Thursday, March 29, 2012

Japan’s Inflationism Begins to Backfire

Changes to people’s behavior in response to devaluation policies adapted by the Bank of Japan (BOJ) have begun to manifest in the asset ownership mix by Japanese households.

Here is what I earlier pointed out,

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

As the great Ludwig von Mises wrote,

The holders of ready cash try as far as possible to avoid the dangers of devaluation which today threaten in every country. They keep large bank balances in those countries in which there is the least probability of devaluation in the immediate future. If conditions change and they fear for these funds, they transfer such balances to other countries which for the moment seem to offer greater security. These balances which are always ready to flee-so-called “hot money”—have fundamentally influenced the data and the workings of the international money market. They present a serious problem in the operation of the modern banking system.

The incipient developing signs of capital flight as noted by Zero Hedge (bold emphasis mine)

Bloomberg reports that "Finance Minister Jun Azumi’s efforts to get Japan’s households to increase investment in the nation’s debt are failing as holdings of government bonds fall to a seven-year low." Combing through the Japanese quarterly flow of funds report shows something very disturbing - the last bastion of JGB ownership, Japan's households, have started to shift out of bonds, which are now yielding 0.27% for the retail 5 Year bond, and about 1.00% for the 10 year, and are now putting their money straight into mattresses. "Japanese households owned 3.09 percent of domestic bonds in the final quarter of 2011, a decrease from 3.2 percent in the third quarter and the lowest since 2005, Bank of Japan data released March 23 show." And the worst news for any domestically funded ponzi regime: "Mrs. Watanabe” as many are housewives, have instead increased foreign-currency deposits and cash, according to the BOJ data. "It’s a case of retail JGBs not having enough yield,” said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd."Households are accumulating cash and using financial investments to diversify into higher yields and JGBs don’t really provide this." ..."Individual investors are holding cash rather than bonds and other financial assets because they are wary of making risky investments, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo." Needless to say, when even Japanese households have given up, it's game over... for bubbles in both bonds and in "conventional wisdom."

As the average Japanese flee domestic bonds and the yen, interest rates would significantly rise that would rock the proverbial boat of the balance sheets of their banking and financial system, whom accounts for as the largest financiers of the Japanese government through the JGB (Distribution of JGB owners as of 2009 shown in the below graph from Japan Bankers Association).

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This would compel the BoJ to inflate even more in a futile attempt to suppress interest rates. The result would be a feedback loop—rising interest rates would be met with more inflationism which would fuel further rise in interest rates. Also Japanese authorities may resort to other means of financial repression, such as currency controls, mandates to own more bonds, and etc...

Thus, we can expect that the average Japanese to seek refuge either through precious metals or through foreign currency or both.

These are emergent signs of the unintended consequences of BoJ’s reckless policies that will lead to the self implosion of the yen, if, in the condition, that such inflationist policies should would be sternly pursued with. This would also presage the worsening of Japan's economic conditions.

Central bankers, mostly of developed economies, seem to think that they can wish away the law of scarcity through the printing (or should I say the digital) press.

Obviously reality has been catching up with them, as warned by Professor von Mises.

As a universal rule, inflation is a policy that cannot last.

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