William Pesek has an interesting September 7 column on Bloomberg which I excerpt below. It discusses the difficulty of Japanes monetary policy management after years of low interest rates and an undervalued yen:
…Modern history knows of no other major economy holding short-term interest rates at, or near, zero for almost a decade. The BOJ has even gone further, adding additional yen to the financial system when zero rates failed to boost demand for credit. Only now are the side effects of that policy becoming clear. Aside from a chronically undervalued yen, ultra-low Japanese rates are exporting bubbles around the globe.
"Overinvestment amid conditions of ample global liquidity was a major factor in causing the subprime issue," BOJ board member Atsushi Mizuno said Aug. 30. The market turmoil "is proof that keeping rates at levels that stray from fundamentals could actually cause instability."
He's right. For the good of the global financial system, Japan needs to normalize interest rates. While that won't sit well with the countless number of investors who borrowed cheaply in yen and put the funds in higher-returning assets overseas, it's necessary to restore sobriety to global markets...
... Japan's woes stem from risk-averse politicians who rely on easy money to avoid doing their part to modernize the economy. Rather than increasing competitiveness and entrepreneurship and utilizing the female workforce, the ruling Liberal Democratic Party depends on ultra-low rates.
Fukui's Choices Fukui has two choices before his five-year term ends in March 2008. One, he can go boldly where politicians tell him not to and raise rates. Two, he can maintain the status quo, which means the BOJ will remain a creature of Japan Inc. and have even less credibility than it does today.
Economists will argue that higher short-term rates are the last thing Japan needs. Yet Japan's recovery is based on three artificial forces: negligible borrowing costs, an undervalued yen and the largest public debt in the developed world. Maintaining the status quo means Japan continues to muddle along below its potential.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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