by Nomi Prins
A month later, Japan’s government, under newly elected Prime Minister Yukio Hatoyama, launched a 7.2 trillion yen (US$81 billion) economic stimulus program to confront deflation and the stronger yen.55 He would serve as prime minister from September 16, 2009, through June 8, 2010. The BOJ agreed with the Japanese government on the need to fight deflation and remained committed to keeping the call rate at 0.1 percent.56 It didn’t matter who the prime minister was.
SHIFTING—BUT NOT BACK TO NORMAL
Throughout 2010, G7 central banks expanded easy-money policies. The ECB kept key rates at 1 percent. The Fed kept rates between 0 and 0.25 percent. The BOJ released fifteen statements from its monetary policy board meetings confirming its stance;57 in all of them, rates remain unchanged. The central bank crafted new asset purchase and money injection programs to “promote growth.”
The yen continued to appreciate against the dollar, pressuring the Japanese government to consider doing something about it. Big Japanese banks began switching from local to international lending, especially into the United States, augmenting their outside lending. They sought solutions to the lack of credit demand at home that was putting a damper on their profits.
On January 28, 2010, Bernanke was elected for a second term as Fed chairman. The Senate approved him in a 70–30 vote, the weakest endorsement for that position in ninety-six years.58 Still the reelection provided Obama’s administration a political victory. It also substantiated Bernanke’s money-conjuring policy, though US Senator Bernie Sanders from Vermont called Bernanke out for being “asleep at the switch while Wall Street became a gambling casino.”59
Nonetheless, more liquidity clouds formed. On May 9, Bernanke spoke with several of the G7 central bank leaders: BOE’s Mervyn King, BOJ’s Shirakawa, and ECB’s Trichet. The Fed had to respond to “strains in US dollar short-term funding markets” by reestablishing temporary US dollar liquidity swap facilities. The Swiss National Bank and the Bank of Canada joined the team.60
Before announcing the decision, on a conference call of the Federal Open Market Committee Bernanke made it seem as if this idea was not his but had risen from the angst of his cheap-money allies. “Yesterday Jean-Claude Trichet called me and made what I would characterize as a personal appeal to reopen the swaps that we had before,” he said. “I have gotten, again, personal calls from Mervyn King, of the Bank of England, and Masaaki Shirakawa, of the Bank of Japan, also asking us to reopen the swaps.”61 Bernanke was such a master of collusion that he made it appear as if the colluders didn’t include him but were somehow acting completely independently of the Fed’s policies and implicit or explicit directives.
Meanwhile, Japanese banks decided to go shopping with the higher yen. On July 8, 2010, Japan’s second-largest bank, Sumitomo Mitsui, said it might buy a stake in a US commercial bank for $5 billion.62 Since 2009, shares of Sumitomo Mitsui had fallen 26 percent. Two weeks later, Mitsubishi UFJ announced it might spend ¥500 billion (US$5.7 billion) to buy more US banks.63 Mitsubishi had invested $9 billion in Morgan Stanley in 2009.
In June, the Federal Open Market Committee noted that the pace of recovery in output and employment had slowed in recent months. So, on August 10, the Fed announced it would buy more long-term Treasury bonds and increase the QE program.64 The federal funds rate would remain “exceptionally low” for an “extended period.” Yields on ten-year Treasury bonds fell to 2.74 percent, their lowest level since December 2008.
Although the yen appreciation against the dollar was a thorn in the side of Japan’s economic performance, it benefited German companies that competed with Japanese exporters because the euro was depreciating. As a consequence, Japanese companies lost market share to German exporters, especially in the Chinese market, which made matters worse.65 The euro had fallen 19 percent against the yen in 2009, double its decline against the dollar. In September 2010, the euro stood 36 percent lower against the yen than it had in August 2008. According to the Chinese engineering federation, German companies increased their share of imports in China from 20.6 percent to 22.9 percent, whereas Japanese participation fell from 27 percent to 24.1 percent.
