japan is printing yen to buy dollars, keeping glob

Japan is printing yen to buy dollars, keeping global interest rates down
[ERAInf]

Date: Tue, 11 Oct 2005 06:49:03 +0930 From: ERA
Relayed by: Frances Milne

Financial Times, 2 October 2005

Great Daring Monetary Experiment: Japan Printing Money to Buy U.S. Dollars

The most aggressive experiment in monetary policy ever conducted occurred
mid-2003 and throughout 2004. Japan has been printing yen in order to buy
dollars in such extraordinary amounts that global interest rates are being held
at much lower levels than would have prevailed otherwise.

In essence, the Bank of Japan is carrying out the unorthodox monetary policy
that the U.S. Federal Reserve intimated it was considering in mid-2003. In other
words, the BoJ is creating money and buying U.S. Treasury bonds, which is
helping to drive down U.S. interest rates and underwrite U.S. economic growth -
and, by extension, global growth.

It is inconceivable that economic policy-makers in Tokyo and Washington do not
understand the impact that this unprecedented act of money creation is having on
global interest rates and economic output. The amounts involved are staggering.
Since the beginning of 2003, monetary authorities in Japan have created
Y27,000bn with which they have acquired approximately $250bn - that amount is
equivalent to more than 4% of Japan's gross domestic product. It also represents
$2,000 for every person in Japan. In fact, it would amount to $40 per person if
divided among the entire population of the world. Most importantly, it is also
enough to finance almost half of America's $520bn budget deficit this year. The
amount of new yen that Japan "printed" and converted into dollars during January
2004 alone was enough to finance 13 per cent of the U.S. budget deficit. The
investment of those dollars into dollar-denominated debt instruments clearly
explains why the yield on the 10-year U.S. Treasury bond fell last month in
spite of the 10 per cent upward revision in the Bush administration's budget
deficit projections.

By accident or by design, Japan is carrying out the most audacious endeavour to
conjure wealth out of nothing since John Law sold shares in the Mississippi
Company in 1720. So far, the results have been impressive. Japan's monetary
alchemy has been the most important factor in allowing the U.S. government to
finance a $700bn deterioration in its budget over the past three years without
pushing up U.S. interest rates to levels that would pop the wealth-creating
property bubble there. The U.S. tax cuts have fueled domestic consumption. In
turn, growing U.S. consumption has shifted Asia's export-oriented economies into
overdrive. China has played an important part in this process. With a trade
surplus vis-à-vis the U.S. of $125bn, equivalent to 9 per cent of its 2003 GDP,
China has become a regional economic growth engine in its own right. China has
used its large trade surpluses with the U.S. to pay for its trade deficits with
most of its Asian neighbours, including Japan. This recycling of China's US
dollar export earnings explains the incredibly rapid "reflation" now under way
across Asia. Even Japan's moribund economy has begun to show signs of
export-oriented growth.

These developments highlight a fundamental question that has been debated over
centuries: can governments create money and make the population richer without
setting in motion a chain of events that ultimately ends in monetary chaos? We
may be about to find out as Japan tests the hypothesis on an unprecedented and
global scale. If this experiment in unorthodox monetary policy succeeds, then we
have arrived at a new international monetary paradigm. Governments will have
discovered how to finance limitless deficits through the creation of paper
money, and we all can look forward to an age of great prosperity.

If it fails - as have all past attempts to create wealth from thin air - then
the world may not be able to avoid a severe and protracted economic slump as the
extraordinary imbalances in the global economy (caused by the explosion of fiat
money in recent years) begin to unwind.

In mid-2003, economists at the US Federal Reserve published a paper explaining
why the Fed was not "out of bullets" despite having cut short-term interest
rates to 1 per cent. That paper stated that "the Fed could even implement what
is essentially the classic textbook policy of dropping freshly printed money
from a helicopter", if necessary, to stimulate the economy.

Today, that helicopter is in the air. But, strangely, it is not the Stars and
Stripes that is painted on its side, but rather the Rising Sun. That much is
clear. What still is not quite discernible, however, is who is actually in the
pilot's seat. ####