Japan Returns to 'Stealth Intervention' Tactics

Since we once more encountered Japanese intervention to drive down the value of the mighty yen in September of 2010 after a hiatus of about six years, there has been a pattern in place. Tha Bank of Japan makes a big announcement concerning market volatility or the unduly strong yen. In turn, this is followed up by the BoJ wading into the spot market, selling yen and buying dollars in a major way to achieve an implicitly desired dollar/yen level.

Let's just say that this has not been an approach that has yielded sustainable results from the Japanese point of view. Forex traders have learned to wait the BoJ out insofar as its recent efforts have been one-day wonders not backed up by subsequent dollar buying. It appears though that Japanese officials are returning to what they hope are subtler, more effective tactics. That is, the past week has not seem any dramatic BoJ denunciation of forex market evils accompanied by massive intervention. Instead, it is more or less keeping silent to not give away timing cues. Plus, intervention is not a one-shot deal but a continuing effort dubbed 'stealth intervention' said to be similar to the 2004 campaign:

Japan's stealth intervention replicates an approach employed in the massive yen-selling intervention in 2003-04 that totaled about ¥35 trillion, or about $450 billion at today's exchange rates. But the new use of the tactic caught market participants off guard because many believed the latest intervention was a one-day operation.

To maximize the impact and preserve secrecy, the Finance Ministry and Bank of Japan select a limited number of private banks for intervention in the direct deals, refraining from electronic trading systems such as EBS. The designated banks were cautioned by authorities not to leak the information outside.

Sworn to secrecy, Japanese banks facilitate the deed clandestinely so as not to reveal BoJ presence on forex trading platforms. While the Japanese hope that keeping things under wraps results in a more tolerable USD/JPY exchange level for exporters, it too probably wishes that it won't collect as much opprobrium from fellow G7 members. Why is one of their own setting a bad example when global 'rebalancing' is supposedly being encouraged, especially among G20 emerging economies?

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US & Roping Japan Into Trans-Pacific Partnership

There's a new article in Foreign Affairs by Bernard K. Gordon on further broadening the mooted expansion of the Trans-Pacific Partnership (TPP) to include Japan. Right now, the existing hole-hearted TPP includes trade-deal hungry countries Brunei, Chile, New Zealand and Singapore. The US is in a group of countries including Australia, Malaysia, Peru and Vietnam that is currently negotiating to join the TPP. A large part of TPP's appeal to America is that it includes many issues near and dear to the US alike intellectual property and services trade.

By contrast, I've been quite sceptical of this grouping from the get-go. The latest US tack is expanding a pre-existing Asia-Pacific "coalition of the willing" to ensure that it remains deeply involved in this fast-growing region. As I've mentioned though with regard to Hillary Clinton's recent and rather hackneyed speech on why the US should remain involved in this region, it's yet another in a long line of failed American initiatives to launch a broad FTA among APEC members. The latter have indicated time and again that they are more interested in capacity-building. Which, to me, makes perfect sense insofar as LDCs need to have the infrastructure to handle trade liberalization before actually undergoing it.

At any rate, Gordon now sees the inclusion of Japan as crucial to ensuring that TPP encourages bandwagon effects and produces tangible gains for the US:

1. First is the fear generated by the U.S. free trade agreement with South Korea. [For instance, having the tariff applied in America to Korean automobile imports reduced from 2.5% to nothing.] Japan’s export industry has long been worried about near-identical Korean products in foreign markets, and Seoul’s access to U.S. consumers will only grow once the pact is implemented.
2. The second element is the declining political clout of Japanese agricultural interests. This group was long opposed to a free trade agreement with the United States because it feared that Japan’s small-scale and highly protected farmers would be overrun by lower-priced imports. But agriculture now accounts for less than 1.5 percent of Japan’s GDP, which has also meant a sharp decline in farm-related employment. The need to rebuild the economy in the wake of the March disasters amplified calls for reform of Japan’s outdated farming sector. This has eased the way for Japan’s exporters, led by the business federation Keidanren, to step up their pro-trade agenda.
3. The final factor is China’s new foreign policy assertiveness. An early sign was Beijing’s revival, in 2010, of claims to islands in the South China Sea, an issue that has roiled relations between China and its neighbors since the mid-1990s. In 2002, China and its neighbors in the Association of Southeast Asian Nations agreed to resolve the claims multilaterally, but China later insisted on dealing bilaterally with each neighbor. China’s foreign minister argued at the time, “China is a big country and other countries are small countries, and that’s just a fact.”

