ECON430-Topic #3: Emergency liquidity interventions

Monetary policy has become a savior of sorts for advanced economies in the last few decades as political entities are often too slow to react to crises. Following the earthquake/tsunami/nuclear crisis in Japan, the Yen strengthened dramatically against the Euro and Dollar for a variety of possible reasons. The G7 subsequently took action to weaken the Yen through unified action. The Bank of Japan independently took action to create additional liquidity immediately following the quake. If the BoJ takes further quantitative actions, they will face some scrutiny with further easing. However, as Bloomberg notes, the BoJ may be hesitant to take action that would finance further government borrowing. You might compare the BoJ’s immediate actions in comparison with what the U.S. central bank did during the time leading up to the passage of the TARP legislation. With the government slow to act, liquidity measures were taken to shore up some institutions. It should be noted though that if Japanese banks or corporations held large amounts of assets in the stricken regions, that there could be a solvency issue for institutions that were not (or could not be) properly insured.

Questions you might think about (Please don’t answer all questions)

  • Do you agree with the actions taken by the Bank of Japan following the triple crisis? Were these actions similar to what happened after the Kobe earthquake in 1995?
  • Do you think the G7 acted properly by helping to weaken the Japanese currency? Do you believe this will help Japan recover from the crisis?
  • Should the BoJ accommodate further fiscal action by the Japanese government? Might this help Japan to finally break their long trend of slow/zero growth?

11 thoughts on “ECON430-Topic #3: Emergency liquidity interventions”

  1. I think the G-7 acted properly in helping to weaken the Japanese currency. I also think actions of speculators driving the yen to a record high last Thursday [1] helped support their decision. Had no actions been taken, the recent events in Japan could threaten the global recovery as we saw the market drop off sharply but recover with the assurance of intervention. [2] The events will undoubtedly depress demand and with Japan being the third largest economy in the world, this could certainly have an impact on other economies. Goldman Sachs in a report Friday suggested that global uncertainty sparked partly by the recent events in Japan could shave a half point off U.S GDP for 2011. [3]
    On the other hand, I also think we have to consider the repercussions of the intervention on other economies. Selling yen means buying another currency, which results in the depreciation of the yen and appreciation of the other. The other currency in this instance will mainly be the dollar and euro. With the European sovereign crisis far from over, this could dampen the recovery as those countries exports become less attractive with a stronger currency. Although Antje Praefcke states Japan only accounts for 1.5% of Germany’s total exports [4], this could be the upsetting force for the countries barely staying above water (Greece, Portugal).
    Therefore, the actions of the G-7 were right in helping to recover the Japanese economy but I only hope it’s not at the expense of the rest us.

    [1] http://www.reuters.com/article/2011/03/18/us-global-economy-idUSL3E7EH14Q20110318
    [2] http://www.reuters.com/article/2011/03/18/us-global-economy-idUSL3E7EH14Q20110318
    [3] http://www.nytimes.com/2011/03/21/business/global/21econ.html
    [4] http://www.cnbc.com/id/15840232?play=1&video=1848030300

  2. Although reluctant to help stimulate the economy, it is essential for the Bank of Japan to underwrite Japanese Government debt. By underwriting their own government’s debt, the Bank of Japan accomplishes two feats: first, it inspires confidence domestically within the country (intangibly important). Second, it allows money to be put towards the reconstruction of Japan’s infrastructure following the damages estimated at $309 billion [3]. Roads, homes and now energy are essential to Japan’s rebuilding process.
    Unlike the actions taken in 1995, the Fed and German Central Bank will not cut interest rates (caused a 20% increase in the value of the Yen) [1]. Obviously the 2011 disaster won’t yield similar responses from the US, as interest rates are nearly zero. In fact the triple crisis invoked coordination among the G7 to help lower the Yen’s strength against the Euro and Dollar amid the Yen’s highest value post-World War II. The Yen is expected to decrease further following the 76 Yen/Dollar exchange rate it reached last week. [1]
    But Japan’s fiscal policy must remain observant and responsible. The current estimate of Japan’s government debt is more than double that of their nation’s GDP [1]. But as Roubini notes, if they start the reconstruction fast enough, the “policy stimulus might lead to a recovery of growth” [2]. The immense reconstruction spending could jumpstart the economy into future growth.

