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from Breakingviews:

Japan’s bond-hugging banks are pinning Abe down

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japanese lenders’ outsized government bond holdings have Prime Minister Shinzo Abe in a chokehold. Unless banks shed the load now, they might try to dump the debt when the Bank of Japan stops printing money and causes bond prices to fall. A stampede could rattle the financial system and dent Abe’s anti-deflation campaign.

Deposit-taking institutions have trimmed their portfolio of Japanese government bonds (JGBs) by 9 percent over the past year, helped by the BOJ’s aggressive bond-buying programme. But they still carry 288 trillion yen ($2.8 trillion) of JGBs, equivalent to 60 percent of GDP.

There is a worrying amount of government debt still to come. The stock of JGBs would zoom to just over 925 trillion yen by 2017, from an estimated 860 trillion yen at the end of 2014, assuming 2.5 percent annual growth in the debt pile. If the Government Pension Investment Fund starts chasing riskier assets like equities to bolster returns, another 10-15 trillion yen of JGBs may need to find alternative buyers by 2017.

from Nicholas Wapshott:

Nothing pacific about it: Japan pushes back on China

Members of Japan's Self-Defence Forces' airborne troops stand at attention during the annual SDF troop review ceremony at Asaka Base in Asaka

China is on the march. Or, to be precise, China has made a strong push, militarily and otherwise, into seas nearby, setting off alarms among its neighbors. Now Japan has pushed back, announcing it will “reinterpret” its pacifist constitution so it can be more militarily aggressive in responding to China’s persistent territorial expansionism.

Japan’s actions, however, have also raised alarms. A century ago, Japan set out on a destructive path of conquest, and many still remember firsthand the brutality with which Japanese troops occupied the region -- from Korea and the Philippines, through Manchuria and China, Vietnam and Thailand, all the way to Singapore. Though China is now threatening peace, the memory of Japan’s savage adventurism adds to the general unease.

from Counterparties:

The Abenomics arrows

Abenomics grinds on. Bloomberg has just put out a new report on the state of Japanese prime minister Shinzo Abe’s project to revive his country’s economy and concludes that “the record is mixed.” “Inflation is up, though import prices rather than wages account for the bulk of the increase. A skeptical public remains unconvinced that long-term prospects are brighter.” Japan is a little over 18 months into Abenomics, and two of the three “arrows” — fiscal stimulus and monetary easing — have been deployed. Barry Ritholz thinks they’ve already been pretty successful so far: “deflation is being replaced by inflation; profits and investments are both increasing for Japanese companies; and the Nikkei 225 is up considerably.”

However, there’s plenty to be worried about. Back in April, Japan raised the consumption tax to 8% from 5% — the first hike since 1997 (which threw the economy into a tailspin). It was supposed to be “the fatal flaw in Abenomics,” according to theEconomist, but “the early signs are that a preternaturally lucky Mr Abe has got away with it.” However, the Japan Times writes today that the economy has taken a significant hit after the tax hike: average household consumption is down, wage growth is below inflation, corporate capital investment hasn’t made up for the fall in household consumption, and export growth is sluggish.

from Breakingviews:

Japan’s corporate tax cut could harm Abenomics

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Shinzo Abe wants to prove his reform credentials by cutting Japan’s 36 percent corporate tax rate. But the prime minister’s plan could backfire and end up harming his anti-deflation campaign.

from The Great Debate:

Is Iran being victimized by sanctions it doesn’t deserve?

A security official stands in front of the Bushehr nuclear reactor

Iranian officials met this week with their six-power counterparts to try to hammer out the outlines of a comprehensive nuclear deal set to last for several years. But its precise duration remains undecided.

Reaching an agreement will be a monumentally challenging task because all the parties have veered away from international law and are trying to make ad hoc arrangements. They should instead aim for a permanent, straightforward and legal solution whose basis already exists. Successfully sealing a deal with Iran may also help Western efforts to stabilize the situation in Iraq, where Iranian and Western interests align.

from The Great Debate:

Let Japan help defend America — and itself

Members of Japan's Self-Defence Forces' airborne troops stand at attention during the annual SDF troop review ceremony at Asaka Base in Asaka

Japanese Prime Minister Shinzo Abe is now following through on actions laid out in his recent bold speech calling for Japan to defend allies who might be under attack.

But wait, you may ask, hasn’t the United States had a mutual security treaty with Japan for more than half a century?

from Anatole Kaletsky:

Euro zone’s big problems require big fixes

ECB President Draghi addresses a news conference in BrusselsAt last, the European Central Bank seems ready to inject some adrenalin into the moribund euro zone economy. After last week’s news conference, when European Central Bank President Mario Draghi strongly hinted that action would take place after the June 5 council meeting, there have been a host of interviews and leaks specifically describing the new ideas the bank has in mind.

The biggest measure, now almost a foregone conclusion, will be a cut in the interest rate the ECB pays on bank deposits from zero to negative 0.1 or 0.2 percent. Bank officials have also hinted at several additional stimulus measures: extension of loans to commercial banks at low fixed rates for three years or even five years; ECB purchases of bank loans to small and medium enterprises, packaged into asset-backed securities; and concessional lending to European banks on condition they pass on these funds to small and medium businesses.

from Breakingviews:

Japan index: Wages bigger worry than spending

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

With the sales tax rising from April 1, the shopping spree that pushed the Breakingviews Abenomics Index to a 12-year high in March has ended. But sluggish wages are a bigger threat than a consumption freeze. If pay disappoints, the spending gloom may become more persistent.

from Ian Bremmer:

Japan’s path forward, in five steps

japan888

On the surface, Barack Obama’s recent Japan visit struck all the right chords for Tokyo. For the first time ever, an American president stated that the U.S.-Japan security treaty extends to the Senkaku/Diaoyu islands dispute, the most combustible geopolitical conflict between Japan and China. And Obama and Japanese Prime Minister Shinzo Abe announced a “key milestone” for negotiations on the Trans-Pacific Partnership (TPP), the trade deal that encompasses 12 countries and more than 40 percent of the world’s economic output.

But there was less to the visit than meets the eye. Obama’s Senkaku pledge was a restatement of existing U.S. policy. The “key milestone” on TPP was never identified; in fact, it seems that the 40 hours of bilateral discussions between the U.S. and Japan led to no breakthrough at all. And while the trip was a big win for Obama -- he managed to placate Tokyo without provoking Beijing -- it didn’t offer any solutions for how Japan should deal with a rising China.

from MacroScope:

Will sanctions bite?

Financial markets may view the latest sanctions against Russia as feeble, but the reaction from Moscow – Vladimir Putin threatened to reconsider Western participation in energy deals and his foreign minister, Sergei Lavrov, said they were the work of weak politicians – suggests otherwise.

Russia's top oil producer, Rosneft, will release first-quarter financial results after its boss and close Putin ally Igor Sechin was put on the U.S. sanctions list. Yesterday, energy giant Gazprom – whose chief escaped censure – said further Western sanctions over Ukraine could disrupt its gas exports to Europe and hit its business and shares.

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