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					Forget the Posturing : Japan has already started to tighten



      The BoJ ‘good cop’ versus the MoF ‘bad cop’ routine is smoke and
       mirrors and is a function of power struggles between the two
       institutions
      Irrespective of when the zero interest rate policy changes, Japan is
       already tightening
      Base money has been drained sharply over the last quarter while the
       fiscal stance has also turned contractionary since the end of last year
      Such tightening is premature in our view and risks a significant
       growth slow down next year as external demand moderates


Irrespective of whether the Bank of Japan (BoJ) decides to leave rates
unchanged today or not, it is likely to move overnight rates between 10 to
25 basis points higher some time over the rest of this year. The way the
monetary authorities would like to sell it, they are at the vanguard of forcing
change in Japan and are no longer willing to use taxpayer’s money to
support bust institutions. Thus their stance is a signal of their new found
independence from the dark, reactionary forces of the MoF and the pork
barrel politicians.
Tosh! in our view. This is the same institution that has just wasted another
USD60 bn or so over the last year propping up LDP-related construction
companies and the like via its small and medium sized business loan
guarantee scheme. Moreover, the great radical at its helm is a man who first
joined the Bank in..... well 1947 actually. Hence we view the rhetoric as
more of a manifestation of a perpetual power struggle between different
arms of the Japanese bureaucracy than any great fissures between different
schools of economic thinking. Japan just does not make policy in an open
arena in our view; decisions are taken (or not) behind closed doors.
And the decision has been to tighten over the last 6 months or so. As the
two charts below show, the BoJ has continued to drain liquidity beyond the
reversal of any Y2K injections and over the past quarter, monetary base has
contracted an annualised 12-15% rate. This is a far cry from the
economically sensible but politically suicidal print-money-to-target-higher-
inflation policy espoused by many commentators. Pensioners and near
retirees are quite happy with slow growth, negative inflation and real bond
yields of 3-4%, thank you very much.




         DSGAsia              11 August, 2000                       1
Forget the Posturing : Japan has already started to tighten



                                              The Bank of Japan Has Been Draining Liquidity .....

  20%                                                                                                                                                                                   20%
            %YOY SA                                                                                                                                             %QOQ SA


  16%                                                                                                                                                                                   16%
                                                                                                                                        %YOY SA



  12%                                                                                                                                                                                   12%




   8%                                                                                                                                                                                   8%




   4%                                                                                                                                                                                   4%




   0%                                                                                                                                                                                   0%
                                                                                                                                            %QOQ SA
            Japan Adjusted Monetary Base
  -4%                                                                                                                                                                                   -4%
    Jan-90           Jan-91         Jan-92     Jan-93           Jan-94         Jan-95        Jan-96        Jan-97        Jan-98        Jan-99         Jan-00       Jan-01


Source: CEIC

Moreover, on the fiscal side, the Treasury has been accumulating monthly
surpluses since late last year. Admittedly this is only one arm of the State’s
spending machine – albeit one of the few that publishes regular data – but it
is an important bell weather of overall policy direction.

                              ....... While the Treasury Has Also Been Sucking Funds At Of The System

  1000
            JPY bn, 12MMA


   800



   600



   400



   200



       0



  -200

            Japan Treasury Balance
  -400
                95




                                               96




                                                                                97




                                                                                                                 98




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       95




                                         96




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                      -9

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Source: CEIC




                     DSGAsia                                          11 August, 2000                                                                                2
Forget the Posturing : Japan has already started to tighten



So why is Japan tightening now? It is not because the authorities are
suddenly ready after a decade to allow Darwinian selection to reign supreme
in the Japanese corporate sector. After all, there are still plenty of avenues
by which to prop up the weak and the politically necessary. However, the
finance bureaucrats are clearly concerned about the ever deteriorating fiscal
position while a move to slightly higher borrowing costs also sends a signal
to the outside world that they believe the economic recovery to be ‘self-
sustaining’ and a gradual normalisation of monetary policy is appropriate.
But this begs the question as to whether the recovery really is self-
sustaining. We have been and remain sceptical. The growth pick-up in
Japan has been a function of torrid external demand conditions and IT-
related spending. The consumer remains highly reticent to part with his or
her Yen as evidenced by the effective 70% plus roll-over rate in Postal
Savings deposits. We therefore feel that Japan risks tightening policy just at
a time when the external drivers are dissipating somewhat and therefore
choking off the recovery before it has really begun. The risk of the
economy falling back into recession next year is very real as a result and we
see growth in the 0-0.5% range in 2001 compared to market consensus of
nearer 1.5-2%. In any case, do not expect Japan to be the engine of global
growth that counteracts any U.S. slowdown.




___________________________________________________________________________________________
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_________________________________________________________________________




              DSGAsia                        11 August, 2000                                         3

				
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