Has Abenomics in Japan found what it is looking for?

This morning has brought news from Nihon the land of the rising sun and no I do not mean that the summer has been especially hot this year peaking at above 40 degrees centigrade around Tokyo. I mean this from The Japan Times.

Separate data showed workers’ real wages rose 2.8 percent in June from a year earlier, accelerating from a 1.3 percent increase in May and marking the fastest pace of growth since January 1997.

We have been noting a change in the pattern and waiting for developments and the June numbers are good but come with a kicker. What I mean by this is that it is the month where around two thirds of the summer bonuses are paid so it is good for workers as the 2.8% is of a larger than normal amount as pay is 41% above average in the month. But the kicker is that the boost is mostly bonuses and therefore will fade.

Looking into the detail we see that nominal wage growth was 3.6% and was pulled higher by the manufacturing sector where the summer bonuses saw wage growth rise to 4.2%. It must have been party time in the wholesale and distribution sector as total wage growth rose at an annual rate of 10.7%. So there was an excellent bonus season as 3.6% growth replaced the 0.4% of this time last year.

What about base or regular pay?

This was by no means as good as contracted earnings rose at an annual rate of 1.5% and scheduled earnings at 1.3%. However these are better numbers than seen in 2017 or indeed in the Abenomics era. Just to give you the picture starting in 2014 annual growth has gone -0.1%, 0.2%,0.2% and 0.4% last year. When you consider that one of the Abenomics “arrows” was supposed to be higher wages that was quite a failure when you consider all the monetary easing.

Now the picture looks a little better as real wage rises have replaced falls albeit that they are small such that pressure is put on the accuracy of the data. They probably cannot take it but they are what we have.

Full employment

I get regularly asked what this concept is and if it is seen anywhere in practice Japan seems to be it. For example whilst the unemployment rate nudged higher to 2.4% in June it is extraordinarily low. The job applicant to vacancy ratio has been setting new highs at 2.47 according to Japan Macro Advisers. Thus economic theory would predict that wages would have been rising and frankly surging, after all the Bank of Japan estimated that the structural rate of unemployment was 3.5% as another Ivory Tower foundation bites the dust.

The blame game

At the end of last month the Bank of Japan published some new research on this issue. First we get something of a criticism of what is called Japan Inc.

Basically, the reason for this is that, under Japan’s
labor market structure, which is characterized by
different wage-setting mechanisms for regular and
non-regular employees, the increase in wages of
regular employees has been remarkably
sluggish.

This is pretty standard analysis world-wide of course except the degree of tightness of the labour market is exceptional in Japan. But the theme of employers being willing to do almost anything other than raising basic pay we have seen pretty much all over the world. However the next bit of research has more than a few implications.

With labor shortage intensifying recently, the pace
of increase in the labor force participation rate,
especially among women and seniors, is
accelerating.

Encouraging women to work has been a government objective and you can see the rise in older people working in two ways. One as a sign of good health in that they can but the second is not so positive as I have noted before some are forced to work because times are hard. A while back I noted the issue of retired women in Japan sometimes being very poor which is against its culture. Well if you throw all of these factors into the pot look what the Bank of Japan thinks you get.

In other words, among these groups,
there will be greater labor supply for the same rate
of increase in wages . As a result, as
labor demand increases (represented by a shift of
the labor demand curve to the right in the chart),
women and seniors will supply more labor, which
in turn suppresses wage increases.

So this has been a boost for Japan Inc which has increased its labour supply cheaply but not good for existing workers.

If the labor supply of women and seniors were not elastic,
wage increases likely would have been larger.

So it was them that done it if we look at it in tabloid terms but where the Bank of Japan does not go I will. You see if we go back to the critiques of the likely behaviour of Prime Minister Abe before he was elected there was the case that he would favour Japanese businesses and Japan Inc. Just like he had in his first term. Well is there anything they would like more than a cheap labour supply? Especially in a country which due to a shrinking population has a clear issue with labour supply.

Next comes the impact of a supply of cheap labour. This makes me think of the UK where the Ivory Towers tell us again and again that the increase in labour supply from net immigration did not affect wage growth. Now there are various factors to put in this particular melting pot but this research from the Bank of Japan is clearly heading in the opposite direction.

Productivity

Here is something you may not expect but I mention it from time to time so let me hand over to the Bank of Japan and the emphasis is mine.

One reason is that the productivity of
Japanese firms is relatively low and there is large
room to raise productivity, mainly in the
nonmanufacturing sector. In fact, Japan’s labor productivity remains at only 60 to 70 percent of the U.S. level.

