World stocks rise on yen devaluation

Here’s something for fans of the Keynes/Krugman “beggar-thy-neighbor” model to think about:

NEW YORK (AP) — U.S. stock futures are rising, following world markets higher after the central bank of Japan moved to weaken the yen.

Japanese stocks jumped 1.5 percent after the Bank of Japan moved to push the yen down, a move that will help big Japanese exporters like Toyota.

Japan’s central bank cut its key interest rate to virtually zero and is looking to buy government bonds in an effort to boost the faltering Japanese economy.

The most important concept in economics:  It’s not a zero-sum game.


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13 Responses to “World stocks rise on yen devaluation”

  1. Gravatar of Mattias Mattias
    5. October 2010 at 04:28

    If (theoretically) all central banks in the world sell their own currencies and the net effect is that no currency ratios have changed – does that mean nothing has happened or has more money been created globally? Or does it depend on how the central banks do it?

  2. Gravatar of Leigh Caldwell Leigh Caldwell
    5. October 2010 at 05:29

    If all banks sell their own currencies (and buy other people’s currencies), the only way this can happen is either that they all cancel each other out or that they print new money.

    If the BoJ sells 100 yen for $1, the Fed sells $1 for 1 euro and the ECB sells 1 euro for 100 yen, then there are two ways to look at it:
    1. If you imagine that the BoJ’s original 100 yen already “existed” and was just kept in its vaults, then everyone ends up holding a bit of currency that was previously held by someone else.
    2. If the original 100 yen did not “exist”, then new currency has been created and taken out of circulation by a foreign central bank.

    Does this make any difference? Well, it depends on whether each bank’s holdings of foreign reserves has any effect on private sector behaviour. Which in turn probably depends on what the banks are expected to do with those reserves. Will they use them to buy back their own currency later (“defending the value of the yen”, say), reducing the money supply? If so, the new money should have no effect.

    Or will they use them to buy government bonds, allowing their home government to get free imports from the other country’s industry? If so, the money supply will permanently increase, and it should have an inflationary/expansionary effect.

    But then, this is exactly the same question as we ask about standard monetary policy. Is it permanent or not?

    If the BoJ doesn’t buy currency with its newly issued yen, but other assets (e.g. US Treasuries) then the current (privately held) money supply definitely does increase. This looks more like a permanent injection. But it is, potentially, still reversible. The reversibility starts to depend more on the future value of the purchased assets.

    So yes, it does depend on how the central banks do it – and also on how they signal their future intentions.

    I think we need a Nickrovian thought experiment to explain this more clearly. Nick?

  3. Gravatar of scott sumner scott sumner
    5. October 2010 at 05:42

    Mattias, It’s global QE, the world money supply increases.

    Leigh, A few comments:

    1. Central banks don’t buy currency, they buy bonds. So this increases both the Japanese and world money supplies. It doesn’t matter whether they buy US bonds or Japanese bonds, either way the yen depreciates. For instance, on March 19. 2009 the dollar fell sharply on news the US was going to buy domestic bonds.

    2. They signaled it is mostly temporary and a little bit permanent, I’ll do a separate post later today explaining why.

  4. Gravatar of Silas Barta Silas Barta
    5. October 2010 at 05:50

    Yep, it’s not zero sum because Japanese consumers and savers don’t count.

    My grandpa was sure ahead of his time on economics!

  5. Gravatar of scott sumner scott sumner
    5. October 2010 at 06:44

    Silas, The Japanese price level is lower than 16 years ago, and will be lower still next year–despite these moves. So I’m not too worried about “Japanese consumers.”

  6. Gravatar of Silas Barta Silas Barta
    5. October 2010 at 07:16

    @scott_sumner: I don’t dispute that you have the same level of worry about Japanese consumers and savers as my grandpa. But you claimed that this makes people better off without making people worse off — and this is wrong, when you account for Japanese savers and consumers.

    If you get to ignore them, why not just hyperinflate the Yen into oblivion?

  7. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2010 at 07:36

    Here’s the continued question: since you are going to inflate away their savings, WHY NOT put all the new money into the hands of the savers first?

