The Jackson Hole symposium should embace lower inflation

Later this week the world’s central banks will gather at the economics symposium of the US Kansas Federal Reserve at Jackson Hole in Wyoming. The description can be found below.

The 2017 Economic Symposium, “Fostering a Dynamic Global Economy,” will take place Aug. 24-26, 2017.  (The program will be available at 6 p.m., MT, Aug. 24, 2017).

It is appropriate that they do not yet know the program as the world’s central bankers find themselves at a variety of crossroads which they are approaching from different directions. It is also true that after all their expansionary monetary policy and “masters ( and mistresses) of the universe” activities over the last decade or so they now approach one of the most difficult decisions which is how to exit these programs. For some this will simply mean a slowing of the expansion. This all looks very different to when a speech on Forward Guidance was eagerly lapped up by a receptive audience and quickly became policy in many countries. After all Open Mouth Operations make a central banker feel both loved and important as we all hang on every word. Oh and there is a clear irony in the title of “Fostering a Dynamic Global Economy” for a group of people whose propping up of many zombie banks has led to anything but. That is of course assuming anyone knows what the phrase means in practice!

The inflation issue

The issue here is highlighted by this from Bloomberg today.

The world’s top central bankers head to Jackson Hole amid growing unease about low inflation.

Of course central bankers and those in the media subject to their brainwashing program may think this but the ordinary worker and consumer will be relieved. Should any of the central bankers suffer from stomach problems no doubt they will be delighted to discover this from CNBC.

Hikma Pharmaceuticals Plc’s U.S. subsidiary has raised the price of a common diarrhea drug by more than 400 percent and is charging more for five other medicines as well, the Financial Times reported on Sunday……The average wholesale price of a 60 ml bottle of liquid Atropine-Diphenoxylate, a common diarrhea drug also known as Lomotil, went from about $16 a bottle to $84, the FT reported.

Central banker heaven apparently and what needs looking into in my opinion is the clear examples of price gouging we see from time to time. Also more mundane products are seeing price rises. From Mining.com last week.

The iron ore price is now trading up a whopping 43% from its 2017 lows struck just two months ago.

According to Yuan Talks the Dalian futures contract rose 6.6% today before price limits kicked in. It is not alone as the Nikkei Asian Review points out.

Three-month zinc futures were at their highest level in 10 years, at about $3,100 per ton, rising 26% over the same period.
Aluminum also rose 10% over the same period.

So as well as raising a smile on the face of the heads of the central banks of Canada and Australia there are hints of some commodity inflation about. This provides a counterpoint to the concerns about low inflation which in the Euro area and the US is not that far below especially when we allow for the margin of error.

Does QE lead to inflation?

Some care is needed here as of course we have seen waves of asset price inflation across a wide range of countries. But of course the statistical policy across most of the world is to avoid measuring that in consumer inflation. Then it can be presented as growth which for some it is but not for example for first time buyers. However one of the building blocks of economics 101 is that QE ( Quantitative Easing) leads to inflation. Yet the enormous programs in the US and the ongoing one in the Euro area have not got consumer inflation back to target and the leader of the pack in this regard Japan has 0% inflation. After all the money involved has it simply led to price shifts? That is especially awkward for Ivory Tower theorists as they are not supposed to be able to happen with ~0% inflation so I guess they sent their spouse out to fill up the car as the petrol/diesel price fell.

More deeply whilst the initial effect of QE should have some inflationary implications is there something in it such as the support of a zombie business culture that means inflation the fades. It could of course be something outside of the monetary environment such as changing demographics involving ageing populations. Perhaps it was those two factors which broke the Phillips Curve.

As to future prospects there are two issues at play. The US Federal Reserve will start next month on an exit road which I remember suggesting for the Bank of England in City-AM some 4 years ago. If you do not want QE to become a permanent feature of the economic landscape you have to start somewhere. The issue for the ECB is getting more complex mostly driven by the fiscal conservatism of Germany which means that a supply crunch is looming as it faces the prospect of running out of German bonds to buy.

Currency Wars

There are two specific dangers here which relate to timing ( during thin summer markets) and the fact that markets hang on every central banking word. Eyes will be on the Euro because it has been strong in 2017 and in particular since mid April when it did not quite touch 93 on its effective ( trade-weighted) index as opposed to the 98.7 the ECB calculated it at on Friday. It has put another squeeze on the poor battered UK Pound £ but of more international seriousness is yet another example of a problem for economics 101 as interest-rate rises should have the US Dollar rising. Of course there is a timing issue as the US Dollar previously rose anticipating this and maybe more, but from the point of Mario Draghi and the ECB there is the fear that cutting the rate of QE further might make the Euro rally even more. Although one might note that in spite of the swings and roundabouts along the way the Euro at 98.7 is not far away from where it all began.

The Bank of Japan is also facing a yen rallying against the US Dollar and this morning it briefly rose into the 108s versus the US Dollar. Whilst it is lower than this time last year the trend seemed to change a few months back and the Yen has been stronger again.