Japan has been doing well in terms of growth recently but there are two issues. Firstly even 1.2% per annum is not great and secondly it has been forced on it as it looks to a future of labour shortages.

Comment

There is a fair bit to consider here. The rise in wages in June is welcome and the Yen in the workers pocket does not know whether it is a result of regular or bonus pay. But for now it looks like some icing on a similar cake. Combining this with the news on inflation that I discussed last time means that one area of Abenomics failure will in fact  be a positive here.

Another factor is that households are reluctant to
accept rises in housing rent and administered
prices given the low actual inflation rate and
inflation expectations ( Bank of Japan)

If we throw in imputed rent as well that is half the inflation measure. The Japanese do not know have lucky they are to have this and for all the Turning Japanese themes the Bank of Japan wants them to turn British in this respect. But if we move on from the detail we see that low inflation means this looks like a better year for real wages. Accordingly if we look back to my last update on this issue from a fortnight or so ago this from Gavyn Davies in the Financial Times looks even worse than it did then.

Even with very careful communication and forward guidance, monetary policy may not be sufficient, on its own, to reach the inflation target. Eventually, unconventional fiscal easing may also be needed, though this is not remotely on the horizon at present.

As ever the picture remains complex as so far the wages growth has yet to filter through.

Household spending fell 1.2 percent in June from a year earlier, government data showed on Tuesday, marking the fifth straight month of declines.

 

 

 

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Wages finally rise in Japan but are such small rises the future for us too?

This morning has brought news from the land of the rising sun or Nihon. Actually it is news that much of the media has been churning out over the Abenomics era when they have tried to report wage growth when there has not been any. However today the Ministry of Labor published some better news of the real variety.

Nominal cash earnings rose 2.1 percent year-on-year in March, the fastest annual gain since June 2003. It followed a revised 1.0 percent gain in February.

Regular pay, which accounts for the bulk of monthly wages, grew 1.3 percent in the year to March, the biggest gain since July 1997, while special payments jumped 12.8 percent as many firms offered their employees end-of-the-year bonuses.

Overtime pay, a barometer of strength in corporate activity, rose an annual 1.8 percent in March versus a revised 0.4 percent increase in February. (Reuters)

As you can see these numbers are something of a landmark in the lost decade era as we note the best overall earnings numbers since 2003 and the best regular pay data since 1997. Overtime pay was up too which is intriguing as the Japanese economy has not had the best start to 2018 and may even have shrunk in the first quarter ending a run of growth. Maybe this year Japanese employers are actually fulfilling their regular promises to raise wage growth.

Care is needed in that this is only one monthly number but after some revisions we see that 2018 so far has recorded annual wage growth of 1.2%,1% and 2.1%. These are low numbers but in the context are a shift higher. This can be explained if we look at the index for such numbers which is still only 101.9 after being set at 100 in 2015. We get an idea as it was 100 in 2014 as well and 100.6 in 2016 and 101 in 2017. Also we need to be aware that the main months for pay in Japan come in June/July and particularly December as for example pay in December is around double that for March but for now let us move on with a flicker of spring sunshine.

Is this the revenge of the Phillips Curve?

No doubt it is party time at the Ivory Towers although many may not have spotted this yet as of course news reaches them slowly. However I am still something of a “party pooper” on this subject as it still does not really work. Here is a tweet from a discussion I was involved in yesterday.

As you can see the state of play is very different between the American situation which we have looked at many times and the Japanese one. Female participation in the labour force changed with the onset of the lost decade era and male participation has picked up in the era of Abenomics although it had started around the beginning of the credit crunch.

If we look at the Abenomics impact I will let you decide if a major swing is good or bad. You see in the age group 55-64 the female participation rate is up by 10.2% in the past 6 years and the male one by 6.6%. I have written in the past that Japan looks after it older citizens well but there have been more and more suggestions that this is if not forced due to difficult circumstances. From the Independent on the 23rd of April.

For decades prior to this trend, it was a tradition for families and communities to care for their older citizens, but a lack of resources is making that harder to do so.

With the older population feeling more and more isolated as a result of this, women especially have turned to a life of crime in the hope that prison will provide them with a refuge and a home.

Returning to conventional economics there is also this to consider.

The number of unemployed persons in March 2018 was 1.73 million, a decrease of 150 thousand or 8.0% from the previous year.   The unemployment rate, seasonally adjusted, was 2.5%. ( Japan Statistics Bureau).

