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Thread: Japan central bank injects funds as stocks plunge

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    Japan central bank injects funds as stocks plunge

    TOKYO – Japan's central bank injected a record 7 trillion yen ($85.5 billion) into money markets and the Tokyo stock market nosedived Monday on the first business day since an earthquake and tsunami devastated the country's northeast and raised dire worries about the economy.
    And that is another aspect of our economy. Because the markets in so many nations are tied together, to some extent, a disaster in Japan can have a very adverse effect on the market in the US. Monday's almost here. Let's cross our fingers. I think we are about to have somewhat of a wild ride, although I expect it to be relatively short-lived. However, I think it will take quite a few years for Japan to fully recover from what has already happened, and from the nuclear situation that is still in play at this time. Even if total meltdowns are prevented at the plants there, those that have had corrosive seawater pumped into them are now completely unusable. No matter how this plays out, Japan is going to be dealing with electricity shortages, and higher prices for electricity for quite some time. That, of course, is going to affect the price of electricity there, and along with it, consumer prices. Japan most likely will also have to import more oil for a while, which is going to drive prices in the US up even higher.

    Energy is a more fragile commodity that we realize, and as evidenced in Japan, it can disappear in an instant, when a disaster happens. This is why going green is a good idea. We need to end our reliance on Middle Eastern oil, and we also need to replace it with something that is not going to take many, many years to build and put online, which of course, is nuclear power plants. I am still in favor of them, but I also agree with ALL of the safety provisions and regulations that are in place, which is the reason they are taking so long to build. After all, Chernobyl and 3 Mile Island can no longer be considered as "isolated incidents". There is danger in building a nuke plant, but reasonable people can build them with safety in mind, thus mitigating the dangers to acceptable levels. Nuclear power can be a wonderful genie, just so long as we do not, in haste, let it out of the bottle. Which means of course, going green and developing something that can supply our energy needs in a relatively shorter period of time, while adding more nukes to our long-term energy strategy. Finally, one more word here - Conservation, conservation, and conservation. OK, make that 3 words.

    Article is here.
    Last edited by danarhea; 03-13-11 at 11:15 PM.
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    Re: Japan central bank injects funds as stocks plunge

    Unsurprising.
    If the Solow model is correct, then you're going to have a major depression (caused by the amount of capital that got destroyed) followed by above-average growth (as the now higher-than steady-state savings rate causes capital deepening) then the same morass that Japan's been in for the last twenty years (the steady-state with a population growth rate of close to zero alongside some hilariously bad economic decision-making).

    If the much older Bastiat broken-window fallacy is correct, the amount of capital required to rebuild to even 10 March 2011 levels is going to take up any growth potential that they have for a very long time, also causing a major economic slowdown.

    While there are going to be winners from something like this (the architects/civil engineers, etc.), the amount of losers is liable to be high enough to where I have a hard time seeing any overall growth out of this. Especially since their private savings stocks that would have to be dipped into have gone for the last twenty years to buying up all of the Japanese governmental debt that they've piled up.

    If we look a little more at Bastiat,

    "And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.

    A nation is in the same case as a man..."

    Bastiat's analysis suffers from the fallacy of composition. Analyzing the behavior of one individual and using inductive reasoning to come to conclusions about aggregates is flawed. As the Paradox of Thrift shows what is good for the individual can be very bad for society.

    Bastiat assumes a multiplier of 1. This is not surprising because he is using the tenets of classical economics. Classical economics is completely divorced from monetary economics. It's purpose is to study real factors within a vacuum of equilibrium. Once you introduce monetary factors, particularly changes in the quantity of money due to double ledge accounting, multipliers different from 1 become possible.

    To use Bastiat's example with the introduction of monetary factors: Mr. Goodfellow has no intentions of buying anything because he is uncertain of the current business environment. He wishes to save his 6 francs in safe investments. Unfortunately, his son smashes his window. He is forced to buy a new window because it's of importance to his quality of life.