While I acknowledge Gordon's Sinophobia in particular, is TPP expansion really a trade counterbalance to China in the region? In previous discussions, I certainly got the feeling that all APEC members were being welcomed to maximize America's bang for the buck in promoting its very expansion. Why is Gordon keen on antagonizing China where US previous efforts regarding TPP do not?

At any rate, the APEC leaders' meetings over the weekend will tell us more about the state of TPP. There already are signs that Japan may not be anxious to be involved as evidenced by its recent delay of an announcement to join TPP negotiations:

Japanese Prime Minister Yoshihiko Noda abruptly postponed a news conference Thursday at which he had been expected to announce that his government will join negotiations on a trans-Pacific free trade pact.

Japanese news reports say the prime minister planned to announce the decision to the Japanese people Thursday and personally notify U.S. President Barack Obama when the two meet in Hawaii on Saturday. But officials announced late Thursday that the Tokyo press conference has been pushed back to Friday.

Participation in the talks is highly controversial in Japan, where thousands of farmers and fishermen marched late last week to oppose membership in the Trans-Pacific Partnership . Politically powerful rice farmers, who have been excluded from previous Japanese free trade deals, are adamantly opposed.

Watch this space.

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Decline's Bright Side: BRICs Tourists Do America

If there's any consolation to going down the plumbing system of economic history, it's probably this: Chinese and Brazilian tourists are taking advantage of their strengthening currencies to go on shopping binges in America--where goods are admittedly still among the cheapest in the world. They're also seeing the sights while they're at it:

The U.S. is struggling to keep up with surging demand for visas in China and Brazil, as the growing middle class in the world’s two biggest emerging markets flock to American shopping malls and tourist meccas.

The U.S. plans to boost by 100 people this year its staff dedicated to processing visas in the two countries after it issued 35 percent more travel permits in China this year and 44 percent more in Brazil, Ed Ramotowski, managing director for U.S. visas, said in a conference call with reporters yesterday.

“It’s a function of the robust economy in Brazil,” Donald Jacobson, who oversees visa operations at the U.S. Embassy in Brasilia, said in the same conference call. “Their currency is very strong against the dollar and Brazilians are coming to America to visit Disney World and do lots of shopping.”

To promote job growth and welcome more visitors from the increasingly affluent countries, the U.S. hopes it can handle up to 4 million visa applications in the two countries by 2013, more than double the current amount, Ramotowski said. Together the two countries accounted for about 1.8 million of the 7.5 million visas issued last year.

Ooh, the irony. Consider: (1) America's bad habit of relying too much on consumer spending to fuel growth in recent decades may now have put into place an infrastructure for accommodating tourists visiting the US in its sunset years before its hegemony passes into The Great Strip Mall in the Sky. Also, (2) with any number of consumer goods now Made in China, the Chinese may in more than a few instances be buying products made at home that have become relatively more affordable Stateside due to dollar devaluation.