Two weeks later, on August 12, the yen hit a fifteen-year high against the dollar.66 Although new prime minister Naoto Kan (the former finance minister and “veteran bureaucrat”67 of Japan’s governing Democratic Party68) said this appreciation was “undesirable,” his comments weren’t enough to calm the markets.69 The Nikkei fell to 9,000. The Japanese Trade Union Confederation urged Kan to request a coordinated central bank action at the next G8 meeting to stabilize the yen. After an emergency meeting on August 30, the BOJ had announced a ¥10 trillion increase in lending to commercial banks, putting the total at ¥30 trillion to boost the lending market. But that wasn’t enough either. The BOJ said it “believes that the monetary-easing measure, together with government efforts, will be effective in further ensuring Japan’s economic recovery.”70 The government launched its own ¥920 billion stimulus package.71
The move was politically motivated—it occurred two weeks before Japanese prime minister Naoto Kan won the election in his party. And it seemed successful—at first. The yen fell 3 percent against the dollar.72 The fall lifted Japanese exporters’ performance, boosting Toyota and Sony share prices by 4 percent. The Nikkei closed 217 points higher.
On October 5, 2010, the BOJ announced a new money-conjuring strategy: instead of keeping its overnight rate at 0.1 percent, as it had since December 2008, it would reintroduce a policy of zero interest rates for the first time since July 2006.73 The decision accompanied creation of a ¥5 trillion fund to buy Japanese government bonds, commercial paper, and other asset-backed securities—all to combat the strong yen.
Shirakawa justified the measure by saying “the central outlook for the economy and prices have worsened more than had initially been predicted.” Prime minister Naoto Kan had been calling for BOJ solutions to the yen’s appreciation, succumbing to pressure from Japanese exporters who saw their profits threatened by a strong yen. So he looked good as well.
The New York Times chimed in, saying that the difficulties regarding the BOJ’s capacity to control yen appreciation and restore economic stability brought up discussion of its independence. According to Article Four of the Bank of Japan Act of 1997,74 the BOJ’s “currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.” Opposition groups and some government officials commented on plans to increase government influence over the Japanese central bank.
A month after the strategy was launched, on November 3, the Fed announced its second round of QE (QE2).75 With a high level of unemployment, feebler economic activity, and low inflation, the Fed added “a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”
This decision was not unanimous. Thomas M. Hoenig, FOMC member and Kansas City Fed president, voted against the increase in the purchase of Treasury securities, affirming that the benefits of that action might be worth less than its risks, especially regarding future financial imbalances, long-term inflation, and economic destabilization.
Japanese banks were successfully leveraging the strong yen. On November 15, Japan’s largest publicly traded bank, Mitsubishi UFJ, declared it had doubled annual profits during the six months ending on September 30. Its rivals, Sumitomo Mitsui Financial Group and Mizuho Financial Group, also exhibited huge profits. Mitsubishi UFJ announced plans to expand overseas by buying European banks.
Toward the end of the year, Japanese stocks rose, following the rise in oil and metal prices and as US shares hit levels not seen since before the Lehman Brothers collapse.76 Since April, the Tokyo Stock Exchange Price Index (TOPIX) had dropped 9.3 percent as a result of lack of confidence in the global growth recovery, Europe’s debt crisis, and US economic concerns. Among thirty-three industry groups, Japanese banks were the main drivers of the TOPIX recovery, followed by the real estate se
ctor.
That meant that financial firms were benefiting from the cheap-money supply, whereas the Japanese people were not. University students were concerned about being able to find jobs; the number of temporary job holders (who receive far fewer, if any, benefits than permanent employees) had been increasing steadily as a percentage of the workforce, and in 2010 temporary jobs made up one-third of all jobs, up from 16 percent in the 1980s. The number of suicides resulting from economic uncertainty was rising.77 In 2010, China also overtook Japan as the world’s second-largest economy.78
NATURE TAKES ITS TOLL
On March 11, 2011, nature struck Japan a devastating blow. A massive earthquake off the coast of Honshu, Japan’s main island, caused extreme tsunami waves that wreaked havoc on coastal areas and a nuclear power plant at Fukushima.79 Concerns about the financial consequences of that earthquake, the tsunami, and the Fukushima nuclear disaster, coupled with Portugal’s credit rating downgrade and political instability in the Middle East, moved investors toward the yen again. It recorded highs against the dollar of ¥76.54, past the April 1995 level. Expectations were that, as Japan needed money to rebuild after the natural disaster, Japanese companies would repatriate large amounts of capital, raising demand for yen.