These are extraordinary numbers as it was 3.9% in 2007 so it has been singing along with Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

We cannot rule out the possibility it will fall even further as it was 2.4% in January. Also it is being combined with rising employment.

The number of employed persons in March 2018 was 66.20 million, an increase of 1.87 million or 2.9% from the previous year.

Inflation

I though I would add this into the mix as it provides something of an irony. The view of the Bank of Japan has been for so long that an annual inflation rate of 2% is just around the corner. Yet in its last report it lost the faith.

In terms of the outlook for prices, most members shared the view that the year-on-year rate of change in the CPI was likely to continue on an uptrend and increase
toward 2 percent, mainly on the back of the improvement in the output gap and the rise in medium- to long-term inflation expectations.

And later this.

the momentum of
inflation was not yet strong enough to achieve the price stability target of 2 percent at an
early stage.

Of course now with an oil price of US $77 for a barrel of Brent Crude they may see an inflationary push bringing them nearer to their objective. Of course they think inflation at 2% per annum is a good thing whereas I do not. After all even the recent better wage data would leave real wages flat in such a scenario.

We will have to see if oil prices remain here but for now the news just coming through that Saudi Arabia has intercepted two ballistic missiles seems set to support it.

Comment

Let me start with some good news for Japan which is that on what used to be called the Misery Index it is doing very well. It used to add the unemployment rate ( 2.5%) to the inflation rate ( 1%) and as you can see it is rather low. Very different to the double-digit numbers from the UK when it was a popular measure.

But for economic theory and for the Phillips Curve in particular this is much less satisfactory.  This comes partly from asking where has it been? Let me hand you over to the Bank of Japan.

(1) the actual unemployment rate had been substantially below 3.5 percent, which had formerly been regarded as the structural unemployment rate,

So wage growth should have been surging for ages and it has not. Now we face a situation which may be more like a cliff-edge that the smooth Phillips Curve. This is because on every measure Japan has been approaching full employment and in the mad world of economics 101 has in fact passed it.

(2) the recruitment rate of new graduates and the employment rate of women had risen
considerably.

In fact if you look at the demographic situation full employment seems set to be lower than it was due to the aging population as so far rising participation has offset it. But here is the rub if participation had not changed then unemployment would be below 2% now as we are left wondering what level would generate some real wages growth?

Meanwhile if we look back at the US participation data there were some chilling responses as to the cause. They looked at something which has troubled us before on here.

https://www.bbc.co.uk/programmes/b09yfqsy#play

 

However much the Tokyo Whale buys wages and consumption seem to struggle

On Wednesday evening the US Federal Reserve will announce its latest policy decision and it will be a surprise if it does not give US interest-rates another 0.25% nudge higher. Yet we see in an example of clear policy divergence other countries ploughing on with monetary easing. For example the European Central Bank continues with monthly QE of 30 billion Euros a month and still has a deposit rate of -0.4%. However the leader of this particular pack is the Bank of Japan especially if we look at other signals of what are known as side-effects. From Bloomberg last week.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading C0. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”

The latter part is simply part of the Japanese concept of face. One reason for this is the size of the holdings of the Bank of Japan.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

The latter sentence there is weak as pension funds and life insurers enact such strategies all over the world and have done so for decades so it is hardly their fault. Indeed quite the reverse s many national bond markets have relied on such purchases.

Whilst we keep being told the Bank of Japan is cutting back the amount of buying remains enormous.

Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.

The next bit contradicts itself as it seems to be claiming that if you buy everything you do not need to intervene. Oops!

The upside for the BOJ is that with such little going on in the market, it makes it easier to control the yield curve, with less need for intervention

The Bank of Japan is the yield curve it would seem which is we step back for a moment begs all sorts of questions. For example you might compare currencies as I have certainly done in the past by comparing bond yields yet in such a calculation there is the implicit assumption that you have a “market” rate. But no, we clearly do not in Japan and that is before we get to the moral hazard of it being set by a body trying to depreciate/devalue the Yen. Oh and if you are a Japanese bond trader you might want to send your CV to the Bank of Japan.

Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.

The Tokyo Whale

This for newer readers refers to the way that the Bank of Japan has piled into the equity market as well. The numbers are opaque as they are in several accounts but Bloomberg has been doing some number-crunching.

The BOJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank had spent $150 billion on Japanese ETFs as of Dec. 8. It owned 74 percent of the market at the end of October, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. ( ETFs are Exchange Traded Funds)

As the Nikkei-225 equity index fell by 195 points today we know that the Tokyo Whale would have been buying again.

