Japan is the home of the “widowmaker” trade: the obviously mispriced Japanese government bonds (JGBs) which keep getting more and more mispriced until all the short-sellers have gone out of business.
JGBs claimed victims in 1993, 2003 and 2013, when yields plunged in the face of all the arguments presented by the bond vigilantes worried about the slow economy and government debt at levels unheard of elsewhere in the world.
This year was meant to be different. Frantic money-printing by the Bank of Japan last year weakened the yen and so pushed up the price of imported goods, particularly energy, while signs of consumer spending allowed shops to push through price increases. Read more
The Bank of Japan’s May statement on monetary policy is out, and it’s basically a big MAINTAIN on its ‘quantitative and qualitative easing’ (QQE) programme.
If anyone was anticipating the BoJ might take this opportunity to point out it is mindful of recent rises in government bond yields — and apparently some were expecting this sort of reassurance, possibly even tweaking maturities purchased — they would be disappointed. Equities traders just seemed relieved that their rally will continue.
However one member, Takahide Kiuchi, proposed the 2 per cent inflation target shift to a “medium to long term” and the new QQE plan itself be designated as “an intensive measure with a time frame of about two years”. Kiuchi’s proposal at this meeting was voted down by the other eight board members. The central bank has, however, already revealed that some members are concerned about the risks of its QQE plans hurting retail investors in Japanese government debt. Read more
Today in Abenomics, we saw some yen strengthening after Japan’s economy minister Akira Amari made remarks interpreted as indicating the yen had weakened enough:
“People say the excessively strong yen has corrected quite a bit. If the yen continues to weaken steadily from here, negative effects on people’s lives will emerge,” Amari told a Sunday talk show.
All very exciting and the yen strengthened accordingly, allowing us the space to take a longer look at the progress Japan’s reflation experiment has made. Read more
Bank of Korea has done its bit to stoke the currency wars…
Although they insist that it’s not. From BAML’s Jaewoo Lee:
In the press interview, the Governor cited a few main changes since April which led the BoK to cut in May rather than in April: the supplementary budget was finalized; many central banks, including the ECB, turned to easing mode; and the easing can help further with improving sentiments. The Governor, on the other hand, stated that today’s decision was not a response to the yen weakness, contrary to the often-voiced speculation.
The yen has gained back 2.4 per cent against the US dollar since it threatened but failed to break Y100 ahead of the most recent, and quiet, Bank of Japan meeting — the first since April 4, when QE on steroids was announced.
Now, we are not suggesting this is definitely the start of a yen correction — if we could predict FX moves for sure we’d be on a yacht, Japan isn’t lacking the political will to give it a further shot, this dip is small in context and we’ve seen its like before — but there is clearly a threat.
Simon Derrick, chief global markets strategist at Bank of New York Mellon, sent through a few thoughts which we think capture that threat quite nicely: Read more
It’s been a big day for the Bank of Japan. The QE programme was re-affirmed, as expected, and inflation and growth forecasts were raised, including a new 2015 CPI forecast of 1.9 per cent. It all looks thoroughly positive — especially if you ignore all the assumptions. Read more
Seemingly everybody is benefiting from the Bank of Japan’s decision to splash the cash. Peripheral bond yields in Europe have fallen and high-yielding carry targets such as Mexico and Brazil are being touted as destinations for Kuroda’s cash.
Where that cash ends up will in many ways define the success or failure of the Abe/ Kuroda push since what really matters is what happens after the cash has left the BoJ. Read more
Gloves off from Kuroda and everyone is very excited…
For those who need a rundown of what the BoJ actually did, here’s a summary from Nomura: Read more
At least, markets are sure it’s a new dawn for Japanese monetary policy. And yeah, we know: this sort of initial euphoria has fizzled out before — but the new Bank of Japan governors appear to have actually come through with the goods:
Click screenshot for the statement. More to come soon, and in the meantime, see this from the FT’s Ben McLannahan: Read more
Well, some of them at least. One of the big determinants of whether ‘Abenomics’ manages to pull Japan from its deflationary spiral is through wage growth. Inflation can’t really kick off or arguably even begin without rising wages. One can argue about how important wage growth is, or where it fits in causality-wise — and we’ll come to that later. But it is — or will be — an important signal as to whether this three-pronged approach of the new-ish Japanese government is working.