The Nikkei 225 dove 1.4 percent on March 17, 2011.80 The BOJ offered to inject ¥6 trillion into the banking system to calm markets, adding to the ¥28 trillion it had already offered.81 On March 18, 2011, G7 leaders embarked on a coordinated monetary intervention to help Japan and tame the sharp rise in foreign exchange volatility after the earthquake.82
On that day, the Fed bought $1 billion against the yen.83 The last time the United States had intervened against the yen was in June 1998, when it purchased $833 million worth of yen, and it did so again in 2000, aiming to support the euro after its inception. This latest intervention worked: it lowered the yen by 2.1 percent.84 The measure was seen as a real act of solidarity with Japan by the United States, underscoring an implicit agreement between the two countries about what is and is not necessary regarding the currencies and the international monetary system. The US intervention was motivated not only by solidarity but also by the need to keep the dollar-yen exchange rate over ¥70.
However, the Dollar Index sunk to its lowest level in two years on April 28, 2011, as first-quarter economic data showed US expansion at a slower rate than expected.85 The yen rose against its counterparts as a result of repatriation of capital. The biggest loser that day was the Brazilian real, which dropped 1.9 percent against the dollar after the Central Bank of Brazil indicated it had executed much of its plan to contain escalating inflation—and it wasn’t guaranteed to change anything.
Six weeks later, on June 14, 2011, the BOJ announced it would expand its credit lines.86 It created a ¥500 billion credit line for banks that extended asset-based lending. The policy’s aim was to target growth industries to foster recovery in the wake of the tsunami.
The August 7 G7 emergency conference call brought tighter collaboration.87 The Fed kept rates at near-zero levels; the ECB intervened in the bond market, and the BOE announced more stimulus would come if needed. The BOJ expressed concerns about the yen’s appreciation, and Switzerland announced an effort to avoid an overvalued franc. More united them than divided them. Worried about a new global recession, the G7 leaders stated they would “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.”88
In Brussels, where European leaders reunited in late October 2011 to discuss the euro and the sovereign debt crisis, German chancellor Angela Merkel stated that “the world is watching” and “if the euro collapses, then Europe collapses.”89 Brussels was the fourteenth summit in twenty-one months. Merkel said she considered the euro the base for peace in Europe: “Nobody should believe that another half century of peace in Europe is a given—it’s not.”90
The next day, on October 27, the BOJ increased the size of its asset purchase program of Japanese bonds, from ¥50 trillion to ¥55 trillion.91 Three days later, Japan intervened in the foreign exchange markets to weaken the yen for the third time that year, pushing the yen to its lowest level against the dollar since 2008.92 The yen fell against its sixteen most-traded counterparts. The last time Japan had intervened in the yen was in August, when ¥4.51 trillion (US$57.8 billion) was sold, the largest amount since March 2004.
A month later, the key developed country central banks, on a roll, announced more coordinated measures to provide liquidity. They agreed to lower the pricing on existing US dollar liquidity swap arrangements by 50 points beginning December 5, 2011.93 They established bilateral swap arrangements through February 2013.
At Christmas, Japan and China were stirring a new initiative in contrast to these dollar arrangements. On December 26, 2011, in Beijing, Chinese premier Wen Jiabao met with Japanese prime minister Yoshihiko Noda as part of the Japan–People’s Republic of China Summit.94 In an unexpected decision, the governments announced both countries would promote direct trading of the yuan and yen, reducing their dependence on the US dollar.
