David Glasner on Japan and Currency Manipulation

     Sumner has a great quote about success in economics:

      "I’m stuck being perceived as a China bull, which means it’s only a matter of time before my reputation lies in tatters.  There are no “happily ever afters” in macro."

      http://www.themoneyillusion.com/?p=21380

     Sumner is quite cautious in being too bullish about Abenomics. David Glasner has a recent post about Japan where he suggest there may be something to the complaint of some Asian countries that Japan is manipulating its currency. It is rather ironic that China is calling someone a currency manipulator. 

     "In a couple of posts last November about whether China was engaging in currency manipulation, I first gave China a qualified pass and then reversed my position after looking a bit more closely into the way in which the Chinese central bank (PBoC) was imposing high reserve requirements on commercial banks when creating deposits, thereby effectively sterilizing inflows of foreign exchange, or more accurately forcing the inflow of foreign exchange as a condition for expanding the domestic Chinese money supply to meet the burgeoning domestic Chinese demand to hold cash."

     "So to answer the question whether Japan has been manipulating its currency to drive down the value of the yen, the place to start is to look at what has happened to Japanese foreign-exchange holdings. If Japan has been manipulating its currency, then the reduction in the external value of the yen would be accompanied by an inflow of foreign exchange. The chart below suggests that Japanese holdings of foreign exchange have decreased somewhat over the past six months."

     "However, this item from Bloomberg suggests that the reduction in foreign exchange reserves may have been achieved simply by swapping foreign exchange reserves for different foreign assets which, for purposes of determining whether Japan is manipulating its currency, would be a wash."

Japan plans to use its foreign- exchange reserves to buy bonds issued by the European Stabilitylity Mechanism and euro-area sovereigns, as the nation seeks to weaken its currency, Finance Minister Taro Aso said.

“The financial stability of Europe will help the stability of foreign-exchange rates, including the yen,” Aso told reporters today at a briefing in Tokyo. “From this perspective, Japan plans to buy ESM bonds,” he said. The purchase amount is undecided, Aso said.

The move may help Prime Minister Shinzo Abe temper criticism of Japan’s currency policies from trading partners such as the U.S. The yen has fallen around 8 percent against the dollar since mid-November on Abe’s pledge to reverse more than a decade of deflation as his Liberal Democratic Party won an election victory last month.

“The Europeans would be happy to see Japan buy ESM bonds, so Japan can avoid criticism from abroad and at the same time achieve its objective,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former central bank official.

     "So I regret to say that my initial quick look at the currency manipulation issue does not allow me to absolve Japan of the charge of being a currency manipulator."

     He notes that Japan has not come close to the 2% inflation target yet-though at least deflation has been mitigated:

     "It was, in fact, something of a puzzle that, despite the increase in Japanese real GDP of 3.5% in the first quarter, the implicit Japanese price deflator declined in the first quarter. If Japan is not using currency depreciation as a tool to create inflation, then its policy is in fact perverse and will lead to disaster. It would also explain why doubts are increasing that Japan will be able to reach its 2% inflation target."

     Sumner doesn't know that he believes the BOJ really wants 2% inflation. 

     "But I doubt the BoJ will reach an inflation rate of 2%, because the BoJ doesn’t seem committed to that goal:

TOKYO (Reuters) – A rift within the Bank of Japan’s board over how to steer its radical monetary stimulus to end nearly two decades of damaging deflation underlined the early challenges Governor Haruhiko Kuroda faces in his efforts to foster sustained growth.

The differences of opinion were highlighted in the minutes of the April 26 meeting, which showed some policymakers opposed targeting 2 percent inflation in two years and called for more flexibility in guiding monetary policy.

    "I presume this rift contributed to the recent appreciation of the yen, and the sharp selloff in Japanese equities."

     http://www.themoneyillusion.com/?p=21380

     If Sumner is right then according to Galsner then Abenomics will lead to "disaster", as the goal is simply to give exports an advantage.