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You're 'Developed'? Italian vs LDC Bond Yields

Ah Italy, G7 member country and the land of bunga bunga parties (but until when?) With Italian bond yield spreads over German Bunds now in orbit somewhere above Brussels and Strasbourg, I came across an interesting chart from Trading Economics that compares 10-year bond yields of a number of developed and developing nations. From this (abridged) list alone we see that Singapore (kinda obviously), Thailand, China, Malaysia, South Korea, Brazil, Russia, Mexico, Indonesia are able to borrow at cheaper rates for debts due in a decade than Italy's 6.59%--or fellow EMU members Ireland, Portugal or Greece for that matter. Moseying over to the ADB bond site, we too should add the Philippines to this list. Why is this important? After doing so, we find that all five original ASEAN members (Indonesia, Malaysia, the Philippines, Singapore and Thailand) now have lower 10 year borrowing costs than an erstwhile G7 stalwart undergoing difficult times.

As it so happens, pop financial writer Michael Lewis has a book just out entitled Boomerang: Travels in the New Third World that features him embarking on journeys to recent crisis-hit Western countries alike Iceland (chapter title "Wall Street On the Tundra"), Greece ("And They Invented Math?") and Ireland("'s Original Sin"). While his characterization of each new third world country's failings may border on the simplistic, he does hint at a wider question that I increasingly find harder and harder to answer: Does it still make sense to divide this world of ours into developed and developing countries or first and second or third world ones?

Remember, it was not so long ago during the Asian financial crisis that the likes of Thailand, South Korea, and Indonesia mentioned above had their own catastrophic run-ins with financial contagion. Being a charitable sort to those willing to atone for past misdeeds, I mention all this not out of schadenfreude but out of a wish that these peripheral European economies recover just as quickly.

Here's my parting thought for you: Why is the world's foremost regional grouping headed by someone from a nation whose borrowing costs are definitely third world (Portugal's Jose-Manuel Barroso) and its central bank by, well, someone from Italy circa the end of 2011 (Mario Draghi)?

As you ponder that, the development divide blurs more when it comes to borrowing costs.

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CSR: Milton Friedman Would OK Both Jobs & Gates

There's a much-read article taken from Harvard Business Review by Maxwell Vessel circulating on the Businessweek website. He argues that while the late, great Apple chief Steve Jobs and his Microsoft counterpart were both admirable business leaders, Bill Gates deserves to be idolized more for his subsequent philanthropic work after leaving day-to-day operations at MS:

As much as I love Apple, Inc, I would happily give up my iPhone to put food on the plates of starving children. Steve Jobs turned his company into a decade long leader in the truly new space of mobile computing. Bill Gates decided to eliminate malaria. Who do you think we should be putting up on a pedestal for our children to emulate?

To those familiar with the CSR literature, there is a false argument in place here that is exacerbated by the quotation above. Let me explain. Even the arch-critic of CSR Milton Friedman did not disapprove of do-gooding. Rather, he thought that devoting time and effort to worthwhile causes should be separate from the regular business of doing business:

[H]ow much cost is he justi­fied in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropri­ate share of others?

And, whether he wants to or not, can he get away with spending his stockholders', cus­tomers' or employees' money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have re­duced the corporation's profits and the price of its stock.) His customers and his employees can desert him for other producers and em­ployers less scrupulous in exercising their so­cial responsibilities.

The important thing to remember, dear readers, is that neither Steve Jobs' Apple nor Bill Gates' Microsoft for that matter have devoted the bulk of their companies' activities to social causes per se. activity. While both Apple and Microsoft do conduct CSR-related activities--supplier audits for labour and environmental standards, for instance--that is pretty much par for the course among their peers. The purpose is primarily defensive in avoiding Nike-and-sweatshops-like entanglements.

Rather, what does set Bill Gates apart is that he devoted his post-Microsoft work to funding socially beneficial initiatives alike coming to terms with HIV/AIDS, tuberculosis and malaria. In a Friedman-friendly way, he did not plow Microsoft's retained earnings into philanthropic ventures. They instead conducted using his own funds (along with those of other fellow billionaires, it should be added) and on his own time. Here's Friedman again:

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he rec­ognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to de­vote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country's armed forces.

If we wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibili­ties," they are the social responsibilities of in­dividuals, not of business.

