Archive

from MacroScope:

Resolving Shirakawa’s conundrum

The governor of the Bank of Japan, Masaaki Shirakawa, says he is confounded by the still very low level of Japanese government bond yields given the country’s elevated debt to GDP ratio of over 200 percent. Speaking on an IMF panel over the weekend, he offered a rather unintuitive explanation for the phenomenon:

It seems difficult to explain the case of Japan in light of conventional wisdom. One frequently offered explanation is that the ample domestic savings in Japan have absorbed the issuance of JGBs and the share of JGBs held by foreign investors is very small. But a more fundamental explanation is that the stability in the current bond yields reflects market participants’ expectations that fiscal soundness will be restored through structural reforms imposed in the economic and fiscal areas.

Most economists think Japanese yields are low because of continued expectations for deflation and weak economic growth. But for Shirakawa, it seems, it is public confidence in future fiscal restraint that is keeping bond yields low. Except he then contradicts this point by saying weak confidence in future fiscal reforms is also simultaneously undermining consumer spending:

At the moment, such expectations are not firmly backed by concrete reform plans. The public therefore restrains spending on concerns over future fiscal developments. This constitutes one factor behind sluggish economic growth and mild deflation. If this is indeed the case, the experience of Japan indicates a possibility that a cumulative increase in government debt combined with weak economic growth expectations might generate deflationary pressures.

Not so, argues Ugo Panizza, head of debt and finance analysis at the United Nations Conference on Trade and Development. He and co-author Andrea Presbitero find no causal link between high debt levels and weak economic growth.

Christopher Sims, a Nobel-winning economist and Princeton professor also on the panel with Shirakawa, had a much simpler explanation for why Japanese yields are low while Europe’s face steady upward pressure even though both economies are struggling with soft growth:

from MacroScope:

Central bank balance sheets: Battle of the bulge

Central banks across the industrialized world responded aggressively to the global financial crisis that began in mid-2007 and in many ways remains with us today. Now, faced with sluggish recoveries, policymakers are reticent to embark on further unconventional monetary easing, fearing both internal criticism and political blowback. They are being forced to rely more on verbal guidance than actual stimulus to prevent markets from pricing in higher rates.

How do the world’s most prominent central banks stack up against each other? The Federal Reserve was extremely aggressive, more than tripling the size of its balance sheet from around $700-$800 billion pre-crisis to nearly 3 trillion today. Still, the ECB’s total asset holdings are actually larger than the Fed’s – it started from a higher base.

The Bank of England, for its part, went even deeper into uncharted territory, with its assets as a percentage of GDP surpassing the Fed’s. By the same measure, the ECB has overtaken the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level.

Taken together, the expansion in reserves is impressive – and speaks to just how deep the global recession proved to be.

from Global Investing:

Japan… tide finally turning?

Until recently, when you mentioned  "Japan" in the investment context, you could almost hear a collective sigh of disappointment -- it was all about recession, deflation and poor investment returns.

However, sentiment does seem to be finally changing, not least because Tokyo stocks have rallied almost 20 percent since the start of the year, outperforming benchmark world and emerging indexes.

The yen has also been on a (rare) declining trend since the start of February, with the selling momentum accelerating since the Bank of Japan set an inflation goal of 1 percent in a surprise move and boosted its asset buying programme by $130 billion on Feb 14.

A closely-watched survey by Bank of America Merrill Lynch showed record optimism on Japan's growth among fund managers, with a net 91 percent of Japanese fund managers saying they expected the domestic economy to strengthen. That's up from a net 47 percent two months ago.

Overall, survey partipants worldwide slashed their underweight positions on Japanese equities to a net 4 percent in March from 23 percent last month. This is the smallest underweight position on Japan since August. According to Gary Baker, head of European equity strategy at BofA Merrill:

There's quite a change in sentiment towards Japan. If you have global growth then Japan... is a big cyclical region to benefit from that. While investment story is the same, what changed there is the yen weakness... it becomes easier to play the story.

from Global Investing:

Being chic and not saving

Japanese people are generally regarded as saving a lot and not spending much, but in olden times when Tokyo was called Edo (until the mid-19th century), it was considered iki (chic or sophisticated) not to keep one's earnings overnight.

