Friday, February 06, 2009

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.

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