    [1] http://www.businessweek.com/news/2011-03-21/yen-undermined-as-g-7-unites-with-japan-after-post-war-high.html
    [2] http://www.reuters.com/article/2011/03/19/us-japan-economy-roubini-idUSTRE72I1GA20110319
    [3] http://www.businessweek.com/news/2011-03-23/japan-forecasts-earthquake-damage-may-swell-to-309-billion.html

  3. I do believe that the G7 was right to weaken the Japanese yen. Speculators attempted to profit off of the assumption that investors would repatriate $124 billion to finance the reconstruction of areas affected by the crisis. Though one could argue that anticipated action by the Bank of Japan lead to the speculation, the coordinated actions of the Euro zone and US Central Banks to sell the yen outweighed the upwards pressure of speculation. With a weakened currency, Japan can increase its exports and avoid sliding back into a recession.
    With government debt twice the size of their economy, the Japanese already have major fiscal concerns [2]. Though easing monetary policy by buying Japanese government debt will further exacerbate the fiscal instability of the country, it would allow the Japanese government to begin reconstruction and stimulate the Japanese economy. The massive reconstruction may actually help end the cycle of slow growth that Japan has seen over the past two decades.

    [1] http://www.businessweek.com/news/2011-03-21/yen-undermined-as-g-7-unites-with-japan-after-post-war-high.html
    [2] http://www.reuters.com/article/2011/03/19/us-japan-economy-roubini-idUSTRE72I1GA20110319

  4.             I think the G7 took the appropriate action of depreciating the yen after it hit a post war high of 77 yen per dollar. This depreciation should help the export sector of Japan, the fourth largest exporter in the world with 765.2 billion dollars in exports last year. I agree with the Economist that this will help the exports in the short run, but will have minimal long-run impact. The Bank of Japan has also acted hastily to inject liquidity into the system, and expanding its asset-buying program by 5 trillion yen or $60 billion. This move will further weaken the yen [1].
                I believe that the domestic economy is in as much trouble as the exporting sector. According to David Wessel of the WSJ, “They describe the area affected by the disaster to be a “trading economy,” one in which both demand and production are highly dependent on other places, are in contrast to the “exporting economy” of the area hit by the 1995 quake, an area that relies mainly on demand from outside but favors products within its economy for its own consumption,” [2]. According to BBC news, both carmakers (like Toyota and Nissan) and the electronics industry (like Toshiba and Sony) were badly affected [3]. The triple disaster has shut down production at Nissan, and some of their suppliers were affected by the nuclear crisis.
                 The economy hopes to rebound with the reconstruction. It cost $100 billion to rebuild following the Kobe earthquake. Japan hopes to receive more than $14 billion in insurance, compared to $3 billion from the Kobe earthquake [3].

    [1]http://www.economist.com/blogs/freeexchange/2011/03/foreign_exchange?fsrc=scn/tw/te/bl/g7japansympathy

    [2]http://blogs.wsj.com/economics/2011/03/15/human-economic-impact-of-japanese-quake-likely-worse-than-kobe/

    [3]http://www.bbc.co.uk/news/business-12732194

  5. I think G7 actions will keep the confidence on Japanese economy in the short-run, however in the long run it will be the resilience and spirit of Japanese (who are well-experienced to handle the natural disasters) to come out of disaster stronger. Because first of all the depreciation of yen is not a long run problem [1]. Because the triple crises have not really damaged the export sector of the economy permanently, the east-northern (where the earthquake and tsunami happened) is more an agricultural area than industrial one.

    Secondly the sympathy of G7 might be based on short-run humanitarian and political reasons rather than long-run economic ones. The Economist calls and justifies this intervention as a “reactivation” of G7 [1]. Also, and according to BBC, this reactivation process and sympathy is described and emphasized as a “coordinated action” and responds in the currency market [2]. And in a separate interview, the head of G7 who is also the finance minister of France stresses about the surprise effectiveness of such intervention, but I doubt if even G7 would be happy to continue supporting a depreciated Yen during the assumed 5 year of rebuilding that Japan would require to clean up the crises, because most of these countries themselves require to depreciate their currency to boost their exports and economies, so this rebuilding is also a time for G7 countries to step in and get involved in reconstruction of the area hit by triple crises.

    I think G7 intervention maybe a political one with no long term effect on Yen, it would be the Yen to emerge stronger through Japanese tradition of resilience, hard work and confidence on their economy and government ultimately.

    [1] http://www.economist.com/blogs/freeexchange/2011/03/foreign_exchange
    [2] http://www.bbc.co.uk/news/business-12781534
    [3] http://ambafrance-us.org/spip.php?article2242

  6. I agree that the G-7 acted properly to devalue the Japanese economy, however I believe that this may not be optimal for all. After the Japanese earthquake the Nikkei plunged a little over 20%[1] and the Yen appreciated to record levels. Many have come out and suggested to invest in Japan due to the price levels. For example in Barrons front cover article claimed that Japanese stock are a buy after the drastic hit to the stock market and potential future growth. It can be seen that Japanese stocks are trading at half the price to book ratio of the US and China. As they put it “ Japanese stocks have not been this cheap since the financial”[2] . However, I would be hesitant to jump on the bandwagon just yet. The G-7 has sharply devalued the Yen and depending on what levels it sees appropriate could further devalue. This currency risk could have a big impact on foreign investors investing in Japan [3] . When one invests in Japan for example the Japanese ETF (EWJ) the fund takes the dollars and converts it to Yen to invest in the Japanese market and the reverse is done when an investor sells. So if the Yen devalues more the foreign investor may lose money even if the actually Nikkei rallies [3] .

    [1]http://online.wsj.com/article/SB10001424052748704662604576202060711738734.html
    [2] Barrons March 21, 2011 print edition

    [3] http://seekingalpha.com/article/259919-the-one-risk-that-could-undermine-your-investment-in-japan?source=yahoo

  7. I do agree with the actions taken by the BoJ following the crisis. Because of the earthquake, tsunami, and nuclear crisis, it was clear that Japan had a lot to deal with and I feel as if they handled it pretty well. They are well aware of rebuilding costs and are weary about excessive borrowing [1] which makes me assume that they realize that they almost need to let things happen naturally and can’t take complete control. Contrary to BoJ’s decisions, I think the G7 should have handled things a little different, even though they seem to be effective thus far. The dramatic increase in yen was caused by speculators “repatriating money back to Japan to raise cash” [2]. Again, the shock may just have short-term effects so for the G7 to put so much money into helping the exchange rates seems a little rushed. Although the G7 believed that the increase in Japanese yen would dramatically hurt Japan’s exports, I think they should’ve considered the effects it would have on other economies as well. Intervening with currency has not always proved effective [3] so it’s hard to believe that this was the best thing to do considering Japan’s state of economy before the crisis. As an economy that’s already struggling, it may not have been in the US Fed’s best interest to intervene so much.

    [1]. http://www.bloomberg.com/news/2011-03-20/boj-reluctance-to-finance-borrowing-to-be-tested-as-japan-readies-rebuild.html
    [2]. http://www.ibtimes.com/articles/126020/20110323/g7-yen-usd-jpy-one-way-bet.htm
    [3].http://online.wsj.com/article/SB10001424052748703328404576207364114326614.html

  8. The G7’s intervention is a good thing for Japan in my opinion. The excess demand for the yen has driven up its value which is not a good thing for an economy that relies on exports. It would be difficult for just the Bank of Japan to keep the yen’s value down so it is imperative that the G7 take action as well. On March 18 after the G7 explained that they would intervene to help weaken the yen; its value dropped by 4 percent that day [1]. This has helped to both keep the yen’s value down, but also instill confidence in investors that the yen’s value will stay low. Japan’s economy may struggle because of a loss of investors due to increased volatility so it is important that Japan can keep exporting goods to fuel its economy. The weak yen will help Japanese goods remain desirable.
    I believe that a weak yen will help lessen the effects of the disaster on Japan’s economy, but there are other factors involved. Increased volatility and uncertainty is also damaging Japan’s economy and will also make it difficult to control the value of the yen. An increase in speculation or “bets” surrounding the yen makes it hard to predict whether the yen will appreciate or depreciate [2]. If the G7 can keep the yen’s value down then Japan will recover much faster. However, if this is just a short term reduction in the yen’s value, then fiscal policies by the Bank of Japan may need to be implemented.

    [1] http://marketplace.publicradio.org/display/web/2011/03/18/am-g7-rallies-to-weaken-yen-calm-markets-/
    [2] http://www.bloomberg.com/news/2011-03-18/japan-individuals-cut-bets-on-weak-yen-spur-surge-to-record-versus-dollar.html