    His purchases of goods creates a cascading effect throughout the banking system that causes a comparatively large increase in the money supply (due to double ledger accounting.) This increase in the money supply represents a real increase in wealth. An increase of wealth changes the expectations of consumers and investors and more people are willing to purchases/invest than before. This culminates until the economy reaches potential. Expectations temper with time or are forced into temperament by inflation.

    If the economy is at potential Mr. Goodfellow and society are worse off. If the economy is below potential Mr. Goodfellow's son is a hero. Keynes hypothesized that such spending is ridiculous. But, it's still better than doing nothing.


    I think we're likely to see more QE from Japan in the near future.
    Last edited by iamitter; 03-13-11 at 11:21 PM.
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    Re: Japan central bank injects funds as stocks plunge

    in the short term, i do not anticipate japan will impose additional demand on the oil market
    given the temporary disruption within a horizontally/JIT structured industrial nation, the demand for oil would likely ebb, until adequate transportation and communications links are restored
    not certain what implications the loss of the nuclear generation capacity will have on the availability of power
    dubious that the japanese people would tolerate rebuilding of nuclear capacity until adequate assurances can be given that a repeat of the recent events cannot recur
    would expect lots of short sellers of industrial stocks. especially those corporations without significant off shore capacity
    that, in turn, could be a boon to japanese based activities located within other nations
    if there is any nation positioned to bounce back from such a tragedy, it is the people of japan
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    Re: Japan central bank injects funds as stocks plunge

    A few quick thoughts:

    The capital injection makes sense, both in terms of reducing liquidity shortages in Japan and in mitigating an international fallout. There is now much less risk that Japanese bank customers won't be able to receive such cash as they need. At the same time, there is reduced risk that Japanese nationals (persons and businesses) will seek to repatriate their oveseas holdings, pushing up interest rates in countries from which they would be repatriating capital. Such a move reduces the risk of a sharp market reaction in response to such capital repatriation. Where things might play out more slowly is that Japan's appetite for purchasing new Treasury offerings could slow.

    In addition, given the magnitude of the quake and disruptions resulting from the quake, it would not be surprising to see Japan suffer from 1-3 quarters of economic contraction. Japan was facing headwinds from its debt and persistent deflation, even as its economy had moved back onto a growth trajectory. The quake will probably add to those headwinds leading to at least a period of contraction. The duration of that period will depend, in significant part, on whether Japan can address post-quake energy shortages. A slower recovery on that front would lead to a slower return of production and slower return to growth.

    In the medium-term and beyond, Japan should demonstrate resiliency. Throughout the course of history, the Japanese people have demonstrated sometimes amazing resiliency i.e., following the 1923 Kanto earthquake, WW II and the 1995 Kobe earthquake. Indeed, much of Kobe was rebuilt approximately 5 years later. I see little reason to expect anything different from the Japanese people and have strong confidence that they will overcome this latest catastrophe.

    As a result of that resiliency, the quake's impact would fade in terms of economic significance. Issues such as competitiveness, debt, deflation (if it still persists), etc., would again reassert themselves in shaping the country's macroeconomic performance.

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    Re: Japan central bank injects funds as stocks plunge

    Quote Originally Posted by danarhea View Post
    And that is another aspect of our economy. Because the markets in so many nations are tied together, to some extent, a disaster in Japan can have a very adverse effect on the market in the US. Monday's almost here. Let's cross our fingers. I think we are about to have somewhat of a wild ride, although I expect it to be relatively short-lived. However, I think it will take quite a few years for Japan to fully recover from what has already happened, and from the nuclear situation that is still in play at this time. Even if total meltdowns are prevented at the plants there, those that have had corrosive seawater pumped into them are now completely unusable. No matter how this plays out, Japan is going to be dealing with electricity shortages, and higher prices for electricity for quite some time. That, of course, is going to affect the price of electricity there, and along with it, consumer prices. Japan most likely will also have to import more oil for a while, which is going to drive prices in the US up even higher.

