The Bank of Japan holds fire whilst new evidence on UK and US Housing Markets raises concerns

Today sees a meeting by the Federal Open Markets Committee which is eagerly anticipated as it may signal a change in US monetary policy. This will be something of a sea change should it take place because if you look back to the beginning of this year the Fed was making plans for a reduction in stimulus measures rather than an increase. In some ways the change is quite an eloquent summary of the turn in the US economy although I still feel that a policy response would be premature as the evidence so far is of a slackening in growth only. One somewhat ironic consequence of the change is that the Fed is presently trialing moves to reduce its monetary stimulus just at the moment there is speculation it will in increase it!

Another factor which has been concerning markets has been concerns about commodity prices which were highlighted by the surge in wheat prices last week. In terms of the overall effect the Commodity Research Board’s spot index drifted slightly lower yesterday to 444.93 with foodstuffs falling but metals rising. As to wheat itself it is edging back up towards US $7.50 per bushel this morning.

Bank of Japan’s meeting

The Bank of Japan has also had a policy meeting which has attracted less publicity than the Fed’s. In the event it decided at the end of its two-day policy board meeting that it will keep the overnight call rate at  0.1%. The rate hasn’t changed since December 2008. The last actual policy move by the Bank of Japan was in March when it doubled a fixed-rate credit program for banks to 20 trillion yen ($233 billion). Part of the reason for not acting was probably that it had only a month ago raised its forecast for Japan’s economic growth for the year through March 2011 to 2.6% from 1.8%. At the time it said that the main reasons for this were improved demand for exports from the U.S. and developing nations like China. Also as one of Japan’s main problems at the moment is external being the current high level of the Yen at 85.75 versus the US dollar which makes like harder for Japan’s exporters it is also probably true that the Bank of Japan is waiting to see what will happen at the FOMC meeting.


In some ways the Bank of Japan is caught between a rock and a hard place. Over the lost decade it has tried various policy measures none of which have decisively moved Japan out of a deflationary and indeed disinflationary gridlock. It has tied its own hands a little by raising its growth forecast just as economic news turned downwards as for example the unemployment rate has risen to 5.3% in the last data set and industrial production has fallen back from 96.1 to 94.7 on a seasonally adjusted basis. This morning also saw some new data on Japan’s current account surplus for June which was 1.047 trillion Yen (US $12.3 billion). This was not only lower than expected but was also some 18% lower than last June’s adding to the disappointment was the factor that Japanese export growth has also slowed. Now I always caution placing too much emphasis on one months trade figures because they are simply not accurate enough but even so these figures will give Japan’s policymakers some food for thought as the recent rise in the  Yen’s exchange rate is probably too recent to have affected these figures and so its impact has yet to come.

There are two main themes that the Bank of Japan’s inaction leaves me with. The first applies elsewhere today as it has tried Quantitative Easing and asset purchases several times and yet still finds itself in the economic mire, policymakers on the other side of the Pacific will do well in my view to take note of that later on today. The second is that the lost decade has highlighted the limitations of monetary policy and the powers of central banks as the Bank of Japan has used most if not all of the policy measures available to it without finding a full solution to Japan’s problems. As central banks are being relied on to influence quite a few economies at the moment this is a particularly sobering thought in my view.

Housing Markets in the UK and US


The Royal Institute for Chartered Surveyors has reported this morning that it had detected signs of a downturn in house prices. In its survey of 242 surveyors it found that 25% had seen falls but only 11% reported house price rises. This added to recent surveys that had indicated something similar. Foreign readers may not be aware of the amount of time spent in the media discussing house prices in the UK . Partly this is due to the relatively high rate of owner-occupation in the UK but it is also true that it is something of a national obsession! I have a London radio station on in the background and their response to this (and a curious report about fuel prices I will discuss later) is “are we falling back into recession?” So nice, balanced and temperate as you can see!

Be that as it may house prices are a bellweather for the UK economy and as so much of the moves to benefit the UK economy should have benefitted it then any sustained downturn will have implications for the wider economy. For example variable mortgage rates fell substantially as official interest rates were slashed in response to the crisis and the Bank of England has done its best to support the banks with its various programmes which include not only QE but also its Special Liquidity Support operation. I guess this is an example of watch this space.

US Housing Market

Here the news had a similar implication but it came from another route. The two state supported mortgage lenders Freddie Mac and Fannie Mae  have tottered on since they were bailed out by the US government back in 2008. So far the financial support provided by the US government has come to US $148.3 billion. Anyway Freddie Mac has just asked for some more money and yesterday requested an additional $1.8billion from the US government, as underperforming home loans continued to saddle it with losses. It said it lost some US $6 billion in the second quarter of this year. Whilst this is an improvement on the first quarter it is much worse than the same period last year when it lost a comparatively small US $840 million.

 So one is left with the opinion that the US housing market is still struggling and if you were in any doubt here is a quote from the chief executive of Freddie Mac which I found a little chilling.

Freddie Mac “continues to support the still-fragile housing market by providing America’s families with access to affordable home financing and foreclosure alternatives.”

As well as the fact that plainly from these figures and the quote above America’s housing market continues to struggle there are some other Interesting features. Firstly those who believe in proper accurate accounting will be concerned to see that neither company is included in the US government budget even though they were taken over by the government in 2008 and their losses since then are the responsibility of US taxpayers. Secondly as plainly they are still struggling any further reversal in the US housing market would hit them hard. Thirdly they are financing more than 90 per cent of the home loans issued at the moment in the US such is the disarray in the US private-sector mortgage market.