The latest survey from the Central Council for Financial Services Information (part of the Bank of Japan) may suggest that people are going back to that tradition -- although perhaps not for style reasons.

The survey, only available in Japanese so far, showed more than one in four households (consisting of at least two people) said they have no savings, the highest level since the survey started in 1963.

The average level of savings was 11.5 mln yen ($143,232), down 190,000 yen from last year.

More than 40 percent of the respondents said their savings fell from a year ago, double those who said their savings increased.

As Goldman Sachs predicted last year, it may be a matter of time before Japan's savings rate goes negative.

from Global Investing:

End of LTRO = end of equity rally 2012?

This year's global equity rally is unlikely to survive the end of the ECB's liquidity injections, warns HSBC.

World stocks have jumped 10 percent since the start of 2012, emerging markets are up 15 percent and the index of top European stocks has gained 8 percent. These gains, HSBC says, are almost entirely down to the European Central Bank's end-December refinancing operation, or LTRO, that injected $500 billion to ease banks' liquidity worries. The tentative improvement in the U.S. and global growth picture along with beaten-down stock valuations added only limited ammunition to the rally, the bank says.

The findings of HSBC's analysis? First, past episodes of quantitative easing -- Japan in 2001-2004 and the United States, Britain and the euro zone after 2008 --  provided a significant fillip to equity markets.  U.S. stocks rose an average 6 percent, UK stocks by 8 percent and euro zone markets by 15 percent in the three months following the post-Lehman QE rounds, though in Japan the gains have been short-lived. Second, unexpected changes in monetary policy produced a larger impact on stock prices than the continuation of a previous policy.

And when QE stopped, the effect on stocks was immediately negative. HSBC found:

The periods when the Fed halted QE and allowed its balance sheet to shrink (in August 2009, June to October 2010 and July to October 2011) were all periods of weakness for the stock market.

The ECB is gearing up for another LTRO round in two weeks time. But it will not come as a surprise to markets and there are no plans for more.

HSBC concludes:

from Global Investing:

Japan fires latest FX wars salvo; other Asians to follow

Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan's massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies.  The action is unlikely to sit well with other central banks struggling to boost economic growth and raises  the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September's selloff.  The won for instance is up 6.9 percent in October against the dollar -- its biggest monthly gain since April 2009.  The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.

Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar,  and most analysts reckon Japan's latest intervention is by no means its last. That's bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ's next move. "Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions," BNP Paribas analysts said.

But the race to the bottom has been underway for some time.  After all central banks in the West have cut rates, as in the euro zone, and embarked on more quantitative easing, as in the UK.  One bank, Switzerland's, has gone as far as to effectively establish a ceiling for its currency.  And in Asia, Indonesia surprised markets with an interest rate cut this month while Singapore eased monetary policy. Many expect South Korea's next move also to be a rate cut even though inflation is running well above target.  Analysts at Credit Agricole predicted this week's G20 meeting to yield no fruitful discussion on what they termed "currency manipulation". "This lack of co-ordinated policy could trigger an escalation in ongoing currency wars," Credit Agricole analyst Adam Myers told clients. That would in turn lead to a renewed acceleration in central banks' dollar reserves, he added.

from Breakingviews:

Strong yen is not Japan’s main problem

You wouldn't know it to hear officials talk, but the strong yen is not Japan's main problem. The Bank of Japan's latest moves on Monday didn't weaken the currency -- though that is one broad objective of fiscal and monetary stimulus. In any case, the trade-weighted yen is weaker than its real 1990-2010 average and Japanese exports are still rising. Export lobbies may have the government's ear, but intervention could make Japan's domestic predicament worse.