  9. The recent earthquake in Japan alarmed investors and politicians around the globe, and many are turning to the 1995 case of earthquake Kobe for empirical data. [1] While the earthquakes were similar in terms of their initial effect on financial markets, the different positions of the Japanese economy prior to each and the unequal magnitude of the two would encourage more forceful expansionary monetary policy this time.
 Both earthquakes caused the Yen to surge in value by causing investors to speculate that Japan would “liquidate their assets abroad and repatriate funds for reconstruction.” [2] A rising Yen could devastate Japan’s export oriented economy, so expansionary monetary policy was pursued in both cases. One significant difference when, however, is the state of Japan’s economy prior to Kobe. In 1995, Japan was already facing a rising yen as a result of a trade imbalance with the US, a deteriorating banking sector, and a sudden rush by insurance companies to sell foreign-bonds before losses exceeded 15% (the point at which they had to report losses) . [3] Thus the 19% rise in the yen following Kobe was mostly due to other factors. [4] A second difference is the greater magnitude of last month’s earthquake. While Kobe was a 7.3, concentrated in a relatively small region, this earthquake was a 9.0, affecting a much broader area. [5] Consequently, the effect on the currency will be correspondingly larger this time, and as a result, probably warrants the BoJ’s dramatic expansionary policy and the concerted action by the G7. [1]


    1. http://www.forexborn.com/news/could-the-1995-kobe-earthquake-give-traders-insight-on-the-direction-of-the-yen
    2. http://www.forexborn.com/news/japanese-yen-nuclear-crisis-and-the-g7
    3. http://ftalphaville.ft.com/blog/2011/03/14/513026/dont-compare-sendai-quake-to-kobe-nomura-fx-analysts-say/
    4. http://blogs.ft.com/gavyndavies/2011/03/11/sad-memories-of-the-kobe-earthquake-1995/
    5. http://www.businessinsider.com/hanshin-earthquake-vs-tohoku-earthquake-2011-3

  10. About one and half month before the 9.0 earthquake hit Japan, S&P downgraded Japan because of its debt problems. [1] A month later, so did Moody’s. [2] Japanese national debt has accumulated to 228% of its GDP even before the 9.0 earthquake took place. [3] After the earthquake, the Bank of Japan had injected $494billion worth of Yen daily into its system from Mar 14 to Mar 22. [4] Japan was estimated to have an economic loss of 25 trillion Yen from the Mar 11 earthquake and the tsunami and nuclear leak. [4] In my opinion, central bank and government intervention in cases like natural disasters is necessary. Even though interest rates in Japan had been low, I think injecting more money into the system in a disaster of such magnitude is helpful at lease in the short run. I also believe this earthquake can be an opportunity for Japanese economic recovery and a possible chance for improvements in production capabilities in the local area. As soon as situations improve, people may see investment opportunities in the area. Private sector will start borrowing and Japan may experience a period of economic growth. However, the reconstruction might be costly for the Japanese government. On top of its already heavy debt, Japanese government will have to borrow more to finance its programs, leaving even greater debt problems for the future.

    [1] http://money.cnn.com/2011/01/27/news/international/s_p_japan/index.htm
    [2] http://www.bloomberg.com/news/2011-02-22/japan-s-aa2-government-debt-rating-outlook-changed-to-negative-by-moody-s.html
    [3] http://www.economicshelp.org/blog/economics/japanese-national-debt/
    [4] http://www.bloomberg.com/news/2011-03-25/japan-s-bond-futures-gain-a-third-week-as-central-bank-injects-record-cash.html

  11. I believe the role of monetary authorities in times of economic distress is stabilizing markets by maintaining confidence of all the market participants. This is exactly what the G7 did by intervening and forcing the Yen to depreciate after the strong rally by the currency [1]. There are doubts on the lasting effects of this move however; the most important thing this coordinated effort did was restoring confidence in the markets. Currently, some still feel that the economy is not yet in a phase of a self –sustaining recovery and certainly the catastrophe in Japan had the potential of causing a shock to confidence within the economy which could have resulted in a major setback to the global economic recovery. The actions of theG7 were much needed because at a time like this a stronger yen only increases deflationary pressure and this would be damaging to the already lagging Japanese economy [2]. Some point out that the actions the G7 helped curb the speculative surge of the Yen. This move by the central banks will not only curb speculation but also help Japan as an export driven country by making Japanese goods more competitive and boosting growth. In addition, the intervention by the G7 raises the question of currency manipulation and moral hazard. Such a move could trigger other countries to also depreciate their currencies in response to this and promote trade wars among countries [3]. Whether these policies will work without raising other political issues is yet to be seen.
    [1] http://www.ibtimes.com/articles/126020/20110323/g7-yen-usd-jpy-one-way-bet.htm
    [2] http://blogs.ft.com/gavyndavies/2011/03/17/the-case-for-co-ordinated-yen-intervention/
    [3] http://www.economist.com/node/17043795

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