The Japanese LDP and its partner the New Komeito Party have seemingly captured more than the 320 seats needed to override the upper-house on most legislation. The two-thirds majority garnered by the ABE COALITION will give the LDP enough power to put pressure on the BOJ to attempt an effort to end the deflation that has encumbered the Japanese economy. The campaign issues promoted by the victorious coalition should lead to further weakening of the YEN although we may see a bout of profit taking as the rumor has become fact. Mr. Abe had promoted the ending of BOJ independence but it is doubtful that promise will be realized. The overall response to the end of central bank independence may unleash a response bigger than the LDP will want to confront. The global financial world have become very supportive of central banks being independent of government control and it seems more likely that PM Abe can influence policy in other ways.
Since the IMF meetings in October, the YEN has fallen 10% and, more importantly, the EURO/YEN cross has rallied to 110 from 100, a 10% devaluation of the YEN to the EURO. More importantly, the EURO/YEN has rallied almost 17% since the July 25 low of 94.25, the day before President Draghi’s comments about doing everything possible to save the EURO. The movement of the EURO/YEN cross is going to be an important variable for Germany for the EURO weakness against the YEN for the last three years has helped to boost German auto sales around the world. It has been the German export engine that has helped maintain growth in Europe. If Germany’s economy begins to slow in 2013 because of the headwinds from a weak YEN then a whole new dynamic unfolds. The recent strength in the EURO is not aiding the already stressed peripheral economies and if Germany weakens then the stress upon Spain, Greece, Italy and Ireland will become even greater.
(For more on the LDP’s victory, read “Just How Convincing was the LDP’s Victory?” — hat tip TH)
Part of the Brussels playbook is for Germany to increase its domestic demand but if the German export machine begins to slow domestic demand will not pick up. German demand was lackluster with a robust economy. Now imagine how quick consumers will retrench in a slowing economic environment, especially as the newly imposed austerity budgets foisted upon the peripheries begins to bite. The resounding LDP victory in Japan is likely the beginning of what Mervyn King warned about in last week’s speech: Currency intervention will become a tool of domestic monetary policy. This will be an unfolding story in 2013 and will play out in many various ways but its greatest impact may be upon Europe and possibly the German elections in September 2013. Mario Draghi will have little time to enjoy being the Financial Times person of the year.
***There was a great bit of noise about Europe agreeing to a central banking supervisor. I caution that the concept of a European wide banking supervisor is far from being realized as it is not due for another 15 months and its reach is very limited. There is no agreed upon resolution authority nor any deposit scheme put into place. It seems that the ECB is to have jurisdiction and supervision over banks with 30 billion of euro assets. The result being that many banks fall back to being supervised on a national basis. This threshold was a bow to the Germans have many far smaller banks. The smaller German banks play a large role in financing the MITTLESTAND–the small and medium-sized enterprises–and FM Schaeuble did not want the ECB meddling in the lending practices of the regional German banks.
In a Financial Times article from Thursday, “Berlin Gives Ground on Bank Union,” it is reported that the threshold was very important for Germany as a measure of compromise. The French were pushing for a more comprehensive ECB supervisory role as “the bulk of France’s banking system is made up of large financial institutions; Germany’s comprises small ones.” So while much is made about the idea of a European banking union it seems that the champagne should not be opened yet.
***Friday, the lone dissenter at the FOMC meeting released a statement through the Richmond Fed, noting his reasons for dissent. Fed President Lacker noted that a “single indicator cannot provide a complete picture of labor market conditions. Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC‘s price stability and maximum employment mandates.”
The Richmond President is worried that the FED will unleash inflationary forces as it seeks to reach its mandate on economic growth and employment. He also thinks that the FED‘s effort of buying MBS to support the housing market borders on fiscal policy and is against treading upon the Congressional authority. It is very unusual for a Fed President to release his own statement right after a FOMC meeting. It seems like Mr. Lacker wants the FED to be careful about losing its battle on inflation expectations, but he hasn’t paid attention to Chairman Bernanke warning about the “waste of human and economic potential” through long-term unemployment. The Fed has certainly taken on the task of arbitrator for the nation’s workers … seems that they are the only game in town.