Monday, November 15, 2004

Brad Setser weighs in today on the ability of the Bank of Japan to fight off the dollar speculators ad infinitum.

You should read the whole thing, but here's the teaser lines:
The notion that the hedge funds can overwhelm markets may need to be revised after Japan's Ministry of Finance (MOF) redefined the possible by selling some insane amount yen debt to fund an intervention war chest -- a war chest that has financed $100 billion of intervention earlier this year and is far from being empty.

The MOF, and the Chinese central bank, are effectively becoming the biggest macro hedge funds of them all.
In January 2003 Japan (both private individuals and the BOJ) owned $385bn in long-term US Treasuries; by August 2004 that total stood at $722bn (Setser estimates around $500bn of that is in the BOJ's coffers). Japan has not intervened to support the dollar at all since March, it's money supply is growing slowly, it does no sterlization and it is still in deflation. All this suggests to me that Japan can prop up the USD to its heart's delight if it so desires.

Of course, a week ago Brad DeLong claimed
If the private market--which knows that with high probability the dollar is going down someday--decides that that someday has come and that the dollar is going down NOW, then all the Asian central banks in the world cannot stop it.
Unfortunately, our friendly neighborhood economist never tells us why this is so.

I've been arguing for about a month now that as long as Japan is in deflation, its ability to defend the dollar is unassailable. In my view, Japan's will to defend it -- which is tied up in the trials and tribulations of the country's export dependence -- is more relevant. Since the election, the markets have been very wary of pushing the dollar below �105. Fear of awakening the giant?

DeLong should read more of Setser and General Glut. Unfortunately, he never answers my emails.


At 1:53 PM, Anonymous Anonymous said...

Of course with the volume of yen debt that Japan has issued, and the very poor credit quality, based on real return, any normal person would have to ask who is buying the debt and why is the interest on the debt so low - 0.01%, when the credit quality and sheer volume of debt should price the government debt at far higher interest rates.

Japan has actually been engaged in a period of 'usual practices' (defrauding its savers) by literally printing money. The offical name for this practice is quantitive easing.

I have to ask therefore why you believe in your deflation scenerio.


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