Tsunami in Japan spreads fiscal and monetary insanity diseases. Warning: it might be contagious.

This is a follow up to the previous post on Japan: Natural, Human, and Environment Catastrophes adding to more than 20 years of financial, political and fiscal disasters.

A few points:

  • Fiscal insanity will not end, as per the official statement from the Finance Minister: “The fiscal situation can’t be a constraint to addressing this natural disaster.”
  • The Bank of Japan's solution is "Massive Liquidity Injections": a record 15 trillion yen ($183 billion). Bernanke and Mervyn King will probably take some lessons from Governor Masaaki Shirakawa.
  • The BoJ has been in the business of buying ETFs and other non-conventional assets. They are buying equity stakes in many parts of the economy. This is not only really inflationary, but they might end up owning most of the assets of the country, creating a sort of de-facto communist regime.
  • It is obvious that all the financial institutions will support the government's and the BoJ's insanity. These measures are highly profitable to the banks and are direct wealth transfer from the public to these institutions.
  • All the disastrous decisions of the government, and their completely foreseeable inability to "revive the economy" with "monetary and fiscal stimulus" of the past 20 years will now be forgotten and the reasons for their failure will be attributed to the tsunami as the statement "Before the quake, Japan’s economy was showing signs of a revival" is leading us to believe.

Below are some quotes from two different Bloomberg reports:

March 14 (Bloomberg) -- The Bank of Japan may today inject more short-term cash into the banking system after the nation’s most powerful earthquake on record, while keeping its asset- purchase plans unchanged as officials gauge the longer-term effect on the world’s third-largest economy.

Governor Masaaki Shirakawa told reporters late yesterday he’s ready to unleash “massive” liquidity starting this morning in Tokyo, as the BOJ seeks to assure financial stability.
For now, the central bank is likely to ensure lenders have enough cash to settle transactions, and aim any additional steps at providing credit in the areas of northeastern Japan devastated by the temblor, analysts said.

Shirakawa and his board could opt to accelerate asset purchases, including government bonds and exchange-traded funds, within the existing credit programs, particularly if the yen climbs and stocks tumble, said Masaaki Kanno, chief Japan economist at JPMorgan Chase in Tokyo, who used to work at the central bank.

Japan’s currency rose 0.5 percent to 81.45 per dollar as of 8:11 a.m. in Tokyo, bringing its climb since the earthquake hit to almost 2 percent, amid prospects for Japanese investors to repatriate assets. The government may order the BOJ to sell yen if it soars, Mansoor Mohi-uddin, head of global currency strategy at UBS AG in Singapore, wrote in a note.
Prime Minister Naoto Kan is also preparing a fiscal response. Fiscal Policy Minister Kaoru Yosano said at a press conference the government still has 1.3 trillion yen in discretionary funds from the budget for the year through March 31 that can be allocated for quake relief.

“This earthquake affected a wide area, and it’s likely that the economic impact will exceed the 20 trillion yen in damage sustained during the Kobe earthquake” of 1995, Yosano said.
“We are going to do everything we can” Noda told reporters in Tokyo on March 11 after the quake. “The fiscal situation can’t be a constraint to addressing this natural disaster.”

March 14 (Bloomberg) -- The Bank of Japan poured a record 15 trillion yen ($183 billion) into the world’s third-biggest economy today as the strongest earthquake in the nation’s history triggered a plunge in stocks and surge in credit risk.

The yen fell after the central bank added funds to the financial system, reversing earlier gains against the dollar on speculation authorities would sell the currency to aid exporters. Governor Masaaki Shirakawa yesterday said he is ready to unleash “massive” liquidity to support markets.

“This is a big and also appropriate move,” said Stephen Schwartz, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It’s a short-term measure to ensure stability to prevent this shock from spilling over to the financial markets.”
Besides the 15 trillion yen of emergency funds deployed in the central bank’s biggest one-day operation, the Bank of Japan offered to buy 3 trillion yen of government bonds from lenders in repurchase agreements starting March 16.

“We are providing as much funds as needed to dispel anxiety in financial markets,” said Kazushige Kamiyama, an official in charge of the central bank’s money market operations. “We will continue to add ample funds to stabilize financial markets.”
Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year.

The cost of protecting Japanese government bonds with credit-default swaps surged the most in two years and the Nikkei 225 Stock Average fell 6.2 percent as of 1 p.m. local time.

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