Comment

It is hard not to have a wry smile at a group of people who via Forward Guidance and Open Mouth Operations have encouraged markets to hang on their every word now trying to downplay this. If you create junkies then you face the choice between cold turkey or a gradual wind down. Even worse you face the prospect of still feeding addiction number one when a need for number two arises as sooner or later an economic slow down will be along. Or creating fears about low inflation when the “lost decades” of Japan has shown that the world does not in fact end.

If we move onto the concept of a total eclipse then I am jealous of those in the United States today. From Scientific American.

Someone said that it is like suddenly being in some sort of CGI of another world or maybe like a drug-induced hallucination that feels (and is) totally real.

No they have not switched to central banking analysis but if the excellent BBC 4 documentary ”  do we really need the moon?” is any guide we should enjoy solar eclipses whilst we still have them. Meanwhile of course there is Bonnie Tyler.

I don’t know what to do and I’m always in the dark
We’re living in a powder keg and giving off sparks.

 

 

 

 

The land of the rising sun sees rising GDP too

Today starts with good news from the land of the rising sun or Nihon. I do not mean the sporting sphere although there was success as a bronze medal in the men’s 4 by 100m relay was followed by silver and bronze in the men’s 50 km walk at the world athletics championships. There was also a near miss as Hideki Matsuyama faded at the US PGA  and did not become the first Japanese man to win a golf major. But the major good news came from the Cabinet Office as this from The Mainichi tells us.

Japan’s economy grew an annualized real 4.0 percent in the April-June period for a sixth straight quarter of expansion, marking the longest growth run since 2006, as private consumption and corporate spending showed signs of vigor, government data showed Monday.

If we convert to the terms we use there was 1% economic growth from the previous quarter which was quite a surge. Actually that is way beyond what the Bank of Japan thinks is the potential growth rate for Japan but let us park that for now and move on to the detail.  Reuters points out that consumption was strong.

Private consumption, which accounts for about two-thirds of GDP, rose 0.9 percent from the previous quarter, more than the median estimate of 0.5 percent growth.

That marked the fastest expansion in more than three years as shoppers splashed out on durable goods, an encouraging sign that consumer spending is no longer the weak spot in Japan’s economic outlook.

In fact so was investment.

Capital expenditure jumped by 2.4 percent in April-June from the previous quarter, versus the median estimate for a 1.2 percent increase. That was the fastest growth in business investment since January-March 2014.

The combination is interesting as this is something that Japan has wanted for a long time as its “lost decade(s)” of economic malaise have seen domestic demand and consumption in particular struggle. Some countries would be especially troubled by the trade figures below but of course Japan has seen many years of surpluses as this from the Nikkei Asian Review indicates.

 Japan’s current account surplus expanded in the January-June period to the highest level since 2007 as earnings from foreign investments moved further into the black, despite rising energy prices pushing up the overall value of the country’s imports, government data showed Tuesday.

 

Thus it is likely to see this as another welcome sign of strong domestic demand.

External demand subtracted 0.3 percentage point from GDP growth in April-June in part due to an increase in imports.

Those who look at the world economy will be pleased to see a “surplus” economy importing more.

Where does this leave Abenomics?

There are various ways of looking at this and the Japanese owned Financial Times leads the cheers.

‘Not a fluke’: Japan on course to record best GDP growth streak since 2000

“Not a fluke” is an odd thing to write because if you look at the GDP chart they provide we see several spikes like this one which imply it may well be er not only a fluke but another one. They are less keen to credit another form of Abenomics which is the way that the latest stimulus programme impacted with a 5.1% (21.9% annualised) rise in public investment causing a 0.2% rise in GDP on its own. Perhaps this is because of the dichotomy in this part of Abenomics where on the one hand fiscal expansionism is proclaimed and on the other so is a lower deficit! Also there are memories of past stimulus projects where pork barrel politics led to both bridges and roads to nowhere.

Actually the FT does then give us a bit of perspective.

 

Japan’s economy, as measured by real GDP, is now 7 per cent larger than when prime minister Shinzo Abe took office in late 2012, notes Emily Nicol at Daiwa Capital Markets.

That is a long way short of the original promises which is one of the reasons why the Japanese government page on the subject introduces Abenomics 2.0.  If we look at the longer-term chart below is there a clear change.

On such a basis one might think it was the US or UK that had seen Abenomics as opposed to Japan. Of course the figures are muddied by the recession created by the consumption tax rise in 2014 but the performance otherwise even with this quarter’s boost is far from relatively stellar.

Bank of Japan

It will of course be pleased to see the economic news although it also provides plenty of food for thought as details like this provide backing for my analysis that ~0% inflation is far from the demon it is presented as and can provide economic benefits. From Bloomberg.

The GDP deflator, a broad measure of price changes, fell 0.4 percent from a year earlier.

Board Member Funo confirmed this in a speech earlier this month.

The rate of increase for all items less fresh food and energy had remained on a decelerating trend, following the peak of 1.2 percent in winter 2015; recently, the rate of change has been at around 0 percent.

He of course followed this with the usual rhetoric.

The rate will likely reach around 2 percent in around fiscal 2019.

It is always just around the corner in not entirely dissimilar fashion to a fiscal surplus in the UK. As to the official view it is going rather well apparently.

Taking this into consideration, the Bank decided to adopt a commitment that allows inflation to overshoot the price stability target so as to strengthen the forward-looking mechanism in the formation of inflation expectations, enhance the credibility of achieving the price stability target among the public, and raise inflation expectations in a more forceful manner.

Make of that what you will. The reality is that the QQE programme did weaken the Yen but that effect wore off and inflation is now ~0% as is wage growth.

Comment

This growth figures are good news and let me add something that appears to have been missed in the reports I have read. Back to Board Member Funo.

In an economy with a declining population.

Thus the per capita or per person GDP numbers are likely to be even better than the headline. I would say that this would benefit the ordinary Japanese worker and consumer but we know that real wage growth has dipped into negative territory again. This provides a problem for Prime Minister Abe as when he came to power the criticisms were based around his past history of being part of the Japanese establishment. What we see nearly 5 years down the road is a lack of real wage growth combined with good times for Japanese corporate profitability. As to the reform programme there is not a lot to be seen and maybe this is why Board Member Funo was so downbeat.

In an economy with a declining population, as is the case in Japan, demand is expected to decrease for many goods and services; therefore, it will be important to adequately adjust supply capacity; that is, employees and production capacity to meet such a decreasing trend.

I do not know about you but trying to raise prices when you expect both demand and supply to fall seems extremely reckless to me.

As to the GDP numbers themselves we need a cautionary note as Japan has had particular problems with them and they are revised more and by larger amounts than elsewhere.

 

When will real wages finally rise?

One of the main features of the credit crunch era has been weak and at times negative real wage growth. This was hardly a surprise when the employment situation deteriorated but many countries have seen strong employment gains over the past few years and in some employment is now at a record high. Yet wage growth has been much lower than would have been expected in the past. As so often the leader of the pack in a race nobody wants to win has been Japan although there has been claim after claim that this is about to turn around as this from Bloomberg in May indicates.

It’s not making headlines yet, but wages in Japan are rising the fastest in decades, in a shift that’s poised to divide the nation’s companies — and their stocks — into winners and losers, according to Morgan Stanley.

No doubt this was based on the very strong quantity numbers for the Japanese economy which if we move forwards in time to now show an unemployment rate of 2.8% and a jobs per applicant ratio summarised below by Japan Macro Advisers.

Japan’s job offers to applicant ratio rose to 1.51 in June from 1.49 in May. The ratio is the highest in the last 43 years since 1974. While the number of job offers continue to rise along with the expansion in the economy, the number of job applicants are falling. With the shrinking population, Japan simply does not have a resource to meet the demand for labor.

I can almost feel the wind of the Ivory Towers rushing past to predict a rise in wages in such a situation. They will be encouraged by this from the Nikkei Asian Review on Friday.

The labor shortage created by stronger economic growth has prompted many companies to raise wages. Tokyo Electron, a semiconductor production equipment manufacturer, is a good example.

Tokyo Electron introduced a new personnel system on July 1 in which salaries reflect the roles and responsibilities of employees. Under the new system salaries will rise, primarily for junior and midlevel employees. The change will raise the total wages paid to the company’s 7,000 employees in Japan by about 2 billion yen ($18.1 million) annually.

This is something we see regularly where the media presents a company that is toeing the official line and raising wages. But I note that it is doing particularly well and expecting record profits so is unlikely to be typical. By contrast I note that there is another way of dealing with a labour shortage.

In April, Lumine, a shopping center operator, responded to an employee shortage among its tenants by closing 30 minutes earlier at 12 locations, or 80% of its stores. The risk was that shorter operating hours would cut revenue, but Lumine sales held steady in the April-June quarter.

Awkward that in many ways as for example productivity has just been raised with total wages cut.

What about the official data?

I will let The Japan Times take up the story.

Japan’s June real wages decreased 0.8 percent from a year before in the first fall in three months, labor ministry data showed Friday.
Nominal wages including bonuses fell 0.4 percent to ¥429,686 ($3,880), the first drop in 13 months, the Health, Labor and Welfare Ministry said in a preliminary report.

Up is the new down one more time. Also the official story that bonuses are leading growth due to a strong economy met this.

due mainly to a 1.5 percent decrease in bonuses and other special payments.

There is one quirk however which is that part-time wages are doing much better and rising at an annual rate of 3.1%. The catch is that you would not leave a regular job in Japan because those wages are lower and to some extent are catching up. How very credit crunch that to get wage growth you have to take a pay cut! Indeed to get work people had to take pay cuts. From the Nikkei Asian Review.

Japanese companies hired more relatively low paid nonregular employees during the prolonged period of deflation.

Now we find ourselves reviewing two apparently contradictory pieces of data.

 The number of workers in Japan increased by 1.85 million between 2012 and 2016……….Japan’s wage bill was 7% lower in May than at the end of 1997 — before deflation took hold.

Australia

You might not think that there would be issues here as of course the commodity price boom driven by Chinese demand has led to a boon for what we sometimes call the South China Territories. Indeed this from @YuanTalks will have looked good from Perth this morning.

The rally in industrial continues in . rebar limit up, surging over 6%

Yet according to the Sydney Morning Herald this is the state of play for wages.

But since 2012 and 2013, Australian workers have felt stuck in a holding pattern of slow wages growth. Wages for the whole economy increased by 1.9 per cent in the year to March just in line with inflation.

There are familiar issues on the over side of the balance sheet.

Families are also wrestling with rising electricity prices, skyrocketing property prices and high demand for accommodation has also forced up rents.

Even the professional sector has been hit.

When Sahar Khalili started work as a casual pharmacist eight years ago, she was paid $35 an hour. Over the years that has fallen to as low as $30 while her rent has more than doubled.

Actually there is something rather disturbing if we drill into the detail as productivity has done quite well in Australia ( presumably aided by the commodity boom) but wages have not followed it leading to this.

The typical Australian family takes home less today than it did in 2009, according to the latest Household Income and Labour Dynamics survey released this week.

These surveys are invariably a couple of years behind where we are but there are questions to say the least. Oh and the shrinkflation saga has not escaped what might be called a stereotypically Australian perspective.

“My beers are getting smaller,” he says.

The USA

Friday brought us the labour market or non farm payroll numbers. In it we saw that wage growth ( average hourly earnings) was at an annual rate of 2.5% which is getting to be a familiar number. There is a little real wage growth but not much which is provoking ever more food for thought as employment rises and unemployment falls. Indeed more and more are concentrating on developments like this reported by Forbes.

Starting pay at the Amazon warehouse, carved out of a large lot with a new road called Innovation Way designed for Amazon-bound trucks, is at $12.75, no degree required. For inventory managers with warehousing experience, the pay is $14.70 an hour and requires a bachelor’s degree.

The new warehouse offers 30 hour a week jobs because they slip under the state legislation on provision of benefits. In some parts of America they would qualify under the food stamp programme. No wonder that as of May some 41.5 million still qualified.

Yet the Wall Street Journal describes it thus.

a vastly improved labor market

Comment

This is a situation we have looked at many times and there is much that is familiar. Firstly the Ivory Towers have invented their own paradise where wages rise due to a falling output gap and when reality fails to match that they simply project it forwards in time. The media tends to repeat that. But if we consider the dangers of us turning Japanese we see that wages there are lower than 20 years ago in spite of very low unemployment levels. Over the past 4 years or so this has been always just about to turn around as Abenomics impacts.

My fear is that unless something changes fundamentally ( cold fusion, far superior battery technology etc..) real wages may flat line for some time yet. All the monetary easing in the world has had no impact here.

 

 

 

What evidence is there for a bond market bubble?

There is a saying that even a blind squirrel occasionally finds a nut. I am left wondering about this as I note that the former Chair of the US Federal Reserve Alan Greenspan has posted a warning about bond markets. From Bloomberg.

Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.

Actually that is troubling on two counts. The simplest is the existence of extraordinarily high bond prices and low and in some cases negative yields. The next is that fact that his successors in charge of the various central banks may start pumping more monetary easing into this bubble to stop it deflating and it being “bad for everyone”. Indeed maybe this mornings ECB monthly bulletin is already on the case.

Looking ahead, the Governing Council confirmed that a very substantial degree of monetary accommodation is needed for euro area inflation pressures to gradually build up and support headline inflation developments in the medium term.

Let us look at what he actually said.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

I find it intriguing that he argues that there is no bubble in stock prices which are far higher than when he thought they were the result of “irrational exuberance” . After all low bond yields must be supporting the share prices of pretty much any stock with a solid dividend in a world where investors are so yield hungry that even index-linked Gilts have been used as such.

What is a bubble?

This is hard to define but involves extreme price rises which are then hard to justify with past metrics or measurement techniques. With convenient timing we have seen a clear demonstration of one only this week as something extraordinary develops. From Sky Sports News.

Sky sources: Neymar agrees 5-year-deal at PSG worth £450m, earning £515,000-a-week after tax. More on SSN.

One sign that we are in the “bubbilicious” zone is that no-one is sure of the exact price as I note others suggesting the deal is £576 million. You could drive the whole London bus fleet through the difference. The next sign is that people immediately assure you that everything is just fine as it is normal. From the BBC.

Mourinho said: “Expensive are the ones who get into a certain level without a certain quality. For £200m, I don’t think [Neymar] is expensive.

To be fair he pointed out that there would however be consequences.

“I think he’s expensive in the fact that now you are going to have more players at £100m, you are going have more players at £80m and more players at £60m. And I think that’s the problem.”

Of course Jose will be relieved that what was previously perceived as a large sum spent on Paul Pogba now looks relatively cheap. Oh and did I say that the numbers get confused?

PSG’s total outlay across the initial five-year deal will come to £400m.

If Sky are correct the high property prices we look at will be no problem as he will earn in a mere 8 months enough to buy the highest price flat they could find in Paris ( £18 million). The rub if there is one is that the price could easily rise if they know he is the buyer!

The comparison with the previous record does give us another clue because if we look at the Paul Pogba transfer it has taken only one year for the previous record to be doubled. That speed and indeed acceleration was seen in both the South Sea Bubble and the Tulip Mania.

Perhaps there was a prescient sign some years ago when the team who has fans who are especially keen on blowing bubbles was on the case. From SkyKaveh.

West Ham were close to signing Neymar from Santos in 2010. Offered £25m but move collapsed when Santos asked for more money

Back to bonds

If we look at market levels then the warning lights flash especially in places where investors are paying to get bonds. If we look at the Euro area then a brief check saw me note that for 2 years yields are negative in Germany, France, Belgium, Italy and Spain. For Germany especially investors can go further out in terms of maturity and get a negative yield. Does that define a bubble on its own as they are paying for something which is supposed to pay you?! There are two additional factors to throw in which is that the real yield situation is even worse as over the next two years inflation looks set to be positive at somewhere between 1% and 2%. Also if we look at Spain with economic growth having been ~3% or so a year for a bit why would you buy a bond at anything like these levels?

Another sign of a bubble that has worked pretty well over time is that you find the Japanese buying it. So I noted this earlier from @liukzilla.

“Japanese Almost Triple Foreign Bond Buying in July” exe: buy or + buy => like a double chocolate pie

Here we do get something of a catch as the issue of foreign investors buying involves the currency as well. Whether that is a sign of the Euro peaking I do not know but in a way it shows another form of looking for yield if you can call a profit a yield. Also there is an issue here of Japanese investors buying foreign bonds not only because there is little or no yield to be found at home but also because the Bank of Japan is soaking up the supply of what there is.

Comment

If we survey the situation we see that prices and yields especially in what we consider to be the first world do show “bubbilicious” signs. If we look at my home country of the UK it seemed extraordinary when the ten-year Gilt yield went below 2% and yet it is now around 1.2%. Of course the Bank of England with its “Sledgehammer” QE a year ago blew so much that it fell briefly to 0.5% in an effort which was a type of financial vandalism as we set yet again assets prioritised over the real economy. What we are not seeing is an acceleration unless perhaps we move to real yields which have dropped as inflation has picked up.

So far I have looked at sovereign bonds but this has also spilled over into corporate bonds especially with central banks buying them. We have seen them issued at negative yields as well which makes us wonder how that all works if one of the companies should ever go bust. Yet we also need to remind ourselves that there are geographical issues as we look around as Africa has double-digit yields in many places and according to Bloomberg buying short dated bonds in the Venezuelan state oil company yields 152% although the ride would not be good for your heart rate.

 

 

Could the Japanese Government cope with an end to QE in Japan?

It is time for us to look east again to the land of the rising sun or Nihon. It remains in the grip of an extraordinary economic experiment as its central bank continues to offer freshly printed Yen ( albeit electronic rather than paper ones) on a grand scale in return for bonds, commercial paper , corporate bonds, equities and property so just about everything!

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline. …… The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.

Perhaps it was the scale of all of this that led much of the media to start writing articles that the Bank of Japan would reduce its operations or as it is now called “taper” them. Only on Friday I quoted this from the Wall Street Journal.

Japan shows Europe how to dial back stimulus without spooking investors

The Bank of Japan responds

Sadly for the media the word taper required the word reverse in front of it. From the Nikkei Asian Review only a few short hours later.

At 10:10 a.m. Japan time, the BOJ unleashed what a market manager for a leading brokerage called a “devastating” combination, announcing both a fixed-rate operation, in which the central bank agrees to buy unlimited bonds at a fixed yield, and an increase in the size of regular bond-buying operations. It was the first time the bank had executed such policies simultaneously.

So more is apparently less as we note that this bit could only have come from Japan.

When yields on 10-year Japanese government bonds hit 0.1% on Thursday evening, the central bank was forced to ring up Japan’s leading securities firms for advice.

What would they have done in places like Greece Italy or Portugal in the Euro area crisis or in the early days of my career when longer UK Gilt yields passed 15%?!

By Friday morning, 10-year JGB yields had reached 0.105% — the last straw

We will have to see what happens next but should the Bank of Japan feel the need to keep intervening this could be the state of play.

If the central bank keeps buying up 10-year JGBs as quickly as it did Friday, annual purchases could exceed new issuance, according to Takenobu Nakashima of Nomura Securities, burning through fuel for measures to combat a future yield surge.

Actually if it bought them all that would of itself tend to stop any yield surge. Although of course that is just the flow so there would still be an existing stock albeit one which the Bank of Japan owes a fair bit of.

Massive bond purchases have swollen the BOJ’s balance sheet to roughly the size of Japan’s gross domestic product

Around 90% I think. There are various issues here one of which has been conveniently pointed out by the European Central Bank this morning.

Worsened liquidity in domestic government bond market

They mean in the Euro area but imagine how much worse the state of play will be in Japan. We do know that trading volumes have dropped a lot so should the day come that the Bank of Japan decides to withdraw a lot of Japanese fingers will be crossed that past traders and buyers will return. The truth is we simply do not know.

Oh and I see some looking at the equity capital of the Bank of Japan implying it could go broke. But that misses the fact that not only is it backed by the Japanese Treasury but it is pursuing Abenomics a government policy.

Number Crunching

Currently Japan owes this according to Japan Macro Advisers.

At the end of March 2017, the Japanese general government owed a total of 1270.5 trillion yen in liability, equivalent to 236.4% of GDP. The liability includes 863 trillion yen of JGBs, 115.2 trillion yen of T-bills and 157.5 trillion yen of loans.

The Bank of Japan owns over 400 Trillion Yen of these so in round numbers if it wrote these off it would reduce the debt burden to ~160% of GDP. I am by no means suggesting this but if such a situation led to a lower value for the Japanese Yen well that is government policy isn’t it? Of course the danger of debt monetisation of that form is that the currency falls heavily or plummets in a destabilising fashion like Ghana saw for those who recall when I looked at its woes.

The Yen

This has been drifting lower recently and Friday’s news added to that with it now taking more than 114 Yen to buy one US Dollar. This continues a trend which began in the middle of last month.  A sign of the Yen weakness is that the poor battered UK Pound £ is near its post EU Leave vote highs at 147 Yen.

But none of this is anything like enough to spark off the amount of inflation required by Abenomics.

The Inflation Target

More than 3 years down the road after the Bank of Japan kicked off its QQE ( Qualitative and Quantitative Easing) effort we find ourselves noting this. From Japan’s Statistics Bureau.

The consumer price index for Japan in May 2017 was 100.4 (2015=100), up 0.4% over the year before seasonal adjustment, and the same level as the previous month on a seasonally adjusted basis……  The consumer price index for Ku-area of Tokyo in June 2017 (preliminary) was 99.8 (2015=100), the same level as the previous year before seasonal adjustment, and the same level as the previous month on a seasonally adjusted basis.

This represents not far off complete failure in spite of the rhetoric about defeating deflation as if Tokyo is any guide 0% is the new 2%. Although of course we have seen asset price inflation leaving us mulling how much of the rise in the Nikkei 225 equity index from around 8000 to the current 20000 is growth and how much inflation?

Often policies to raise inflation really mean wages growth so let us look at that. From The Japan Times.

Japan’s real wages in May gained 0.1 percent from a year earlier for the first rise in five months, the government said Friday.
Total cash earnings per worker, including base and overtime pay, increased 0.7 percent to an average ¥270,241 (around $2,300), the second consecutive monthly rise, the Health and Welfare Ministry also said in a preliminary report.

You can look at this in two ways. The first is that it is not much and the second is that it is about as good as it has got over the past decade or so. One area that is different to the West where we are worrying about workers in the gig economy is that wage growth in Japan is centred on part-time work. It appears to be the one area where conventional economics can breathe a sigh of relief.

Comment

The situation continues to see some gains but also some retreats as these two quotes from The Japan Times today indicates.

Japan ‘economy watchers’ sentiment rises in June for third straight month……..Core private-sector machinery orders defied expectations and fell in May, the second consecutive month of decline, due to weakness in the service sector, the government said Monday.

Of course the UK data on Friday reminded us of the problems that sentiment indicators can have as optimism emerged as a fall!

I would like to return to my central theme that Japan has done okay in many ways with 0% inflation especially as we note its demographic problem. So why all the bond buying? Well a debt burden does of course often require some inflation to ease the burden for debtors of which the largest debtor is the government. The biggest beneficiary has been the Japanese government which has been able to do a lot of its borrowing for pretty much nothing for a while. Could it afford a return to normality? At what bond yield would it find things difficult and would it have to apply austerity? A sort of road to nowhere……

 

 

Of weak wage growth and bond markets

Today I am going to look at some clear changes in the credit crunch era and the way that they link together. Let us start with a clear theme of these days about which there has been news this morning from the land of the rising sun. From Japan Macro Advisers.

The demand/supply condition in the labor market seems as tight as it could be. In May 2017, Japan’s job offers to applicant ratio soared to a 43-year high of 1.49. The increase in the job-offers-applicant ratio marks the third consecutive monthly rise. The current print exceeds the July 1990 levels (1.46) when the Japan economy was enjoying a bubble economy.

It makes you think that the labour market is on this measure stronger than it was than when Japan’s economy was at its peak albeit an unsustainable one. Actually on another measure the situation is so tight they need to look even further back.

New job offers to applicant ratio also show that there is simply not enough supply of labor in Japan. The new job offers to applicant ratio rose to 2.31 in May from 2.13 in the previous month. This marks the highest level of this ratio since November 1973.

As you can see by these measures the labour market is very tight in Japan and is reinforced by these ones reported by Market Insider.

The number of employed persons in May was 65.47 million, an increase of 760,000 or 1.2 percent on year.

The number of unemployed persons in May was 2.10 million, a decrease of 70,000 or 3.2 percent on year.

On the month ( May ) the unemployment rate did rise to 3.1% but as you can see the overall trend seems to be lower in spite of the fact that it is extraordinarily low. Indeed as we have discussed before theories such as the “natural rate of unemployment” or “full employment” are pretty much torpedoed by it as we mull how employment can be more than full?

But if we move to wage growth which according to econ 101 should be soaring we instead see this. From Japan Macro Advisers.

In April 2017, basic and overtime wages, otherwise known as regular wages, rose by 0.4% year on year (YoY), recovering from a decline of 0.1% YoY in March. While an increase in wages is a better news than a decline, the magnitude of the rise continues to be underwhelming.

Quite. As to the real wage growth promised by Abenomics and  reported by the financial  media?

The real wage growth, after offsetting for the inflation in consumer prices, was 0.0% YoY,

So Japan should be seeing wage growth but instead it is flat lining. If we are “Turning Japanese”  then the next bit of news is even worse you see that current wage index for full-time workers is 101 giving an initial though that there has not been much growth since it was based at 100 in 2015. But if you look back the peak in the series was 104.4 in January 2001 and no that is not a misprint.

A possible cause of this is highlighted below and it does provide food for thought as of course Japan is leading the way on a road that many others will be travelling.

The working age population in Japan, defined as the population of the age between 15 and 64, has been shrinking rapidly. In 2016, the work age population in Japan fell by 0.7 million people. Accordingly, job applicants have been declining by 5% per year in the last few years.

Moving On

If we look wider afield we see that wages are struggling beyond the shores of Japan as this from Reuters reminds us.

Wage growth across the developed world is weak. It’s only 2.5 percent in the United States and 2.1 percent in Britain.

It is interesting to note that the have real average hourly earnings falling at an annual rate of 1.3% in the US. The chart below shows that this particular dog is not barking.

Even the figures for Germany are no great shakes when we note this from this morning’s release on the labour market.

In May 2017, roughly 44.1 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). This was a record high since German reunification.

In the UK we have seen quite a change as fears of robots taking everyone’s jobs have been replaced by fears of a former Chancellor of the Exchequer doing so.

George Osborne, the editor of the Evening Standard and former chancellor of the exchequer, has added a sixth job to his portfolio – that of honorary professor of economics at the University of Manchester.

For some Friday humour here are some suggestions for George from the past.

Bond Markets

This week has seen bond markets fall as they try to adjust to a barrage of rhetoric and open mouth operations from central bankers. Those who immediately hid behind a sofa when Janet Yellen told us there would not be another financial crisis in our lifetimes will have missed U-Turns by the ECB and the Bank of England. Also there has been a rather bizarre PR campaign conducted by Bank of England Chief Economist Andy Haldane puffing him up to be the next Governor of the Bank of England on the grounds that he keeps forecasting wages incorrectly. Do I have that right?

We see that the ten-year yield in Germany has risen to 0.47% at one point this morning. If we stay with that whilst it is up that only takes it to around where it was in some of both February and March and indeed May. So not quite as being reported in many places. If we look at the UK the ten-year Gilt yield nudged 1.29% this morning. But if we step back these are very minor moves for markets that really believe what the central bankers are saying which is of course yet another failure for Forward Guidance.

Comment

I wanted to like these two factors ( wage growth and bond yields) because they provide a link to what has happened in 2017. I thought and wrote that it would be a rough year for bond markets based on rising consumer inflation whereas they appear to have looked at low rates of wage growth instead. Of course there have been all the central banking QE purchases but they were a known factor.

As to wages growth itself regular readers will be aware that I fear it is in fact worse than we are told due to the exclusion of the self-employed from the numbers. But also employment figures do not tell the whole story as this from Mario Draghi in Sintra tells us.

Another reason why there is some uncertainty over slack is the correct notion of unemployment – that is, there may be residual slack in the labour market that is not being fully captured in the headline unemployment measures. Unemployment in the euro area has risen during the crisis, but so too has the number of workers who are underemployed (meaning that they would like to work more hours) or who have temporary jobs and want permanent ones…….If one uses a broader measure of labour market slack including the unemployed, underemployed and those marginally attached to the labour force – the so-called “U6” – that measure currently covers 18% of the euro area labour force.

Maybe the weak wage growth is much less of a surprise than we are often told. Especially as it comes with an implied kicker that everything is okay due to this. From Reuters.

In the United States, household net wealth has soared by $40 trillion since the beginning of the expansion in 2009 to $95 trillion from $55 trillion. It is up $11 trillion in just the last two years.

Well that’s okay then is the message, except it isn’t or we would not be where we are.