The landmark currency deal was accompanied by an agreement between Japanese banks (Japan Bank for International Cooperation, JGC Corporation, and Mizuho Corporate Bank) and Chinese banks (including the Export-Import Bank of China) and companies to establish a $154 million fund to invest in environmental technology and business.
For Japan, the year 2011 was marked by strong yen appreciation, which rendered it the best currency for investors’ gains during the period.95 The BOJ had sold ¥14.3 trillion to stop these currency gains, to little avail.
WHAT RECOVERY?
In 2012, tension over the absence of a solid economic recovery gripped developed markets. Patience was wearing thin. Political and economic groups in Japan, Europe, and the United States divided mainly into those that supported easy-money policies and those that criticized them.
Into that cauldron, the Fed embarked on a third round of QE (QE3). Emerging countries considered the move as irresponsible, as fostering financial instability and volatility. The Republican Party in the United States seized on the latest round of QE to criticize Bernanke and the Fed, and by extension Obama, in the elections, but it didn’t change their outcome.
None of the core central bankers knew what else to do. They believed or wanted to believe in their own hype and power—that they could save economies through the right combination of QE, intervention, and lending money cheaply to big banks and corporations, and that somehow this would trickle down into the real economy people live in day to day. They could not admit that their economies had been crippled by the US financial crisis and that the collusion of the Fed with allied central banks had perpetuated risk in a grand conjured-money scheme.
In Tokyo, nerves were frayed. Shirakawa was summoned to parliament to explain his reluctance to utilize QE in a greater capacity.96 One parliament member loudly declared, “We need a new governor.”97 Other officials questioned whether the BOJ should remain independent of the government, given Shirakawa’s apparent reluctance to conjure money fast enough. For his part, Shirakawa worried that because rates—and therefore borrowing costs—were already so low, more rate cuts could overstimulate the economy.98
On February 14, 2012, Shirakawa relented, and the BOJ announced it would add another ¥10 trillion (US$128 billion) to its asset purchase program of government bonds, raising the total figure to ¥65 trillion. Its aim was to achieve a 1 percent annual rise in the CPI rate.99 The yen subsequently fell to 78.12 per dollar from 77.60. The Nikkei rose on the added supply of money.
The overvalued yen was again hurting exporters such as Sony, which doubled its annual loss forecast to ¥220 billion. That motivated finance minister Jun Azumi to express support for the BOJ’s policies, noting the ministry welcomed measures taken by the BOJ: “I hope the BOJ’s bold monetary easing gives a boost to the economy.” It was the fourth time in two years Shirakawa and the BOJ had expanded asset purchases to manipulate
the yen.
This medicine worked—for corporations. The following week, the yen hit a seven-month low against the dollar, its biggest drop since April 2011. And Shirakawa was under pressure to weaken the yen further.100 During the prior quarter, the yen fell 10 percent versus nine peers. Meanwhile, the Nikkei index gained more than any other major index, up 19 percent.
However, companies like Toyota wanted even more yen depreciation to help make their exports appear attractive (aiming for 95–100 yen per dollar). Sharp Corporation, Sony Corporation, and Panasonic Corporation forecast a combined $16 billion in losses for the fiscal year ending in March 2012. According to Sharp’s president, Takashi Okuda, “A weaker yen is a plus, but the 80-level is still harsh.”101
The corporations advocated the BOJ increasing its effort to intervene to weaken the yen, warning that otherwise it would place the Japanese economy in more jeopardy. If major multinational Japan-based companies couldn’t sell their products, sales and employees would suffer.
Shirakawa’s efforts to restore economic growth through a weaker currency were undermined by Bernanke, who was considering more easing—meaning the dollar had the potential to depreciate against the yen. So, on April 27, 2012, the BOJ preemptively increased its asset purchase program by another ¥10 trillion, promising to “pursue powerful monetary easing.”102
The BOJ appeared to be responding to government pressure—politicians were seeking stronger efforts against deflation, low consumption, and investment rates for two reasons: politically to keep domestic voter support, and because low deflation and consumption is bad for any economy, but especially Japan’s, whose neighbors China, South Korea, and even Russia were booming in consumption and investment attraction.