When the Democratic Party of Japan took office last year, its leaders talked about putting more emphasis on Japan's domestic economy rather than the needs of major exporters, which had been favored by Liberal Democratic Party administrations since 1955. The DPJ's first finance minister, Hirohisa Fujii, said at his introductory press conference last September that he was opposed in principle to currency intervention because it could distort the economy.

Fujii was, however, forced out after less than four months, and some officials have reverted to blaming the rising yen for Japan's problems. Direct currency intervention, though not yet tried by the DPJ, looks more likely than ever, too. Yet the yen's trade-weighted exchange rate, corrected for differences in inflation, remains about 6 percent below the average of the last 20 years. True, the yen did last week hit a 15-year peak of less than 84 against the dollar and remains far stronger than its 20-year average of around 100. But the comparison with the trade-weighted figure underlines the extent to which that reflects the dollar's overall weakness.

Meanwhile, exports are hardly suffering badly from the strengthening yen. In July, they were up 2 percent on the month and 23.5 percent from the previous year. Japan also continues to run a large current account surplus.

Even deflation shouldn't be the Japanese government's biggest worry. Consumer prices have, in fact, fluctuated within a 5 percentage point range since 1992. Rather, the number one challenge is excessive government spending, which has brought continuing fiscal deficits and government debt amounting to more than 200 percent of GDP.

By skating over this and majoring on the yen -- particularly against the dollar -- Japanese policymakers risk retaliatory currency interventions. Those beggar-my-neighbor battles worsened global economic conditions in the 1930s and would do so again now.

from MacroScope:

Mission not accomplished at central banks

U.S.  and Japanese monetary policy does not always move hand in glove, but meetings of  the countries' respective central banks in the next few days are likely to spell out the same thing -- that the job of economic recovery is by no means over.

It is almost a dead cert that the Federal Reserve will keep interest rates where they are and a high probability that it will renew its view that we can expect an "extended period" of  "exceptionally low" rates. It is likely to stick to its plan to end purchases of around $1.7 trillion in assets. But it could well leave the door open for a renewal of purchases at a later date should economic expansion fall back.

The message: Mission not yet accomplished.

The Bank of Japan may prove even more dovish. It is under pressure to get even looser than it already is, most likely by increasing funds offered under its lending operation.  This is partly because of weakening price trends and worse fourth quarter growth than expected.

The message: Mission even less accomplished.

A third confirmation is likely to come from the minutes of the Bank of England's last meeting. expected to show unanimous support for keeping interest rates at their rock bottom level in the face of fragile economic growth.

As a result of this kind of thinking,  there are increasing noises from some investors about the danger of  the global economy slipping back into recession and equity markets revisiting the lows of  March 2009.

from The Great Debate UK:

Development of the risk trade

- Jane Foley is research director at Forex.com. The opinions expressed are her own.-

A willingness to differentiate between risk on a country or at a regional level is an important part of the repair process in financial markets.

Credit worthiness is at the core of any assessment of risk and naturally credit worthiness can sort "risk" into a hierarchy which should be instrumental to the pricing of assets and currencies.

At the start of this year, fear and uncertainly herded investors in and out of "risky" investments fairly indiscriminately. Even though the overall rally in risk since the spring suggests that broad based fear has been dispersing, strong correlations between some of these "risky" assets persist.

Forecasts of slow levels of growth for most of the G10 in 2010 suggests that there are still a few more negative shocks in store for the markets in the coming months.

That said, reduced levels of fear should allow fundamentals including assessments of credit worthiness to play a greater part in asset allocations.

from From Reuters.com:

The day ahead: Friday

D.R. Horton, the second-largest U.S. homebuilder, reports its fourth quarter and fiscal year results. Investors will listen for any comments on the builder's order trends and commentary as they try to discern whether the nascent housing market recovery will buoy the new home sector.

Other Highlights:

*  Nortel assets hit the auction block. Nokia Siemens Networks and private equity firm One Equity Partners have jointly bid for Nortel Networks Corp's optical networking and carrier ethernet business, a person familiar with the sale said on Wednesday.

*  The Bank of Japan announces the decision of its two-day policy board meeting.