of MMT is that there is a tendency for the non-government sector to net-save. Foreign central bank liquidity operations are one factor in that tendency – since there is absolutely no incentive on them to recirculate the stock of foreign assets they hold.

      7. @MamMoTh,

        Clearly this is another one of those “I’m right and I’m going to show I’m right” threads rather than somebody who wants to understand.

        Intermediaries make money by intermediating. But that is just distribution amongst actors with expectations. Macroeconomically nothing significant happened.

        Any more than anything happened when QE purchases bonds at differing prices. Or for that matter when the Treasury sells bonds to the private sector only for them to sell them on to the Fed for a turn.

        Financial traders make profit from increase in financial trading activities is hardly news.

      1. and my point was that if the fed then buys those yen at the same price and sells dollars it’s all back where it started.
        that is, they both have the ability to offset each other.
        if the prices/timing aren’t exactly the same yes, there are a few winners/losers depending on how much the currencies shift.

      2. @MamMoTh,

        But why would the Fed buy the yen at the price set by the BoJ? That wouldn’t change the exchange rate targeted by the BoJ which is the only thing that should matter to it.

        The only way the Fed can try to offset the action of the BoJ would be to pay more for the yen which means that anyone intermediating between the Fed and the BoJ will be a net winner of NFAs for nothing.

      3. @MamMoTh,

        You’re making this more complicated than it really is.

        But why would the Fed buy the yen at the price set by the BoJ? That wouldn’t change the exchange rate targeted by the BoJ which is the only thing that should matter to it

        Japan buys dollars at a ratio of 65 – 1. In response the yen “falls” to a new dollar ratio of 70 – 1. The Fed decides it doesn’t like this. It buys yen at a ratio of 70 – 1 until the yen “rises” to the original ratio of 65 – 1. All that’s happened is that the process and the deposits at the CB’s have been reversed, deposits which do NOT impact the greater economy just as all the reserves on the Fed’s balance sheet might as well not exist. I understand you believe you’re communicating clearly but you really aren’t. I can only assume the actual process is not what you are referring to, so it would help me if you took some time to rephrase your argument.

      4. Ben,

        I think the idea is that the Japanese buy, say, $1B for Y65B (at 65-1 moving to 70-1) but then the Fed has to inject only $925m (at 70-1) to remove that Y65B from circulation meaning that the circulation is $75m short of its original total.

        So the injection reduces dollar circulation even if fully neutralised.

      5. @Neil Wilson,

        If that’s MamMoTh’s argument then you’ve stated it much more clearly, but the impression I get from their posts is the belief those units of currency, once bought, are not deposits at the CB but circulating currency available to anyone who wants them. In other words it sounds like they’re arguing the purchases distort the market by inflating.

        Am I the only one hearing that?

      6. What I am saying is, and I will just repeat what I’ve already said

        – if a CB wants to devalue its currency then it must sell it in the market, not to another CB that doesn’t want it to do it.

        – if the BoJ wants to bring the yen at 90 yen to the dollar then it must sell yens and buy dollars at 90 yen for a dollar, which it can always do if there are willing sellers in the market

        – if the Fed is not happy with that, it doesn’t make sense that it buys yens at 90 yens for a dollar. it wouldn’t offset the devaluation.

        – so if the Fed wants to keep the yen at 86 it must buy them at 86.

        – if you are a market participant then you can buy 90 yens for a dollar from the BoJ, and sell them to the Fed making a profit for nothing for as long as the BoJ and the Fed play the game. unlimited NFAs will enter the economy

        – eventually everybody would get rich, which obviously will affect the economy

      7. @MamMoTh,

        That’s where the mistake is.

        If the BoJ sets a rate of 90 yen on the dollar and offers at that, then the Feds job is simply to remove those 90 yen from circulation for no more than a dollar.

        The job is to maintain the relative circulation of the currencies, not to set a counter peg. Setting a counter peg would create a fixed rate currency.

        So there’s not really much of a carry trade there.

        And of course from an MMT point of view if a country wants to ‘save’ in your currency then that means taxes in your country can be that much lower. So why worry anyway?

      8. @Neil Wilson,

        Suppose Japan set a peg, say 90 yen per dollar. The Federal Reserve counters the currency manipulation by removing those yen from circulation, but isn’t necessarily targeting a specific exchange rate.

        Would the Fed, in your opinion, effectively be setting a “floating” currency peg, one that varies within what the Fed considers an acceptable range?

      9. @MamMoTh,

        Sorry, but the BoJ buying the dollar at 90 yen is not setting a peg since it doesn’t offer to sell dollars at any fixed price.

        If the BoJ is targetting a higher exchange rate why would it care if the Fed removes the yen it sells or not from the economy? The Fed wouldn’t offset anything.

        You are still wrong. It’s a matter of price, not quantity 😉

      10. @MamMoTh,

        1) A central bank doesn’t have to offer its currency at a fixed price to estsblish a de facto exchange rate.

        2) The exchange rate can be adjusted by altering the quantity.

      11. @Ben Johannson,

        I wouldn’t say the exchange rate would be adjusted. Exchange rate setting is much more complicated than that. All the Fed would be doing is neutralising the extra Yen liquidity.

        But a better mechanism would be the standard MMT suggestion of treating the amount of dollars the BoJ has locked up as ‘frozen’ and handing that amount across to the Treasury to inject as tax cuts or spending.

        That would restore the circulation ratios via a spending cycle.

  7. […all governments currently miss the point that exports are real (real vs nominal) costs and imports are real benefits…]
    I actually have been reading about this concept that America benefits form cronic trade deficits on the editorial pages of the WSJ and from supporters of globalization, delocalization and outsourcing since I studied at UCLA in 1990. This is the only proposition of MMT or ME-MMT that comes straight from mainstream economic thought. Is there any evidence that foreign deficit countries such as UK, USa, India (let us leave alone Spain, Iceland, the Baltics and the other foreign deficit euro countries for simplicity) have been better off than foreign surplus countries such as Sweden, Switzerland, Germany, Netherlands, Singapore, Korea, Hong Kong, Japan, Taiwan, Malesia, China…? Did China do worse than India ? Germany than the UK ? Japan than the USA ? All the evidence is that cronic foreign deficit are accompanied by lower wages for workes and extreme concentration of wealth in the upper 10% (that owns now 85% of financial wealth in the USA). The argument and the economic chain of consequences is discussed in much more detail in excellent texts such as Ian Fletcher and expecially Ralph Gomory e William Baumol
    I understand Warren that you like simple linear logic supported by your banking experience, but when you venture into free trade, exports and imports benefits, delocalization and outsourcing you are going into areas in which your trading and interest arbitrage experience do not help much. I also understand you try not to clutter your mind with too much useless reading of economics in the J.M. Keynes tradition. But you dismiss the biggest issue of our time, Globalization, “free trade”, cronic foreign trade surpluses and deficits, outsourcing, delocalization and the resulting destruction of standard of living of western workers and concentration of wealth at the top with a couple of sentences.
    Yes, I did read the mandatory reading of this site and with them, since the early ’80s in 3 different universities, also the rest of economic thought from ricardo, smith, keynes, wicksell, monetarist and austrian and the recent stuff. You might be right in cutting to the chase in matters of money since it is accounting and banking mechanics essentially, but the foreign trade-globalization business is not an issue of accounting and settling of credit balances on the books of central banks. We are talking technology, economies of scale, industrialization and de-industrialization, wages and profits, million of jobs lost and gaines, concentration of wealth..
    It is amazing to me you can be so righ in monetary matters and so wrong on the main economic and social and industrial issue of our time, globalization, “free trade”, cronic foreign deficits. You couple of paragraphs that state that receiving goods in exchange for dollars and the latter are credit balances on the books of the CB are fine and understood. But so what ? The entire Asian continent has gone from dire poverty to industrialization and rising wealth in a couple of generations by “missing the point that exports are real (real vs nominal) costs and imports are real benefits…”. The richest countries in Europa keep missing your point since a century…
    You look quite dogmatic on this issue, internal logical consistency is the goal of math, not economics which should explain what is going on in the world.
    This is not an academic discussion, your name is spent now in Italy to support proposals that contradict our economic history of exporting country. Around where I live in Modena, land of Ferrary, Maserati and Lamborghini, more than 50% of GNP is made exports, as much or more than Germany. This is how we raised our standard of living. We are not Canada, Australia or the USA with huge natural resources and space. If you cut taxes on business from the current 65% total rate, deregulate, devalue with the lira like Korea does and put trade barriers to China we will save our standard of living

  8. Trade has always seemed to be a bit of a blind spot for MMT. Yes we get stuff for pieces of paper. But, there is a reason why countries engage in this. I realize this is microeconomics, but I think talking to someone with a lifetime experience in the manufacturing sector might be useful, i.e. not a banker, bond-trader, or professor.

    Building an export market increases the competitive position of your industry. You develop skills and infrastructure. In the end R&D also depends on a healthy manufacturing sector. There is a price to pay in abandoning manufacturing. You might want to look at the December issue of The Atlantic, and an article regarding the potential return of manufacturing to the US.

      1. @WARREN MOSLER, Warren, I never got the impression that you are blind to [We are talking technology, economies of scale, industrialization and de-industrialization, wages and profits, million of jobs lost and gaines, concentration of wealth.}

        I got the impression that this “social” aspect of manufacturing is not your main emphasis, and that since “true” gains accrue to the importing country, then it’s the responsibility of govt to deficit-spend sufficiently to offset the social and domestic economic effects of profits and benefits accruing to the top 1%.

        To explain that point in a more “narrative” manner, the USA economy as a whole benefits from China building Laptops for $50 cost of parts and labor, but the spread between that and retail *vastly* accrues to marketing/sales and executives/shareholders more than other employees. More importantly, Consumers enjoy only a tiny fraction of the reduced labor costs, since the selling prices of units does not fully reflect the discount compared to what prices might be if these were built by higher-priced USA labor.


        This disruption and pain exists because in neoliberal nirvana-land, income and wealth is distributed to the masses ONLY or MOSTLY via work and wages, ergo, your point about using Govt deficits to distribute the “morally-justified” net national gains to the entire population.

        Correct, roughly?

      2. first, assuming some semblance of competition, whoever can get the goods from china to the US consumer the cheapest wins.
        and consumers gain by the (quality adjusted) lower price assuming govt. policy sustains sufficient aggregate demand.

        and i don’t recall proposing ‘using govt deficits to distribute the ‘morally justified’ net national gains etc.?

        I do propose eliminating heaps of govt spending that directs income with no public purpose, re the govt bond industry, etc.

        Also, if you don’t get the macro right, the micro necessarily suffers.

        Hence the appearance that i ‘care’ more about the macro than the micro?

  9. While Alan Grayson in this video favors a repeal of the upper tier of Bush tax cuts, in other words he’s out of paradigm, his proposal for what the Govt should do with that “revenue-savings” is a partial Job Guarantee program.

    He’s moving closer … I think.

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