In essence, Milton Friedman would have approved of both Steve Jobs and Bill Gates. Yes, Microsoft's stock has not done as spectacularly well as Apple's in recent years, but hey, it's not as if Gates still runs the show there. Returning to the first quote above from the article's author, it is thus far-fetched to assume that buying Microsoft products instead of iDevices will better serve the cause of saving the world. Again, separate MS (the company) from Bill Gates (the philanthropist). In Friedman's terms, investing in Apple stock should even prove to be the more humanitarian action insofar as it would provide a socially responsible citizen with more capital to do good deeds--hopefully as a principal and not just as an agent.

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Will a US Tax Holiday Boost US Interest Rates?

There's an interesting video clip over at Reuters Breakingviews on how measly yields on interest-bearing instruments may increase Stateside in the aftermath of the declaration of a tax holiday. Designed to repatriate profits that US multinationals hold abroad by offering concessions on the statutory 35% tax rate to, say, 5.25% (which most corporations dodge anyway--witness those allegedly paying no taxes despite being profitable), the seemingly unrelated and surprising result may be higher yields.

In a nutshell, the argument is that firms which hold a collective $1.4 trillion or so overseas would have to liquidate their existing US Treasury holdings to bring home their foreign income. While I do have doubts about (a) the amount of Treasury holdings firms have and (b) the need to sell such holdings to effectuate repatriation, the video clip presents some thought-provoking ideas.

There's also talk of tax holiday "Dutch disease" insofar as benefits from additional government revenue may be blunted by a stronger dollar from these inflows hurting exports according to the Congressional Report Service.

Either way--the tax holiday's normative implications aside--there are interesting economic implications that may mitigate the revenue-enhancing argument for such an act.

11/4 UPDATE: Here is the text from Reuters Breakingviews if you're unable to access the clip above. Their reasoning involves MNCs having substantial holdings overseas kept not in cash but in nearly as liquid US Treasuries:

Another snag exists: much of the money is invested in Treasuries. The side effects of companies dumping all that paper need to be factored into the equation. Most of the overseas money is on the balance sheets of blue-chip pharmaceutical, technology and consumer goods companies with significant foreign sales and profits.

They include Pfizer, Microsoft, Cisco Systems and Procter & Gamble. Bringing the money home would mean paying taxes, so companies are hoping for a break from the current 35 percent top rate. Microsoft, for example, has $56 billion of cash on its books, $51 billion of which is outside the United States and almost entirely invested in Treasuries.

Securities filings suggest this is typical of multinationals. Investing in United States government bonds mitigates currency fluctuations, carries very little risk and keeps holdings liquid.

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Business "B-20": Screw the $, Internationalize RMB

Darn, just when you thought the states-and-markets IPE literature was becoming increasingly stale comes this news. But first, did you know that there's now a "B-20" parallel to the "G-20" composed of 200 major companies from G-20 countries? I suppose that firms desire a larger stake in the current global governance picture. So, just as the World Economic Forum spawned a concurrent alter-globalization doppelgänger (of sorts) in the World Social Forum, we now have a B-20 convening alongside the upcoming G-20 summit in Cannes, France.

There will of course be less of The Beautiful People in Cannes this time around, and a heckuva lot more of The Angry People. What we may have in a few days is not the Cannes Film Festival but the Cannes Rioter Festival. All the same, businesses the world over have a new gripe that may be unexpected to some. You would think that having the dollar as the world's reserve vehicle currency is generally desirable especially among MNCs that would prefer to deal less with foreign exchange losses and uncertainty over the same. But wait, the answer is a big, bold NO. All this Yankee helicopter dropping is prompting the B-20--which includes several American firms, no less--to call for the further internationalization of a currency of the future and not of the past with an appreciating and not a depreciating bias in the Chinese renminbi.

The Wall Street Journal covers this clamour for real money:

Business leaders meeting alongside the Group of 20 industrial and developing nations summit in France on Wednesday endorsed a move toward a "multipolar" global currency system, with a greater role for the Chinese yuan. But they also called on China to allow full convertibility and greater flexibility for the yuan, saying such a move would be in China's own interest.