And actually, it might be catching on. Read more
Excitement about an imminently more pro-active BoJ might take a bit of a tumble on this news out of Tokyo late yesterday.
From the Japan Times:
The Democratic Party of Japan said Tuesday it will support Asian Development Bank President Haruhiko Kuroda as the next Bank of Japan governor but will oppose Gakushuin University professor Kikuo Iwata’s nomination as one of the two BOJ deputy governors because of his extreme stance on monetary policy.
Abenomics does not suffer rules gladly so the BoJ’s self-imposed ‘banknote rule’ must be getting pretty nervous right about now.
It says the BoJ’s holdings of longer-term Japanese government bonds cannot exceed bank notes in circulation (unless they decide it can, naturally). Read more
“Whatever we can”, you say? Encouraging words from BoJ governor nominee Kuroda over the weekend (even if comparisons with Mr Draghi are overblown). If Cullen Roche is correct, what happens in Japan over the next year or many could change the future of economic policy. So it’s worth spending a bit more time on what Kuroda’s “can” might actually be.
We’ve argued already that much of the low-hanging fruit of expectations and verbal intervention has already been plucked. Read more
Like Top Trumps, just not as much fun…
BoJ governor nominee Haruhiko Kuroda has already been fairly clear that he wants to expand the asset-purchasing programme, and buy longer-term bonds. So how significant are his Draghi-sounding “whatever we can do” comments, really? Read more
As was widely tipped early this week, Asian Development Bank president Haruhiko Kuroda has been nominated for Bank of Japan governor, while academic Kikuo Iwata and Hiroshi Nakaso, a BoJ official, were put forward for the two deputy governor roles.
It wasn’t a big surprise: as the FT reports, the yen briefly weakened to 92.6 from 92.4 on the news, before regaining that loss. Read more
This Monday edition of rising Japanese equities/weak yen is brought to you by Haruhiko Kuroda, president of the Asian Development Bank and according to various media reports, the likely nominee for Bank of Japan governor.
Kuroda reportedly said early this month he was quite happy at the ADB and had nearly four years to serve of his third term. But to that we say: Mark Carney! Read more
Remember how Richard Koo was saying last week that inflationary expectations are actually far more widespread in Japan these days than deflationary expectations? And people fear inflation more than deflation?
We found that idea a bit surprising (and we recommend Krugman for more on the issue) but HSBC made a good argument as to why the concentration on inflation is itself a very legitimate concern. And the idea that recent weakness in the yen might in fact reflect a fear that the BoJ/ MoF will fail to control inflation once it has been loosed (our emphasis): Read more
Are the BoJ’s newly-announced measures really that dramatic?
For all Shinzo Abe’s talk of urgency in meeting the new 2 per cent inflation target, the BoJ itself doesn’t actually expect it to happen that quickly. In the forecasts accompanying today’s statement, the BoJ has maintained the 2013 CPI forecast of 0.4 per cent made back in October — which is probably fair enough as the open-ended programme doesn’t actually start until next year — and only moved its 2014 up to 0.9 per cent from 0.8 per cent. Read more
The Nikkei rose as much as 1 per cent after the BoJ announcement, and then fell nearly as much before recovering somewhat: Read more
Oh look, it’s the Abe effect. How exciting. From Reuters:
RTRS – BOJ TO MULL SETTING 2 PCT INFLATION TARGET AT JAN 21-22 MEETING, DOUBLE CURRENT PRICE GOAL – SOURCES
The third quarter was bad, but it was a revision of Q2 GDP data — from 0.1 to -0.1 per cent, seasonally adjusted and annualised — that puts Japan in official recession: