This morning the main economic developments are taking place in the Far East and UK markets have opened with this being reported. From @RANsquawk.
#USDJPY sub-111.00, paves way for retest of the March low of 110.67 which would be the lowest since Oct 2014, when BoJ last expanded QQE (Quantitative and Qualitative Easing).
There was talk that an option barrier at 110.50 might hold the rise of the Japanese Yen against the US Dollar but in fact in rose to 110.30 and is now at 110.44 as I type this. The reason for the slight dip back was a familiar one.
BRIEF-Bank of Japan checking USD/JPY rate – Nikkei
As you can see hints of intervention do not seem to be achieving much anymore along the lines of the story of the boy who cried wolf. Indeed overnight we saw one of the weapons of modern central banking deployed as Bank of Japan Governor Kuroda indulged in some Open Mouth Operations. From Marketwatch.
Speaking in parliament, Kuroda reiterated his stance to “undertake additional monetary easing without hesitation” if necessary, either by increasing the central bank’s asset purchases or by lowering its deposit rate further below zero, or both.
According to Bloomberg news he went on to say that he is “monitoring” foreign exchange markets which in Kuroda speak is the equivalent of “closely watching from the Ministry of Finance. The problem is summed up by Bloomberg below.
The yen’s 8.7 percent surge this year makes it the best performing Group-of-10 currency.
The rise is exactly the opposite of the plan under the Abenomics policy of Shinzo Abe under which it is supposed to keep falling. It is now 7% stronger than a year ago. These days QQE or QE do not guarantee a currency fall as I discussed only yesterday in reference to the Euro well those in Tokyo will have spotted that since last summer when it nudged over 140 the Yen has been strengthening against the Euro as well as finds itself at 125. 4 .
Of course Japan has its concerns about currencies much closer to home so if we switch to the effective or trade weighted Yen it has risen from 128 to 137 in 2016 so far.
The many faces of Governor Kuroda
An increasing problem for Governor Kuroda is that he is contradicting himself more and more. From The Times of India a month ago.
TOKYO: Bank of Japan Governor Haruhiko Kuroda said on Monday he is not currently thinking of taking additional steps to ease monetary policy.
So either he was not telling the truth or he has undertaken another U-Turn in the way that he introduced negative interest-rates only 8 days after publicly rejecting the idea. Speaking of India I guess Governor Kuroda would love to be cutting from 6.75% to 6.5% as the Reserve Bank of India did this morning.
Where next for monetary policy?
There are problems here for Governor Kuroda. In terms of currency intervention he must be singing along to the Alan Parsons Project.
I just can’t seem to get it right
Damned if I do
I’m damned if I don’t
If he intervenes here again he faces the prospect of the Bank of Japan morphing into an international hedge fund in the way that its “currency twin” the Swiss National Bank has. If you build up foreign currency assets you then need to put them somewhere and the old stand-by of short-dated bonds increasingly brings a guaranteed loss in terms of negative interest-rates. So they increasingly choose equities which mostly means hoping the price of Apple does not fall and the occasional embarrassment as they get caught holding a lemon such as Valeant.
If he does not then if the technical analysts are any guide the Yen is on its way to 107 or maybe 106 when Kuroda will be singing along to Hard-Fi.
Can you feel it?
Feel the pressure rising
Pushing down on me, oh Lord
Of his other options he could do more QQE but it is increasingly damaging the underlying Japanese bond market. From @moved_average
CURRENT 30-YR JGBS HAVE NO TRADE FOR FIRST TIME IN SIX MONTHS
I have been arguing this from the early days but they have ploughed on and pretty much broken the market by buying so many. This is more of a flow problem or the speed of purchases than a stock one but if they keep this up then that will be along eventually as well. It speaks for itself that the Bank of Japan rounds its announcements to 100 million Yen! Oh and one thing it does do which as far as I am aware is unique is that it buys inflation or index-linked bonds as well. Any port in a storm I suppose.
Promises of further steps into negative interest-rate territory have the problem that the first one saw the Yen strengthen substantially afterwards. What if that happened again?
Both the Bank of Japan and the ECB seem to have entered a zone where further monetary easing strengthens the respective currencies. We find ourselves tearing yet another page out of the economics textbooks and soon we will be left only holding a spine.
There are louder and louder calls for this with for example Lord Turner regularly suggesting it in the UK. I do still enjoy the description of him having had a “talentless ascent” in a comment to this blog. Actually Japan gave it a go a decade or more ago giving everyone the equivalent of £142 if I recall correctly which they promptly saved! Please remember that as I see some many articles claiming that this is not only new but in fact has guaranteed success.
Also we find ourselves here on a path where monetary policy is also fiscal policy.
What about fiscal policy?
The Japan Times suggests this is also on the cards.
At a meeting of the Council on Economic and Fiscal Policy on Monday, the prime minister instructed ministers to formulate “bold and convincing measures” to be included in a fiscal and economic blueprint to be compiled in or around June.
Japan is going to press for such moves to be international when it hosts the next G-7 meeting. Presumably this is part of this promise by Shinzo Abe that looks very much like tilting at windmills only a short time after.
Abe has pledged to lift GDP by around 20 percent from the current level, to ¥600 trillion by around 2020.
This poses yet another problem for Abenomics as the initial fiscal boost was supposed to trigger economic growth which would allow Japan to cut its fiscal deficit and thereby get some control over its national debt to economic output (GDP) ratio. According to the Ministry of Finance the fiscal deficit was 6% of GDP in 2015 and the national debt was 229.2% of it. The IMF has it nearing 250% and the Bank of Japan if it throws in all its assets has a net reading of 130%. Take your pick or note the 1.075 quadrillion Yen it has become or 1,075,217,800,000,000.
If we step back for a moment we see three major themes at play. Firstly the economy of Japan has had every form of economic stimulus thrown at it. A continuing fiscal stimulus has seen ever more monetary stimulus and a lower exchange rate added to it. Each time we have been assured of success by the government and mainstream media but if that was true we would not be seeing Agent Smith continually crying “More! More!” would we? In addition the latest phase is that monetary easing is having an inverse and perverse effect on the Yen and the Euro as both rally in response to ever lower interest-rates and yields. Oh what a tangled web and all that. Also please remember that this is happening when lower energy prices should be giving Japan an enormous boost.
One irony is that today has seen a rare outbreak of a real wage rises in Japan but I guess whilst 0.4% is welcome it is not that material. Oh and as to the promised third arrow of reform. From Reuters.
Japan is witnessing a record number of compensation claims related to death from overwork, or “karoshi”, a phenomenon previously associated with the long-suffering “salary man” that is increasingly afflicting young and female employees.
That is neither the reform nor the type of equality required.