Continuing the theme of trying to reduce crisis measures just as other problems may be surfacing Freddie Mac is also making a dividend payment of US $1.3 billion to the US Treasury.

UK Petrol and Diesel Prices

I notice that the UK news media has been running a report saying that UK fuel prices will rise by around 8% by the end of the year. I took a look at the reasons for this report and found it rather odd. The first suggested component of rising crude oil prices is true as they have risen by around ten per cent recently but the second component a fall in the UK exchange rate has simply not happened. In fact the reverse has happened against the US dollar which is the currency oil prices are measured in. Our recent low was at US $1.4305 on the 20th May and we are now around US $1.58 which is a rise of around ten per cent. So we in fact have offsetting moves not complimentary ones.

The RMI Independent Petrol Retailers Association has a vested interest in representing its members but the press should check the claims before giving them publicity. Between now and January 2011 many things may happen but as we stand right now there is no real basis for forecasting price rises except from the increases in fuel duty and then VAT which the government has announced. In my locality I notice that fuel prices have edged up this week so it would appear that petrol retailers are giving price rises a go well before either of these actually happen.


8 thoughts on “The Bank of Japan holds fire whilst new evidence on UK and US Housing Markets raises concerns

  1. The conventional wisdom seems to be that Japan is an economic basket case because of falling prices. I visited Tokyo to attend a conference earlier this year and found it a delightful city, although very expensive, so there seems to be a lot of room for prices to fall further. I understand that the Japanese debt-to-GDP ratio is very high at 200% or so and that deficits may no longer be sustainable. However, I also understood from my hosts that the deficits are about buying votes and do not serve any economic purpose. So what would be so bad about the UK following Japan into long-term deflation?

    • Hi Drf
      I thought I would wait until we got the Inflation Report from the Bank of England and I had watched the news conference before I replied. But in some ways I need not have bothered because the Governor Mervyn King is convinced of his own reasonableness and credibility and appears to feel that all comments/criticism come “with the benefit of hindsight”. As was pointed out by Chris Giles what is the point of telling us that economic growth in 2012 is likely to be between -0.5% and 5.5%% as today’s report informs us? I agree that forecasts should have ranges as spot forecasts imply far too much accuracy but the ranges have to have some limit.
      I notice also that the change of forecasting model was brushed aside which somewhat contradicts Charles Goodhart’s comments.

  2. I listened to Ben Bernanke make a clear point last year that the Fed is not doing what the BoJ did. He said the BoJ’s quantitative easing targeted the increase of bank reserves. The Fed, on the other hand, is pursuing a very complex set of operations designed to restore failing credit markets. Interventions to buy asset backed securities, collateralise ABSs in return for term loans to financial institutions and players, currency swaps,avoid fire-sales of dubious assets without markets in which they can sell,targeted liquidity operations and commercial paper purchases. The combined objectives of the Fed were to restore the flow of credit within and without the financial markets by attacking the failure points. If this was the entire rationale, to admit more is required is to accept that credit flows are still disfunctional and in need of further treatment. He didnt believe inflation to be of huge concern where financial black holes in financial institutions’ balance sheets were continuing to rupture and cause banks to hold their reserves on deposit with the Fed. At least, I think that was his point.

  3. Shireblogger, the problem with Bernanke’s finessing is that without credit demand he can fix the supply all he likes but nothing will happen. The US middle-classes are stuffed, the ‘american dream’ is turning into a nightmare. The only viable solution at his disposal is his ‘helicopter’ solution, give the bottom 90% some cash ( and take it off the top 10%, and corporates). Otherwise the ‘L’ shape ‘recovery’ will drift on and on and on.

    • Thanks JW, you’re right on your point about the real economy taking a hammering. However let me give you an anecdote I heard only last night. Small business with thrifty owners ( not over indebted) want a very small extension to their working overdraft to allow more room for themselves at end of month billing. The answer from a leading UK high street bank was “no”. When challenged, senior manager of bank says “ok, but we will charge 16% interest on your entire overdraft for the new arrangement”. So, the finessing is featherbedding financial institutions whilst they screw small businesses. Big FTSE’s get cheap finance courtesy of central bank operations and everyone else sinks or swims.The Secured Paper Facility ( designed to help a “wide population” of companies) hasnt got off the ground as far as I can see. Its a disgrace. I enjoy reading posts about global trends in commodities, bonds and equities and central bank finessing.In the real home economy occupied by most of those who generate the taxes for the elites to play with there is festering injustice and a sense of outrage.

  4. Shireblogger, just wondering why we, the impoverished savers with diminishing returns, don’t club together and offer the likes of these businesses their capital requirements for something like a better return than 0.05% or even the 2.5% we are offered? Looks to be a lot of manoeuvring room considering a 16% charge!
    Oh yes we already do…………………?????????

    • Mervyn King is talking about this very question now ie SMEs suffering large spreads on borrowing relative to base rate and that the big FTSE boys are able to steer around the problem courtesy of aided corporate bond markets, for example.

      We, the impoverished savers, appear to be paying the increased funding costs of banks’ own funding. Better we find remuneration elsewhere perhaps.

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