The B-20, a group of dozens of top executives from firms around the world, made the recommendations in a report released one day before the start of two-day G-20 summit in Cannes, France. "The current U.S. dollar-dominated system amplifies the risks of the global economy," the group said in a statement. A multi-polar currency system, it said, would reduce uncertainties and transaction costs for companies, "and would lead to a more balanced global economy."

"In a multi-polar system, the dollar and the euro should be followed by the Chinese yuan and other emerging market currencies," the report said. At the same time, a fully convertible yuan would facilitate global trade and investment with China, and "is necessary to enhance the international importance of the nation's currency."

China maintains a broad range of controls on the currency, limiting its convertibility for investment-related transactions on the capital account. Analysts say the country is likely to move gradually towards greater convertibility over the next five years, but Chinese officials haven't given a specific timeline for reaching full convertibility...

The B-20 was assembled by the Mouvement des Entreprises de France, an association of French employers, with assistance by the World Economic Forum and the International Chamber of Commerce.

Fairly mainstream research indicates that more financial crises are occurring in the post-Bretton Woods era (1973 and onwards) than during the Bretton Woods era of the dollar-gold standard. When one country has a practically unlimited ability to abuse the international monetary system, you end up with...well, the world economy circa 2011. To paraphrase Winston Churchill, Americans will %^&* it up if the world has exhausted all other alternatives and the US is left to its devices. As portfolio theory suggests, the impacts of shocks is mitigated if folks collectively hold less of the same sort of thing.

In an increasingly multipolar world where economic activity is less concentrated in Western metropoles, it makes more sense if we had another vehicle currency (or two). Although China is understandably cautious in making the RMB take up that role given the lasting success of its current growth model, it admits that capital account openness and currency convertibility are among its medium- to long-term goals. It's just good to know that even the movers and shakers of the world economy back the idea of such an eventuality. Don't forget who called for and eventually got the creation of the World Trade Organization. When big firms move in unison, they have tremendous political clout.

Being all for a multipolar, superpowerless world--not simply another unipolar one with China in charge, for instance--I fully endorse this idea. Take that, America #1 cheerleaders--the business community is fully fed up with your dollar detritus.

UPDATE: Searching around a bit, I found the lengthier earlier version of the document ultimately given to Sarkozy. Among the signatories are many heads of MNCs; indeed, including several American ones. If anything else, the version described above is even more downcast on the dollar. On p. 51 are the bits concerning the "key policy message" about reserve currency arrangements...
-----------------------------

On the other hand, there is a broader debate about the gradual shift of the global monetary system from a dollar-based system towards a multi-currency monetary system...

As regards the latter, the development of the reserve currency regime will ultimately depend on the choices of economic actors and thus be the result of a market-led (and presumably lengthy) process[:]

• A global monetary system in which the role of the reserve currency is based more broadly than is the case in the present system is a logical corollary of the shifts in the economic weight amongst national economies. It also reflects a geographically more balanced structure of trade, production and investment at the regional level which creates incentives for countries to re-balance their currency reserves in light of these interlinkages.
• A multi-polar reserve currency regime will be possible only if financial markets in those currencies currently used less become deeper and more liquid. Hence, the development of financial markets (indeed, in some cases the transition to full convertibility) will be a pre-condition for this process. Indeed, we would note that the share of the USD in international currency reserves has already started to decline; this, in our view, is a reflection of the greater attractiveness of non-dollar capital markets.
• Compared to the dollar-standard, the transition towards as well as the existence of a multi-polar currency regime can, theoretically, be marked by greater instability, as major shifts in reserve currency allocation – and ensuing capital flows – can occur. Consequently, in a multi-polar currency regime, predictability, sustainability and transparency of economic policies by reserve currency countries (areas) become even more important.

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