This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail.
The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure…
The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case. Read more
And you may be able to blame Ben Bernanke for it (via Bloomberg): Read more
Once upon a time (well, 2012) in a realm of falling or flat prices and stalling economic growth, one man had the courage to face reality with only three arrows — of monetary stimulus, fiscal stimulus and structural economic reform — and a popular mandate to his name.
That name was Abe and he…
No. Let’s just cut to Morgan Stanley on the ‘tragedy’ of Abenomics so far, and its potential ‘rebirth’: Read more
One of the key questions today is about just where we are in the credit cycle, which is more broadly the question of “when’s that debt I bought going to pass its best before date?”
We’re now eight years and counting since the global financial crisis (depending on where exactly you want to pin its beginning) and so there is some nervousness that we’re quite long through the cycle, meaning tougher times are just around the corner — that nervousness, incidentally, has made funding more scarce for online lenders who have largely not been tested through a downturn. Read more
From Deutsche’s Robin Winkler on the dispersion of pain from Japan’s new, tiered, negative rates regime:
So far in 2016, yes.
From Deutsche’s latest House View:
That’s the 10yr going negative for the first time, becoming the first G7 country to do so. Read more
If the BoJ and Mr Kuroda are thinking about storage costs – after taking interest rates to minus 0.1 per cent and saying they “will cut the interest rate further into negative territory if judged necessary” — this might be useful.
From Oxford Econ’s Gabriel Stein & Ben May:
As has been well reported, the IMF has recommended that China’s renminbi should join the basket of currencies used to value its own de facto currency.
There’s been lots of talk, as a consequence, of China now being in a position to properly disrupt the US dollar’s global reserve currency status.
Except, SDR inclusion doesn’t imply anything of the sort.
Furthermore, we’ve very much been here before*. Read more
A brief history of Japan’s stock market, charted by Nomura. Do click to enlarge/ to spot the bubbles:
Jeff Megall: Do you know what time it is in Tokyo, Nick?
Nick Naylor: No.
Jeff Megall: 4 pm tomorrow. It’s the future, Nick.
–Thank You For Smoking (film)
Back when Japan first entered the world of zero inflation and zero interest rates, many Western economists and policymakers thought it was a freak event never to be experienced in their own countries.
But it turned out Jeff Megall was right: far from being unusual, Japan was simply further along in the process of debt-fueled boom and slow deleveraging. Hence the attention paid to Prime Minister Abe Shinzo’s efforts over the past two-and-a-half years or so to boost growth, particularly the ambitious programme of monetary stimulus called Quantitative and Qualitative Easing. Read more
By Deutsche, do click to enlarge:
This, apparently, is a favoured way to short Japanese equities, and trading in said ETF, the Nikkei Double Inverse, has been particularly brisk of late. Meaning a lot of speculative money was caught on the hop on Wednesday…
Consider the following two charts:
The chart on the right shows the price changes of the Shanghai composite stock index since the beginning of 2014 and the one on the left shows the price changes of a different stock index, decades earlier, that appears to have behaved very similarly, albeit with a bigger boom over a slightly longer time frame. We removed the labels and time scales to heighten their similarities, and normalised both to start at 100.
In both cases there was a period when basically nothing happened to stocks, followed by an extreme appreciation, followed by a sharp drawdown of about one-third.
Rightly or wrongly, falling consumer prices — or even plain old price stability — is often treated with alarm by monetary economists and policymakers alike. The common view is that deflation, in addition to exacerbating economic weakness, is an indicator of the economy’s failing vigour.
As Ben Bernanke put it back in 2002: Read more
Another data point for those keeping track of the impact of “Abenomics”, via a recent speech by Bank of Japan governor Haruhiko Kuroda:
About 20 years ago or so, it started becoming fashionable to conclude that the Japanese government’s borrowing costs were going to go up a lot.
Demographic changes were going to dramatically increase the share of retirees dependent on the state for income and healthcare at the same time as the working population — and therefore the tax base — would be shrinking. Add in alleged economic stagnation and the result would be a rapidly widening gap between inflows and outflows. The ratio of government debt to GDP would skyrocket. Read more
Japan turns even more Japanese:
It’s misleading to compare macroeconomic aggregates across countries with very different population growth rates, which is why so many analysts get it wrong on Japan. While we were doing some of the data work for that previous post, however, we thought you might appreciate a visualization of how Japan’s population has aged and why it is poised to shrink a lot over the next few decades:
One of the supposed “lessons” of Japan’s post-bubble experience is that steady grinding deflation is the worst fate that can befall a rich country. See, for example, Ben Bernanke’s classic speech from November, 2002, or this scary-looking visual from Nomura:
Commentators, academics and policymakers often assert that Japan’s economic performance since the 1980s is one of the worst fates a rich country can endure. While this has become somewhat less common since 2008 — Paul Krugman even apologized for his earlier criticisms — concerns about the “Japanification” of the euro area have become particularly intense as inflation has slowed and government bond yields have converged towards zero.
In a new note, economists at Nomura suggest that Europeans should only be so lucky. After all, Japan endured its supposedly “lost decades” with grace. The euro area has not, and things could end up getting even worse.
Before we dig into the meat of their arguments in a follow-up post, we can’t stress enough how important it is to adjust aggregate economic data for demographic differences. Read more
The best way to get less of something is to tax it, so nobody should have been surprised when Japanese GDP cratered after the sales tax was raised from 5 per cent to 8 per cent in April.
What the government didn’t expect, and what is encouraging Prime Minister Abe to delay (if not renege on) the plan to raise the tax rate to 10 per cent, was the economy’s failure to snap back. For example, the latest data show that real household consumption, excluding imputed rent, plunged by 3.5 per cent over the past 12 months to its lowest level since the Tohoku earthquake hit in 2011:
Earlier on Friday, we noted that one of the most interesting things coming out of Japan on the day was the rumour that the government was about to approve new allocation targets for the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF), which would increase its exposure to domestic stocks.
That rumour has now been confirmed.
As Richard Kaye, portfolio manager at the Comgest Growth Japan fund noted, in terms of importance, this far outweighs the BoJ’s decision to raise the monetary base by around Y80tn a year from Y60-70tn and to triple annual purchases of ETFs and REITS. Read more
Since we can’t put charts in the Cut without borking format for a bunch of readers, here’s what a surprise commitment from the Bank of Japan to raising the monetary base by around Y80tn a year from Y60-70tn, a tripling of annual purchases of ETFs and REITS, and a certain (probably coordinated) GPIF rumour doing the rounds will do to Japanese equities and the yen.
More on the GPIF rumour and the positive and negatives of this latest Kuroda splurge near the bottom.
The Bank of Japan has bought bonds, bills, stocks and property since embarking on its radical monetary easing programme last April.
Now it’s buying time. 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
A recent speech by Reserve Bank of Australia boss Glenn Stevens contained this striking chart:
Russia’s ESPO crude blend determines the key compensation rate for Russian oil production.
As analysts at JBC Energy note on Monday, however, the crude now trades at its weakest differential to Dubai crude — the benchmark it is most commonly compared to — since it became an established blend on the market in 2010.
Whilst the analysts are quick to point out that there are legitimate fundamental reasons for the weakness, it should not go unnoticed that some regular ESPO customers seem to be missing from the market. Read more