Dual Currency Plans Being Examined In Japan

Well don't any of you ever accuse me of being behind the curve on this blog. The Financial Times is now running a story about how some "whacky politicians" (sorry, members of the the ruling Liberal Democratic party) in Japan are dusting down plans for the government to introduce its own private currency to rival the country's official one (aka the Yen) issued by the Bank of Japan. To understand what this post is about, and see its relevance to potential events in the eurozone (and in particular in Spain, given the presence of Argentina-style politicians like Miguel Sebastian in the government), see this post here. Of course, maybe they have just been carrying out an extremely literal reading of Gauti Eggertsson's "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible" right down to the small print.

The big difference between Japan and either Spain or the US is, of course, that Japan is a huge current account surplus country, and thus does not rely on external agents to soak up all its debt. But then again, at the time of going to press, Taro Aso is a much more convincing desperate madman at the steering wheel than Barack Obama is.

Aso's popularity continued to slide as he faces criticism -- even by some lawmakers within the LDP -- for his handling of the recession in the world's second-largest economy.The Mainichi Shimbun said support for Aso's government slipped two points from December to 19 percent, making him the second-least popular premier since the newspaper first conducted such polls in 1949.

A plan to print some Y50,000bn ($546bn) worth of a new currency to fund pump-priming projects has been drawn up by influential politicians in Japan in a sign of desperation in the ruling Liberal Democratic party over the country’s failing economy. To be released on Friday, the proposals to issue government notes come amid rising frustration among politicians with the independent Bank of Japan. It has been reluctant to bow to pressure to run the yen printing presses faster to stimulate the economy.

The politicians include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Taro Aso, and want the government to issue its own notes to fund projects. The group wants Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.

“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group.

Naturally, the proposals are causing all sorts of controversy in Japan. Prime Minister Taro Aso said on Monday evening that "We are not at all at the stage of considering such an idea", while Chief Cabinet Secretary Takeo Kawamura warned that if the government prints money, it could lead to inflation and weaken the yen against other major currencies. BOJ Gov. Masaaki Shirakawa was also pretty critical of the proposal, saying it could "cause great damage" to the central bank's balance sheet and monetary policy as well as market confidence in the yen.

"The plan would require very careful consideration because it could result in jumps in Japan's long-term interest rates, with market participants losing trust in the government's commitment to repaying its debts," Shirakawa said.

Well basically weakening the yen, and raising market participants inflation expectations (or their fear that government will irresponsibly monetise its debt) is just what the Eggerston proposal is all about, so these two would hardly seem to be objections to the idea, and while it is unlikely that the plan will get very far in the short term (rather than prodding the BoJ into more aggresive action), Japan's crisis is very severe, and getting worse by the day, so clearly they are going to need to do something.

The Second Great Depression Spreads

The Second Great Depression has now taken a firm hold of Eastern Europe and seems to have just spread from Ukraine, and arrived in Hungary.

Hungarian industrial production fell the most in December since at least 1991 as a recession in western Europe cut export demand and dragged the economy into its worst decline in 15 years. Production dropped 23.3 percent from a year earlier, the seventh consecutive monthly decline, after falling 9.9 percent in November, the Budapest-based statistics office said, based on preliminary data. Output fell 14.6 percent month on month.

And it only looks set to get worse, since Hungary's manufacturing purchasing manager index (PMI) fell to a all-time low of 38.6 in January, down from 40.8 in December. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hadn't been below the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year. Gábor Ambrus, economist at 4Cast, in London, estimates that (in part as a result of the gas crisis) output could drop by another 14.6% between December and January, which will give another huge drop in the year on year number.

“What can I say, just terrible. It appears to be weak on both domestic and external sides, but with Hungary a small open economy it is likely to remain under pressure from contracting demand across the globe and the Eurozone in particular......This isn't just a Hungarian phenomenon however, as German IP today will be weak as will the UK data, albeit not as soft as this number. The business surveys remain weak so it's difficult to forecast any near term recovery. Consequently, the estimate for GDP growth of -3% this year may soon look on the optimistic side."
Stuart Bennet, Caylon, London

VTB GDP Indicator Also Shows Severe Contraction In Russia

Well, while a lot of people in the Russian establishment seem to be busying themselves trying to decide which side they are batting for in the massive crisis which has now gotten a grip on Russia, the economy itself - which is basically being starved of liquidity in a way which is pretty reminiscent of what is happening in Spain - is now spirally downward and downward. The most recent piece of evidence for this comes from the latest reading on VTB’s Russian GDP Indicator which showed that economic output contracted at a year on year rate of 4 percent in January, down from December’s 1.1 percent decline, and November's 2.1 percent expansion.



