What is going on at the Bank of Japan?

It is time to take another step on our journey that Graham Parker and the Rumour would have described as discovering Japan as quite a bit is currently going on. On Tuesday eyes turned to the Bank of Japan as it did this according to Marketwatch.

The central bank cut its purchases of Japanese government bonds, known as JGBs, expiring within 10-25 years and those maturing in 25-40 years by ¥10 billion ($88.8 million) each.

It created something of a stir and rippled around financial markets. There were two pretty clear impacts and the first as you might expect was a stronger Yen which has become one of the themes of this week. An opening level of above 113 to the US Dollar has been replaced by just above 111 and any dip in the 110s will give a sour taste to the Friday night glass of sake for Governor Kuroda.

If we look back to this time last year we see that the Yen is stronger on that measure as back then it was above 114 versus the US Dollar. This may seem pretty poor value in return for this.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

Even in these inflated times for assets that is a lot of money and the Bank of Japan is not getting a lot of bang for its buck anymore as we have discussed. It would be particularly awkward if after not getting much progress for the extra (Q)QE any reduction or tapering took it back to where it began. The impact of Quantitative Easing on currencies is something we regularly look at as the impact has become patchy at best and this week has seen us start to wonder about what happens should central banks look to move away from centre stage. That would be a big deal in Japan as a weaker currency is one of the main arrows in the Abenomics quiver. As ever we cannot look at anything in isolation as the US Dollar is in a weaker phase as let me pick this from the Donald as a possible factor partly due to its proximity to me.

Reason I canceled my trip to London is that I am not a big fan of the Obama Administration having sold perhaps the best located and finest embassy in London for “peanuts,” only to build a new one in an off location for 1.2 billion dollars. Bad deal. Wanted me to cut ribbon-NO!

Mind you that is a lot better than what he called certain countries! If nothing else this was to my recollection also planned before the Obama administration.

Bond Markets

You will not be surprised to learn that the price of Japanese Government Bonds fell and yields rose, after all the biggest buyer had slightly emptier pockets. However in spite of some media reports the change here was not large as 0.06% for the ten-year went initially to 0.09% and has now settled at 0.07%. Up to the 7 year maturity remains at negative yields and even the 40 year does not quite yield 1%. If we look at that picture we see how much of a gift that the “independent” Bank of Japan has given the government of Shinzo Abe. It runs a loose fiscal policy where it is borrowing around 20 trillion year a year and has a debt of 1276 trillion Yen as of last September which is around 232% of GDP or Gross Domestic Product. So each year QQE saves the Japanese government a lot of money and allows it to keep its fiscal stimulus. We do not get much analysis of this in the media probably because the Japanese media is well Japanese as we mull the consequences of the owning the Financial Times.

A stronger effect was found in international bond markets which were spooked much more than the domestic one. US government bond prices fell and the 10-year yield went above 2.5% and got some questioning if we were now in a bond bear market? After around three decades of a bull market including of course these days trillions of negative yielding bonds around the globe care and an especially strong signal is needed for that. Maybe we will learn a little more if the US 2-year yield goes above 2% as it is currently threatening to do. But in a world where Italian 10-year bonds yield only 2% there is quite a way to go for a proper bond bear market.

The real economy

If we look at the lost decade(s) era then Japan is experiencing a relatively good phase right now. From The Japan Times.

The economy grew an annualized real 2.5 percent in the July-September period, revised up from preliminary data and marking seven straight quarters of growth — the longest stretch on record —.

Someone got a bit excited with history there I think as there was a time before what we now call the lost decade. However for those who call this success for Abenomics there are some things to consider such as these.

Exports grew 1.5 percent from the previous quarter amid solid overseas demand as the global economy gains traction.

Japan is benefiting from a better world economic situation but like so often in the era of the lost decades it is not generating much from within.

But private consumption, a key factor accounting for nearly 60 percent of GDP, continued to be sluggish with a 0.5 percent decline from the previous quarter as spending on automobiles and mobile phones fell.

Let us mark the fact that we are seeing another country where car demand is falling and move to what is the key economic metric for Japan.

Workers will see a 1 percent increase in their total earnings next year, the most since 1997, as rising profits and the tightest labor market in decades add upward pressure on pay, a Bloomberg survey shows.

Actually what we are not told is that compared to so many Bloomberg reports this is a downgrade as in its world wages have been on the edge of a surge for 3-4 years now. But reality according to the Japan Times is very different as we note the size of the increase it is apparently lauding.

In a sign that worker could receive better pay, a separate survey on the average winter bonus at major companies this year showed a slight increase — 0.01 percent — from a year earlier to ¥880,793, up for the fifth consecutive year.

Comment

There are quite a few things to laud Japan for as we note its ultra low unemployment rate at 2.7% and the way it takes care of its elderly in particular. At the moment the economic wheels are being oiled by a positive world economic situation which of course helps an exporting nation. That poses a question for those crediting Abenomics for the improvement as we note the more recent surveys are not as positive and the rises in commodity and oil prices and the likely effect on a nation with limited natural resources.