 

 

Abenomics does not address the economic problems facing Japan

At the moment Japan must be looking at the UK with some bemusement. That is because it has been a country with political instability with a merry-go-round of Prime Ministers and yet an axis has shifted. We are now in a type of flux whereas Prime Minister Shinzo Abe has been in power since November 2012. This means that his economics policy of Abenomics has had a decent run in terms of time and yet again we see someone who has taken the Matrix style blue pill and declared it a success. Let me hand you over to Matt O’Brien of the Washington Post.

Its unemployment rate has fallen to a 22-year low of 2.8 percent — yes, you read that right — due in large part to all the yen it has created the past four years.

The former which we have looked at before is a success and it is the flip side of this.

Maybe the best way to tell isn’t its super-low unemployment rate, but rather its super-high employment rate. That, as you can see below, has shot up since the start of Abenomics to an all-time high of 83.5 percent, making our own 78.3  ( He means the US ) percent rate look downright measly in comparison.

Again a success in itself as the quantity measures in the labour market are as strong as anywhere. But then we get an enormous leap of what I can only call faith.

It can’t be the fiscal or structural parts of Abenomics, because they’ve barely been tried……..All their money-printing seems to have given businesses the confidence — and the cheaper currency — they needed to expand a little more.

Thus we see a conclusion that the money printing has led to higher employment. Some would argue that with a fiscal deficit of 4.8% of GDP in 2015 and 4.5% last year with a debt to GDP ratio that fiscal stimulus had been tried rather a lot. Also there seems to be any lack of a causal relationship as the phrase “seems to have” suggests. Let us finish with some hyperbole.

And all it would have taken was printing a few trillion yen, which actually isn’t that high a price to pay.

Numbers may not be a strength for Matt as we remind ourselves of this from the 6th of this month.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets,

Taking the red pill

Dissent in Japan is mostly considered to be non-Japanese so this from the Nikkei Asian Review ( NAR ) is interesting. First the ground is described.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013,

Okay so what has happened since then?

But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

If we return to the case made by Matt O’Brien above the fact that estimates of the potential growth rate have fallen seems to be missing doesn’t it? That is awkward for business supposedly being more confident in response to a promise to print money to infinity and maybe beyond. The tectonic plates on which supporters of QE stand would be on their own Ring of Fire if there are further suggestions that it reduces potential economic growth. I have been a critic of QE style policies and note that this below suggests yet another problem with the claimed transmission mechanism.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

The NAR seems to agree with me about the trajectory of fiscal policy as well.

In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

Also the NAR fires a lot of criticism at the so-called third arrow of Abenomics which is reform in Japan.

The debate on compensation for unfairly dismissed employees has stalled. While Tokyo opened the door for foreign workers with exceptional skills or those in certain sectors such as cleaning, it has shied away from a comprehensive discussion on immigration. Momentum to tackle regulatory barriers is fading.

It points out that if Abe wished to reform the labour market politically he is in what might be called a “strong and stable” position due to the way his party the LDP controls both the upper and lower houses in parliament.

The economy

There was some disappointment last week as the economic growth figures for the first quarter took a downwards revision.

The expansion in real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, was revised to an annualized 1.0 percent growth from the previously estimated 2.2 percent expansion, the Cabinet Office said. ( The Japan Times ).

The good part of that was that it meant that Japan had grown for five quarters in a row which it had not done for over a decade. There were two bad parts though in that as well as being in the economic growth dog kennel with the UK there was an implication for the Abenomics plan of boosting inflation to 2% per annum.

In  nominal terms, or unadjusted for price changes, the economy shrank an annualized 1.2 percent, the biggest contraction since 2.2 percent registered in the July-September period of 2012.

Also the period of Abenomics was supposed to see a rise in inflation and more particularly a rise in wages. As the Japan Times reminds us the labour market is tight.

Moreover, there were 148 job positions open for every 100 people looking for work, the highest ratio in 43 years.

But wage growth is at best anemic.

But the labor ministry reported that in 2016, wages across the board — regardless of whether we’re talking full-time or part-time employment, regular or nonregular employees — only rose by 0.4 percent

Why? Well as we observe in some many countries official definitions of being in a job miss changes in the real world.

a larger portion of the workforce is in part-time and non regular jobs, which traditionally pay less.

Comment

There have been some extraordinary claims made for the success of monetary easing and QE. In my opinion we see a clear divorce between the financial and real economy. If we look at the financial economy in the era of Abenomics we see booming equity markets ( the Nikkei 225 has risen from 9000 or so to ~20,000), a lower currency ( versus the US Dollar it has gone from 80 to 110) and booming bond markets with a ten-year yield of 0%. But the real economy has not seen the boom in wages promised nor any great turn in the rate of GDP growth. Ironically it has been the recent fall in inflation that seems to have given GDP an upwards push rather than the claimed surge to 2% per annum.

Meanwhile the real challenge is adapting to this.

The annual number of babies born in Japan slipped below 1 million in 2016 for the first time since records began, with the estimated figure for the year coming in at 981,000, according to government figures. ( Japan Times)

The reminds us of the demographic changes underway highlighted by the fact that the figures for the 6 months to May showed the population falling by another 245,000. Exactly how will QE fix those?