    Energy is a more fragile commodity that we realize, and as evidenced in Japan, it can disappear in an instant, when a disaster happens. This is why going green is a good idea. We need to end our reliance on Middle Eastern oil, and we also need to replace it with something that is not going to take many, many years to build and put online, which of course, is nuclear power plants. I am still in favor of them, but I also agree with ALL of the safety provisions and regulations that are in place, which is the reason they are taking so long to build. After all, Chernobyl and 3 Mile Island can no longer be considered as "isolated incidents". There is danger in building a nuke plant, but reasonable people can build them with safety in mind, thus mitigating the dangers to acceptable levels. Nuclear power can be a wonderful genie, just so long as we do not, in haste, let it out of the bottle. Which means of course, going green and developing something that can supply our energy needs in a relatively shorter period of time, while adding more nukes to our long-term energy strategy. Finally, one more word here - Conservation, conservation, and conservation. OK, make that 3 words.

    Article is here.
    Which energy technology would have been unaffected by a tsunami?
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    Re: Japan central bank injects funds as stocks plunge

    Quote Originally Posted by danarhea View Post
    Energy is a more fragile commodity that we realize, and as evidenced in Japan, it can disappear in an instant, when a disaster happens. This is why going green is a good idea. We need to end our reliance on Middle Eastern oil, and we also need to replace it with something that is not going to take many, many years to build and put online, which of course, is nuclear power plants. I am still in favor of them, but I also agree with ALL of the safety provisions and regulations that are in place, which is the reason they are taking so long to build. After all, Chernobyl and 3 Mile Island can no longer be considered as "isolated incidents". There is danger in building a nuke plant, but reasonable people can build them with safety in mind, thus mitigating the dangers to acceptable levels. Nuclear power can be a wonderful genie, just so long as we do not, in haste, let it out of the bottle. Which means of course, going green and developing something that can supply our energy needs in a relatively shorter period of time, while adding more nukes to our long-term energy strategy. Finally, one more word here - Conservation, conservation, and conservation. OK, make that 3 words.
    I strongly favor a coherent and comprehensive energy policy that combines aggressive R&D into alternatives, expansion of existing resource utilization (including nuclear power), and robust conservation. A lack of energy supply diversification has led to greater vulnerability to energy shocks than would otherwise have been the case, especially if such a comprehensive energy policy had been put in place following the first energy shocks during the 1970s. It has also exacerbated the United States' geopolitical risk exposure. Although the U.S. national interest is not sufficiently large to justify military intervention in Libya, if a hostile entity (popularly-supported or not) threatened to take over Saudi Arabia, there is little doubt that the U.S. would have sufficient interest to intervene to thwart such a development, if such intervention were key to doing so.

    On another matter, it is also important to note that there are limits to enegineering (capabilities, designs, materials). Hence, IMO, while I continue to strongly favor expanded nuclear power, I do believe that the variable of locational risk probably needs to be handled more rigorously when constructing future plants, especially when choice of alternative locations exists. That luxury might not exist in Japan given how seismically-active the country is. It most certainly does exist in much of North America.

    The science in terms of estimating possible greatest quakes from given fault structures is still quite imprecise and notions of risk should reflect that fact. The recent earthquake is just the latest example of how imprecise that science is, despite marked advances in understanding earthquakes over recent decades. Today's edition of The New York Times reports:

    What is perhaps most surprising about the Japan earthquake is how misleading history can be. In the past 300 years, no earthquake nearly that large — nothing larger than magnitude-eight — had struck in the Japan subduction zone. That, in turn, led to assumptions about how large a tsunami might strike the coast.

    “It did them a giant disservice,” said Dr. Stein of the geological survey. That is not the first time that the earthquake potential of a fault has been underestimated. Most geophysicists did not think the Sumatra fault could generate a magnitude-9.1 earthquake, and a magnitude-7.3 earthquake in Landers, Calif., in 1992 also caught earthquake experts by surprise.

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