But more deeply this weeks market moves are tactically perhaps just a response to the way that “Yield Curve Control” works in practice which currently requires fewer bond purchases. But strategically the Bank of Japan is left with this.

 

That tweet misses out the QQE for Japan and QE for the latter two but we return yet again to monetary policy being pro cyclical and in the case of Japan fiscal policy as well. What could go wrong in a country where demographics are a ticking economic time bomb?

 

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14 thoughts on “What is going on at the Bank of Japan?

  1. Hello Shaun,

    a small though on AI , why would you need cheap labour for menial jobs when Robotics
    will take those jobs away ?

    AI has taken jobs from manufacturing
    AI will take jobs away from services too – given time

    its a real conundrum for economists, if very few are employable does it matter if the workforce is shrinking ? How do you balance the profits of companies with the sure sign that in the end , if too few have a job , then those profits will fade away ?

    compare the economics of Japan – who can make a buck exporting , with the UK who seem intent on selling houses to each other at ever increasing prices …..

    I know which economy I’d like to be in 😉

    Forbin

    • Hi Forbin

      You make a good point about AI and Robotics. The truth is we do not know how the saga will work out. It is a bit like splitting the atom there are good roads ( power) and not so good roads ( bombs). The Japanese are pressing down the robotics route ( they are even using them for elderly care) because they remain anti-immigration but need help for their demographics from somewhere.

      How we and they will split the benefits and gains from AI and Robotics is worrying if we look at the way the ordinary person is being marginalised.

    • As soon as robotics start to replace unskilled labour in a large way, we should end ALL immigration, and make business train, rather than import its skilled employees.

  2. Great blog as usual, Shaun.
    The Japanese residential property price index for September 2017 had an annual inflation rate of 1.6%, down from 2.1% in August, as opposed to a CPI inflation rate of 0.7% in both months. From this it would seem that even if the Bank of Japan were monitoring an inflation indicator with a net acquisitions approach to owner-occupied housing rather than the rental equivalence approach found in the CPI, the inflation rate would still be well under the 2% target. I was unable to locate Excel workbooks online for the Japanese RPPI after April 2017, and only got the updated information from tradingeconomics.com, which doesn’t provide any detail at all. Does the Japanese Ministry of Land, Infrastructure, Transport and Tourism not want foreigners to see this detail anymore?

  3. Shaun, the FT ran an article this week regarding US yields. Bill Gross was “talking his book”, the commentry was critical of this new “bear” market but reading through a range of views I determined that if the US bonds made 2.6 or 2.7 then it was possibly true, now that was Wednesday and we’ve got close within 2 days. It could be a temporary change, maybe Japan caused it but definately there could be a shift here…

    What is your considered view. Is 2018 the year of run away inflation?

    • HI Paul

      I can see some demand pull inflation in the commodity sector which I wrote about back on the 5th of this month. But we are missing factors to pull it through into other sectors. For example the US CPI this afternoon had rises in the energy sector and shelter ( using rents for owner occupied housing works better in the US than UK) but so far not much else above 2%. So an oil price nearing US $70 for Brent Crude will have an impact but so far at least wont kick off other sectors.

      As to US Treasuries well the 2-year did break 2% but that is not even a positive real yield is it?

      • Sorry Shaun dont understand how the maturity profile affects things but 2% is low. Its still possible wages might run away after so many years of stagnation. Caused by Full employment, Brexit emigration and Boomer retirement although Ill admit its a longshot.

  4. Hi Shaun the demographics as you point out are not in Japan’s favour.
    However the ruling LDP under Abe and the BoJ the Del Boy and Rodney of economic policies ,money printing,bond buying,stock buying in fact buying anything that moves have zero chance of success and never did have.
    The Yen should have plummeted yet no matter how bad the debt numbers over 200% of GDP and the economic lunacy of Kuroda San .You have to ask what factors have caused fundamentals to be totally disregarded by currency market.

    • Hi Private Fraser

      We have discovered over time that QE or QQE in this case does not automatically make a currency a basket case. In Japan’s situation whilst the public sector is heavily in debt the nation has run current account surplus after surplus and has invested much of that overseas. So it is a substantial net overseas creditor and thus markets are always on their guide for signs of money going back home and if they think that might happen push the Yen higher.

      • Thanks for your views Shaun I agree that QE appears to have had little effect in part this is because they were not the only country money printing.
        However if there is much more of something it must be worth less.
        Fractional reserve banking and fiat currency work entirely due to confidence if it is lost its game over

        • Those who make a fortune from currency markets know that it does them no good to reduce major currencies to basket cases because of the domino effect.
          When they go, they’ll all go at once.
          Trump is trying to extricate $ from Agenda 2030, but it’s probably too late, & his efforts are so half-hearted.

  5. That reminds me how stupid “my” government acts (Germany) for quite a couple of years now while having very similar demographics. It follows Japans QE path, in addition will be hold liable for other countries debth in the EU, will lose TARGET2, lets immigrate huge amounts of not well educated men, and does not invest much in infrastructure and even more importantly education. I think Asyl is a good think generally and I like a lot Europe, but those policies won’t help both in the long run.

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