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Tuesday, February 14, 2012 12:50 AM

Japan Announces $130 Billion QE Program, One Percent Inflation Target; 4th Quarter GDP Unexpectedly Contracts 2.3%; Lawmakers Threaten to Take Over Monetary Policy

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Japan's 4th Quarter GDP Unexpectedly Contracts at 2.3% Annualized Rate

The Financial Times reports Japan’s GDP shrinks in fourth quarter

February 13, 2012

Japan’s economy shrank for the third time in four quarters between October and December, after floods in Thailand damaged production, and a strong yen and subdued overseas demand hurt exports.

Preliminary government figures showed that real gross domestic product fell 0.6 per cent between the third and the fourth quarters, dragged down by a 3.1 per cent fall in exports and a 0.3 per cent decline in private inventories.

That is equivalent to a 2.3 per cent fall in GDP on an annualised basis, significantly worse than consensus forecast of a 1.3 per cent decline. The data also showed sluggish public investment, which fell 9.5 per cent on an annualised basis.
Hollowing Out of Japanese Economy

This is somewhat dated news from late January, but news that Japan ‘More Than Hollowing Out’ With First Trade Gap Since 1980 fits in nicely to help explain the article that follows.
Jan 25, 2012

Japan’s first annual trade gap since 1980, driven by an energy-import surge as nuclear plants shut down and by a shift of manufacturing overseas, threatens to undermine the nation’s status as the world’s largest creditor.

A third straight monthly merchandise trade deficit in December capped an annual shortfall of 2.49 trillion yen ($32 billion), the finance ministry said in Tokyo today. The data reflect the impact of the record earthquake in March, which sparked a nuclear crisis that shut most reactors, as well as longer-term shifts such as Nissan Motor Co.’s decision to move some production to lower-cost Thailand.

“This is more than hollowing out -- the government hasn’t found any solutions to electricity and at this point I don’t see that we’re going to have nuclear power back again,” said Masaaki Kanno, chief economist in Tokyo at JPMorgan Securities Japan Co. The deficit will “expand in coming years,” he said.
Japan Announces $130 Billion QE Program, One Percent Inflation Target

The previous two articles will help explain this: Japan Announces $130 Billion QE Program, One Percent Inflation Target
Feb 13, 2012

In a move that surprised markets, the central bank added 10 trillion yen ($130 billion) to its asset buying and lending scheme, under which it buys government and private debt and lends cheap funds against various types of collateral. The entire increase amount will be for purchases of long-term government bonds, the BOJ said.

The BOJ also said it will set consumer inflation of 1 percent as its price goal for the time being, making a clearer commitment to end deflation than before when it defined the level as its "understanding" on long-term price stability.

BOJ Governor Masaaki Shirakawa was grilled in parliament last week by lawmakers threatening to revise the BOJ law to give the government more scope to intervene in monetary policy, while the economics minister urged the bank to explore ways to make its price commitment easier to understand.

The central bank has pledged to keep ultra-low interest rates until an end to deflation is in sight, and defined desirable long-term price growth as consumer inflation of 2 percent or lower with the median for the nine-member board at 1 percent.

It had described this as the board's "understanding" of desirable inflation rather than an explicit price target, for fear of having its hands tied on policy. But this has drawn criticism as too vague compared with the Fed's 2 percent inflation target announced last month.
Lawmakers Threaten to Take Over Monetary Policy

In case you missed the key sentence, here it is:"BOJ Governor Masaaki Shirakawa was grilled in parliament last week by lawmakers threatening to revise the BOJ law to give the government more scope to intervene in monetary policy"

The one thing worse than having central banks be responsible  for monetary policy would be to turn it over to politicians.

If I Only Had a Bank!

As much as I despise central banks (and I do think they should all be eliminated - to be replaced by free markets),  bureaucrats in the US or Japan would likely do much worse on monetary policy than the central banks.

Please consider this scary video by Ellen Brown.

The idea that North Dakota, a small loosely-populated farm state is in good shape only because it has a state bank is preposterous. Worse yet, Brown takes that absurd position to the extreme, with a proposal to end the Fed and put California politicians (state politicians in general) in charge of printing money to support union causes.

Should populist Ellen Brown get her way, I would have to rethink my US hyperinflation position. Sadly, Brown is another one of those who understands various problems with the Fed, but proposes a solution that is worse, putting state politicians in charge of printing presses.

Such economically insane ideas are much further along in Japan.

Mike "Mish" Shedlock
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