According to Russian economy Ministry estimates the economy will contract by only 0.2 percent this year after expanding 5.6 percent in 2008, so this estimate now seems hopelessly out of date. If we look at the monthly contraction rate as a reflection of the current quarter on quarter contraction, we find a rate of minus 1.6%, which means that the present rate is something like a 6.5% annualised shrinkage rate. At present this is stationary and not accelerating, but it is quite strong, especially for an economy which only six months ago was expanding at a 6.5% annualised rate.

But Spain - Not Wanting To Be Left Out Of This Great Race To The Bottom - Isn't Far Behind

Spanish industrial production fell by a record 20 percent and bankruptcy proceedings almost quadrupled as the credit squeeze pushed the country’s debt-laden economy toward its worst recession in half a century. The 19.6 percent annual decline in production at factories, refineries and mines in December followed a revised contraction of 15.3 percent in November, adjusting for the number of days worked, the Madrid-based National Statistics Institute said today. The number of Spanish companies starting bankruptcy proceedings in the fourth quarter rose to 960 from 260 a year earlier, a separate report showed.

“It’s like a cluster bomb,” Salvador Bellido, president of the Confederation of Small- and Mid-Sized Companies, said in an interview. “Even the food sector, which shouldn’t really be suffering in such a situation, is suffering.” Spain’s auto industry, which accounts for about 5 percent of GDP, has started laying off workers as sales plunge. Nissan Motor Co. said it would cut 38 percent of workers at a Spanish factory and Renault SA won approval to temporarily lay off as many as 10,311. Vehicle production dropped almost 48 percent on an unadjusted basis in December, today’s report from the statistics institute said. The government has pledged 800 million euros in aid to help the industry weather the crisis. “There will be more mass job cuts in the industrial sector in the coming months,” said Jesus Castillo, an economist at Natixis in Paris. “The year 2009 is going to be a difficult one.”

In spite of a slight improvement between November and January (to 31.8 from 28.2), the latest manufacturing PMI data are consistent with a marked decline in industrial production. However, the pace of the fall is likely to slightly decrease in the coming months.These results confirm the extent of the Spanish recession. The contraction in activity should be more pronounced than expected in Q4 2008 (-0.8% q/q, published on February the 12th). More generally, GDP is likely to fall by more than 3.0% in 2009, after +1.2% in 2008 and +3.7% in 2007.
PNB Paribas

The Paradox Of Thrift Has Arrived In Spain

Yesterday Paul Krugman had this on his blog on the New York Times.

Yesterday’s report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy.

I don’t know who else has made this point, but it’s quite clear that we’re in serious paradox of thrift territory here. Or perhaps more accurately, we’re in a paradox of debt. Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can’t do this accurately until the Federal Reserve’s flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

He calls this process, following Edgeworth, "damnification", but, as he says in an earlier post, there's another, even more problematic form of damnification (or as Jagdish Bhagwati would have called it “immiserizing growth"), that can confront an economy which is deleveraging and contracting at one and the same time - as the US and Spain are currently doing, and that is price deflation.

But there’s at least one more form of damnification that has me really worried: the paradox of deflation. An individual company or worker can preserve a business or a job by accepting a lower price; but when everyone does it, we get debt deflation — a rising real burden of debt, which weighs on the economy — and also start to have deflationary expectations built into lending and investment decisions, which further depresses the economy. And once you’re in a deflationary trap, it’s very hard to get out.

Now, according to the Bank of Spain in its latest quarterly report on the Spanish economy..... "job destruction and the tightening of financing conditions also contributed to the scaling back by consumers of their spending decisions, dampening the expansionary effects on disposable income stemming from the rise in wages, lower infl ation and the fiscal impulse linked to the personal income tax deduction applied in June. All these factors, along with the reduction in the real value of household wealth, are prompting a rapid recovery in the household saving ratio, which rose in Q3 to 11.9% of disposable income in cumulative four quarter terms, compared with 10.2% on average in 2007".

Now I haven't done any calculations here either, but I would say, along with Krugman, that almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more here in Spain too, and not only that, as I was arguing yesterday, the second form of damnification is about to arrive. Better never to have reached this point, but, unfortunately, there is no turning back the clock now.