    All savings in the bank suddenly have a 10% increase…

    Now the people with savings get the juice directly.

  8. Gravatar of Gregor Bush Gregor Bush
    5. October 2010 at 07:47

    The interesting thing is that the yen didn’t actually weaken. It sold off temporarily and then quickly recouped it losses. it’s currently slightly stronger than it was yesterday at 11:00am EST. According to Svensson, this is a sign that the policy isn’t expected to be very effcetive in boosting the price level. But stocks held on to almost all of thier gains. I’m not sure what to make of this. Perhaps its a sign of how flat the SRAS curve currently is in Japan.

  9. Gravatar of Bob OBrien Bob OBrien
    5. October 2010 at 10:20

    If my memory is correct the Fed bought over a trillion of bonds in the last few years such that it’s balance sheet expanded to something over 2 trillion. Many commentators, Larry Kudlow comes to mind, talk about this as a massive expansion of the money supply.

    On the other hand Professor Sumner explains that the Fed did not expand the money supply in late 2008 and that this was a mistake.

    I am confused. Are the Kudlow types and Professor Sumner looking at the same data? If yes, then why didn’t the past QE work and what makes us think more QE will work?

  10. Gravatar of scott sumner scott sumner
    5. October 2010 at 16:06

    Silas and Morgan, Very funny.

    Gregor, That is a puzzle. One angle is the relatively flat SRAS, as you say. Also recall that stronger real growth CAN make a currency appreciate in real terms. So I suppose it is theoretically possible, but I’m still surprised.

    Bob, The money supply is not a good indicator of whether money is easy or tight, as velocity can vary greatly. Better to look at nominal GDP.

  11. Gravatar of scott sumner scott sumner
    5. October 2010 at 17:27

    Gregor, I think I have it now. The dollar fell sharply against the euro, from 136.5 to 138.5. So against the euro the yen still did fall sharply. It wasn’t so much that the yen rose this morning, but rather the dollar fell.

    And I suppose gold is the winner of this game.

  12. Gravatar of StatsGuy StatsGuy
    5. October 2010 at 17:48

    “The most important concept in economics: It’s not a zero-sum game.”

    That is absolutely true – the sum probably increases at the _aggregate_ level.

    The second most important lesson should be that distributions matter, except most of the economics profession spends a lot of time trying to pretend it does not matter how the pie gets divided since everyone will be _at least_ as well off as they were before a trade partner was added to the mix. You can surely understand those who accuse economists of being well-compensated apologists for those who benefit from the existing system.

    To wit, in a world of finite resources where vast quantities of labor are being brought into the world markets, it’s quite likely that as foreign labor bids down labor prices and bids up commodity prices to sustain rising standards of living, we will see large swaths of domestic labor suffer more distributional losses than gains from trade. Much of this is being shielded by a hugely progressive deficit financed taxation system (include an “earned income tax credit”) and 1.5 years of unemployment benefits as well as other programs.

    No one is willing to tell people, however, that gasoline _should_ cost $5.00 a gallon because the rising middle class in India _deserves_ a little more share of the world’s resource base. Or that retirees _should_ cut their consumption expectations because they’ve been living beyond their means for 30 years, and some of those resources are going to educate children in China who probably deserve school supplies more than our retirees deserve a cruise vacation. Of course, sending these messages means admitting the fact that for large segments of the population, real consumption (excluding govt. support) has declined in the past few decades.

    Of course, a lot of these messages would be more tolerable – and likewise, some inflation of consumable resources would be more palatable – without the spectacle of massive wealth concentration in the hands of the very wealthy who seem to be playing in a rigged game – a game which is partly justified by the argument that income from wealth should not be taxed because it is not really income.

  13. Gravatar of ssumner ssumner
    5. October 2010 at 18:05

    Statsguy, Before we can have an intelligent conversation about distribution, we need to understand that the legal incidence of taxes is very different from the economic incidence. As long as people keep talking like the corporate income tax is paid by “corporations” or “the rich” we’ll never be able to address distribution issues. Those who’ve come closest are the Nordic countries, who tax capital very lightly and consumption very heavily.

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