Conventional wisdom says that businesses adjust their investment spending according to changes to the cost of capital. Intuitively, that makes sense: more projects become worthwhile as funding costs go down, while few make the cut when capital is expensive. (In reality, it turns out that interest rates, spreads, and volatility are all irrelevant for capex decisions, but let’s put that aside for now.)
If central bankers want to boost investment to encourage economic activity, conventional theory suggests they should lower interest rates. However, there is a limit to this process because you can’t lower rates below zero without imposing tyrannical controls. Hence the appeal of boosting inflation, which effectively reduces the real cost of capital (assuming risk premia don’t rise) by stealth even when interest rates have hit the floor. Read more
When governor Haruhiko Kuroda stood up in April 2013 to set out a bold new regime of monetary easing at the Bank of Japan, the executive summary seemed obvious: it’s all about the number two.
In vowing to double the monetary base by doubling the maturity of the bonds it buys, the BoJ said it would hit an inflation target of about 2 per cent “at the earliest possible time, with a time horizon of about two years.”
The bank then produced targets for base money and its own balance-sheet holdings for the end of the 2013 and the 2014 calendar years (click to enlarge): Read more
Optimism from the mouth of Haruhiko Kuroda, in the FT:
At this stage, we are not thinking about any other policy tools since we are on track and we are likely to achieve the 2 per cent inflation target within the two-years time band.
But there’s a slight problem. From the pens of Credit Suisse (via our inbox):
Neither financial market participants nor the general public appear to have any real confidence in the BOJ’s ability to achieve +2% inflation. The expected inflation rate priced into the JGB linker market points to a steady state closer to +1% after the April 2014 consumption tax hike (Exhibit 1), while households appear to be anticipating even weaker inflation over the coming year.
Kuroding yields and a Nikkei rout have put Abenomics on the back foot.
Goldman strategists Naohiko Baba, Chiwoong Lee and Yuriko Tanaka’s considered opinion is that Haruhiko Kuroda is just, well, bad at central banker speak.
They think the loss of “any positive market reaction” to Japan’s unprecedented easing has “largely been undone”, and lay the blame mostly at the Bank of Japan chief’s feet for his communications strategy, or lack thereof. Read more
The Nikkei*, today:
What happened early in the afternoon session?
This: 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
Something to keep an eye on (the respective reaction of the 6mth, 2-year, 5-year, 10-year and 30-year JGBs to the BoJ’s QE onslaught):
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
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
He struggled as a young bureaucrat on a climb with officials and journalists up a 1,500-meter (4,900-foot) mountain in Nagano Prefecture, to the west of Tokyo, according to Utsumi, now president of Japan Credit Rating Agency Ltd. Kuroda “got exhausted and said he’d never do it again,” he said. “He’s not the sporty type.”
Metaphors aside we can ignore that but the rest of Bloomberg’s profile of the man set to take over at the Bank of Japan is worth a read. After all Kuroda has to convince the Japanese that Abenomics is for real now that much of the easy lifting has already been done. 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.
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