Japan lends "free money" to the IMF whilst the UK's inflation rise embarasses the Bank of England

17th April 2012 by Shaun Richards

Sometimes the news we receive is hard to believe and at other times it goes further and becomes like an episode from the science-fiction series the Outer Limits. Today it is the latter which has come to the forefront as Japan’s Finance Minister has announced that she will provide some US $60 billion of loans to the International Monetary Fund. The Managing Director of the IMF is very pleased with this development although she has this year told us that her organisation needs US $600 billion or US $500 billion and more recently US $400 billion so we should not put too much emphasis on her. Indeed her lower estimate coincided with the crisis in the Euro building again!

Er doesn’t Japan have an enormous national debt?

It seems appropriate to use IMF analysis to look at Japan’s situation and from November here is its view.

Public debt is on an unsustainable path, carrying risks to domestic and global stability.

Can anybody see a weakness in adding some US $60 billion to something that is on an “unsustainable path”? According to the IMF the gross national debt of Japan is around 225% of her economic output as measured by her GDP (Gross Domestic Product). And the outlook is for this to get even worse as Japan continues to run high fiscal deficits.

Fiscal imbalances are projected to remain large going forward

Indeed with the reconstruction efforts after the Fukushima nuclear problem and the tsunami the IMF expects Japan’s net national debt to surge too.

Following the global financial crisis and
the March 2011 earthquake, staff projects
that a near-term decline in GDP and
reconstruction efforts will push the net
public debt ratio to 160 percent by 2015.

The IMF does have a prescription for this solution.

Japan needs both fiscal adjustment and structural reform

Or we may see.

Should Japanese Government Bond yields rise from current levels, Japanese debt could quickly become unsustainable.


As you can see the IMF prescription for Japan is to cut back its public spending and raise taxes (particularly its consumption tax) to reduce its fiscal deficit so that its national debt does not balloon any further. However this has not stopped the IMF from holding out a begging bowl and then taking US $60 billion in loans from her. The hypocrisy and indeed cronyism going on here is shameful.

But then if you let politician’s have a grip om what they consider to be “free money”…From my update of the 19th of January.

A False Premise or a politician’s fantasy

This is from a research paper from the US Congress Research Board and the emphasis is mine.

In 1967, a Presidential Commission on Budget Concepts recommended that U.S. payments to the IMF should not be treated as budget outlay but rather they should be counted as an exchange of assets which is matched by transfers of equivalent value to the United States from the IMF. Since that time, payments to the IMF have been deemed to have no impact on the Federal budget or on the Federal budget deficit.

A politician’s dream is it not? Expenditure does not count because there is a corresponding transfer of assets of equivalent value! So the recent lending to Portugal, Ireland and  particularly Greece has seen assets of “equivalent value” transferred? Plainly this is an utter misrepresentation.

I have used the United States as an example but the (ill) logic of treatment of IMF contributions is quite general and includes the UK.

So we are likely to see a short-term improvement in the situation in the Euro crisis as Japan is unlikely to have promised this money without believing that others will join her. We can expect to see the hype-ometer ratcheted a notch higher. But this is in many ways another type of alchemy as I have explained above where money is magicked out of nowhere at apparently no cost and we know where that tends to lead.

The IMF is lending in ever more risky situations as the likelihood of Greece and these days Portugal repaying their debts to her looks ever lower. Sooner or later markets will worry about IMF loans not being repaid. Then losses will clash with official account entries and balance sheets where the money does not exist!

The larger the size of loans that the IMF makes to Euro countries the larger the risk of this scenario playing out. It is an irony on a day where the media are majoring on a new US leader of the World Bank (12 in a row now I believe) and ignoring the much more important institutional capture of the IMF by Europe and in particular by France.

Mind you the often outspoken Brazilian government (remember “currency wars”) is on the case.

The euro countries abuse their power in the IMF

Inflation trends continue to disappoint

 We have seen inflation come in disappointingly in both the UK and in the Euro zone today.

UK CPI annual inflation stands at 3.5 per cent in March 2012, up from 3.4 per cent in February

Euro area annual inflation was 2.7% in March 2012, unchanged compared with February

In case you are wondering why I am calling an unchanged inflation number in Europe disappointing it is because the flash estimate was at 2.6%. Continuing a theme you have to look right at the bottom of the report for such bad news.

Real wages in the UK continue their fall

For once the two UK inflation indices are quite close with CPI at 3.5% and our old target of RPIX at 3.7%. Let us compare them with rises in wages.

Total pay (including bonuses) rose by 1.4 per cent on a year earlier, down 0.5 on the three months to December 2011

So if you take our official inflation measure we see that real wages are falling at an annual rate of just over 2%. Even worse nominal wages have been falling as inflation has ticked higher which means that future numbers need to be watched closely. We already have a problem which I believe has undermined the Bank of England’s strategy of easy money and we do not want it to get worse.

I feel that this means that this report by David Smith of the Sunday Times is unlikely to happen.

Consumers start to get back into their stride

Indeed perhaps he is already shifting his ground as today he says

The fall in both measures of inflation is essential if the growth in real incomes is to be restored, thus supporting spending

Inflation is supposed to be falling

The media bought the Bank of England line that inflation was on its way to the 2% target this summer hook line and sinker but yet again we see that we have a “surprise”. There still are inflationary issues out there and one of them was highlighted by our producer price numbers from Friday.

Between February and March the total input price index rose 1.9 per cent

And as we mull the fact that this eventually feeds into a consumer inflation measure that is supposed to rise at 2% per year and not 2% a month we see this too.

Between February and March the output index for home sales of manufactured products rose 0.6 per cent

So we can see that there remains pressure in the inflation chain. At this time I think that we should remind ourselves that this is out of kilter with the weak economic recovery we are experiencing. Indeed when the next economic output numbers are received there is still some doubt that they will show a recovery.

Also the argument that our inflation was driven by tax rises can now disappear as if we look at our inflation measures which cover this the direct measure CPIY is also at 3.5%. So I guess it will no longer be name-checked in Adam Posen’s speeches.

More problems for Adam Posen

From last September.

I don’t really see the inflation threat. If inflation were to get bad it’s pretty easy for us to take it down.

Apparently not that easy Adam!

The Governor of the Bank of England stumbles too

Back on the 2nd of March 2011 Mervyn King told us this.

The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.

Yes inflation was supposed to be back on target in the middle of 2011 whereas in the spring of 2012 it remains 1.5% above it.

17 thoughts on “Japan lends "free money" to the IMF whilst the UK's inflation rise embarasses the Bank of England”

  1. Gareth White says:

    The BoE have quite clearly abandoned the 2% target since the start of the financial crisis but if this was honestly stated then inflationary expectations would of course increase – that would in turn push up inflation and they’ve got a self-fulfilling prophecy on their hands. Hence the constant prediction of 2% inflation in 2 year’s time and then the “surprise” when it always turns out higher.

    They have appointed themselves demand managers, their tool for raising revenue for this tired Keynesian madness is inflation and they are doing it with no democratic mandate. This is dictatorship by committee.

    1. Anonymous says:

      Hi Gareth and welcome to my part of the blogosphere.

      The problem with misleading people is that after a while they catch on. So you get the inflationary expectations then. But because you have a second-order effect from a loss of credibility and faith in you then you can enter a period where you are worse off.

      When I ask people about their views on inflation (admittedly a small sample) they invariably reply it is worse than we are being told. I blame that on the Bank of England’s behaviour..

  2. James says:

    Shaun, I feel that your comments on the Japanese lending the IMF meet several golden rules for politicians:
    1. The number seems huge and therefore we are doing something substantial to grasp the nettle (or other vacuous soundbite)
    2. It does not involve a spending cut or a tax increase
    3. The IMF is so far from consumers that 99% of the population won’t know anything about it.

    These rules apply equally to
    1. Quantitative easing;
    2. The ECB lending money to bail out banks (which then buy government debt)
    3. Buying in the BT pension fund to reduce debt to GDP ratio
    etc etc

    1. Anonymous says:

      Agreed, they love anything which does not have an apparent cost right now. It is a problem with democracy how we can control such behaviour and hold politicians to account.

  3. Anonymous says:

    As far as I can make out, the IMF created its latest bilateral borrowing system precisely so that the lender could net it out and claim nothing was happening. Japan, like the US, can at least do this without a net interest cost at current rates. For the UK, there is an interest cost of about 0.3 per cent (the assumption being that the money is borrowed in Treasury Bills). 

  4. Anonymous says:

    The post-Budget April UK CPI will be particularly interesting. Last year, it rose by 1 per cent on the month. Do you think that it should rise by less in 2012? If so, annual CPI could fall significantly. However, the current six month inflation rate of 1.1 per cent, which includes January discounts but not April tax rises, seems sure to rise. CPI rose by only 0.1 per cent in the month dropping out. This next six month figure, I suggest, will give us a good pointer to where we really are on CPI inflation.  

    1. Anonymous says:

      Hi Outsider

      According to the ONS the total effect on the CPI from this years UK Budget will be.

      “Effects on the CPI 12-month rateIt is estimated the budgetary measures implemented in 2012/13 will add 0.38 percentagepoints to the CPI 1-month rate. However, because the impact of the measures implementedin 2011/12 was similar (+0.21 percentage points), it is estimated that only 0.17 percentagepoints will be added to the CPI 12-month rate.This impact assessment is based on changes in duties being passed on, in full, to consumersas soon as they come into effect.”Apologies for the bold type which is them not me…However the changes are lagged mostly because of the fuel duty rise which is planned for August leading them to a net effect of +0.02% for April. Which slightly bizarrely is because Vehicle Excise Duty was added to CPI in February.
      It is estimated the budgetary measures implemented in 2012/13 will add 0.38 percentage
      points to the CPI 1-month rate. However, because the impact of the measures implemented
      in 2011/12 was similar (+0.21 percentage points), it is estimated that only 0.17 percentage
      points will be added to the CPI 12-month rate.
      This impact assessment is based on changes in duties being passed on, in full, to consumers
      as soon as they come into effect.”

      However the changes are lagged mostly because of the fuel duty rise which is planned for August leading them to a net effect of +0.02% for April. Which slightly bizarrely is because Vehicle Excise Duty was added to CPI in February.

  5. Anonymous says:

    I see that the IMF has been busy today. From the Guardian live crisis blog.

    2.05pm: Just in — the International Monetary Fund has raised its forecasts for world economic growth, but still believes that the eurozone will shrink during 2012.
    The IMF’s latest World Economic Outlook, just published in Washington, predicted sharp contractions in Spain and Italy this year. It also warned that the risk of an escalating eurozone debt crisis remains, and that the global economic recovery remained fragile.
    For the global economy, the IMF now expects growth of 3.5% this year (up from 3.3%), and growth of 4.1% in 2013 (up from 3.9%).
    It expects the eurozone to shrink by 0.3% this year, with Italy contracting by 1.9% and Spain by 1.8%.
    More details here.

    I recall Shaun that in your analysis of GDP numbers you felt that such moves (3.3% to 3.5%) were meaningless. Is that right? It does not seem much I have to confess.

    1. Anonymous says:

      Hi Josephine

      The change in growth in the global economy is an example of spurious accuracy as it is only 0.25. If only their forecasts were remotely that accurate, if only..

  6. Patrick, London says:

    Have we got to a point that we need inflation to get much worse, and for the BOE to be proved so utterly wrong that the senior figures do resign, before our righteous anger will be assuaged? 

    The sickening knowledge is that instead, we will see either of the following:
    1.)A very, very slow reduction to the 2.0% figure, with blips all the way down, and new indices threatened at every turn. (There’s lots of letters of the alphabet to append to CPI and RPI. Lots of fun to be had there). Ultimately, external unforeseen factors (Britain topping the Gold medal table?) being the main reason for the improvement, but Posen and King taking the credit.


    2.)A creeping up of inflation, and some pathetic pronouncement of 4.0% being the new 2.0%, due to unforeseen paradigm shifts in economic theory. Well done everybody, well done.

    It all seems so horribly inevitable, as these vested interest b***ards hold on to their jobs and index linked pensions.

    I can’t bear the thought of them claiming to have been proven right, whitewashing every broken promise and contradiction, but does anybody have an alternative outcome to help me sleep tonight.

    1. Anonymous says:

      Hi Patrick

      If Adam Posen has any honour then if his promise about inflation in the summer of 2012 does not happen then he should not stand again as he promised. Of course we do not know what inflation will be then but he needs a real stroke of luck..

      As to your scenarios I think that number 2 is much more likely. Various organisations such as the US Federal Reserve and the IMF have floated the idea of a higher inflation target.

      1. Patrick, London says:

        First let me just say…… Eject!

        So what are the long term ramifications of a 4.0% target rate. How does a country that seems to have only one industry of significance left create the money needed to pay for wage growth that keeps up with this increase? How do we pay for all those index linked pensions, and benefits payouts?
        Are we hoping for Falklands oil to save us?
        Export sales of jubilee memorabilia?

        One Direction?

        1. Critic Al Rick says:

          Precisely! Down.

    2. Critic Al Rick says:

      Sorry Patrick; the longer this can kicking goes on the worse the Depression will be when it is truly disclosed.

  7. MickC says:

    So, what we have-and will continue to have for a long time, is stagflation. Back to the future indeed-or is it Life on Mars?

    1. Anonymous says:

      I doubt if it will be see as Golden Years or that the Bank of England will be Heroes (with apologies to one D.Bowie).

  8. Auyhiu says:

    Well if you have inflation at 2% over 20 years, £10 becomes £14.86. At 4% the same £10 over 20 years becomes £21.91 so a very significant difference.


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