The BOJ stepped up purchases in November after equities retreated, buying 598 billion yen of ETFs.

With there being a buy the dip strategy we can be sure that the Bank of Japan has been buying this year as there have been dips. If we were not sure then this morning’s release of “opinions” from the latest policy meeting reinforce the message.

If the current trends of the appreciation of the yen and the decline in stock prices become prolonged, business fixed investment and consumption will be restrained due to negative wealth effects and a deterioration of households’ and firms’ balance sheets,

Just for clarity the BOJ is breaking new ground here is it really believes that. Not by arguing for “wealth effects” as central bankers the world over are true believers in them. What I mean is the implication that they are larger than other factors at play whereas the evidence I have seen over time is that they are minor and thus often hard to find at all. Looking deeper we see that the BOJ seems to have little intention of changing course although a boundary is on the horizon as some holders must want to keep their ETFs meaning it cannot be long before it has to look for greener pastures.

Perhaps this are suggested last November, from Reuters.

The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank………By selling put options of Japanese stocks, the BOJ should be able to not only help bring down the stock market’s volatility but also to make it easier to wean the markets off its stimulus, said Katsunori Sago, a former Goldman Sachs (GS.N) executive.

Alumni of the Vampire Squid get everywhere don’t they? So the fact that the Bank of Japan’s policies have in effect been a put option for Japanese equities should be added to by writing actual put options. Who would be silly enough to buy these options from the Bank of Japan? It is hard to know where to begin with the moral hazard here.

If the BOJ sells out-of-the-money puts, for example, put option with strike price below the current market levels, it can reduce the market’s volatility, Sago said.

Er simply no. You can reduce perceived or implied volatility but should the market move there is actual volatility. Unless of course Sago san is suggesting that the Bank of Japan should intervene in equity markets on the same scale as it has in bond markets and I think there we have it. Whilst there would presumably be profits for equity holders as much of the Japanese markets are Japanese owned we are in many cases simply shifting from one balance sheet to another.

Yen

This is something that fits the famous Churchillian phrase.

 It is a riddlewrapped in a mystery, inside an enigma;

Why? Well it is something which all the buying above should according to economics 101 be on its way down and yet there it is at 106 to the US Dollar. You can argue the US Dollar has been weak but I note that the UK Pound £ has been pushed back to 148 Yen as well. We get a clue from this from the Nikkei Asian Review.

Foreign assets held by Japanese institutional and individual investors appear to have topped 1,000 trillion yen ($8.79 trillion) for the first time, according to Nikkei estimates. The amount has increased roughly 50% during the past five years and now is more than twice as much as the country’s gross domestic product.

The market has been responding to fears of a repatriation much more than any new flows. Also as the BOJ has to some extent driven investors overseas it has undermined its own weak Yen policy. We are back to timing effects where something may be true but for a limited time period, Keynes understood it but modern central bankers lack such humility.

Comment

We have looked at the financial economy today but lets us via the “opinions” of the Bank of Japan switch to the real economy.

For instance, although the structural unemployment rate was formerly said to be around 3.5 percent, the actual
unemployment rate has continued to decline and registered 2.4 percent recently.

I imagine each Board Member sipping from their celebratory glass of sake as they type that. But there is a problem as we see below.

Although wage increases by firms have been at around 2 percent for the past few years, real wages registered negative growth in 2017 on a year-on-year basis.

That claim about wage rises is news to me and also the ministry of labor but let us pass that as we note the fall in real wages admitted as we reach the nexus of all of this.

The weak recovery in household consumption since last summer is of concern.

You see one way of looking at the Japanese economy is of deficient domestic demand. So when we are in an official world of wealth effects, plunging unemployment and surging wages ( 2% is a surge in Japanese terms or at least it would be) it should be on the up whereas with a little poetic licence it seems still to be rather Japanese.

How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.

Wages

There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)

Comment

As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV

 

 

 

It is party and sake time at The Tokyo Whale as the Nikkei 225 hits highs

This week has brought a succession of news which will be welcomed by supporters of what has become called Abenomics and the Bank of Japan in particular. In fact the Bank of Japan will be pleased in two ways, one as an ordinary central bank and the other in its hedge fund style role as the Tokyo Whale. From The Japan Times.

The benchmark Nikkei average rose further and marked another 21-year closing high on the Tokyo Stock Exchange on Thursday, boosted by Wall Street’s overnight advance. The Nikkei 225 average gained 73.45 points, or 0.35 percent, to end at 20,954.72 — the best finish since Nov. 29, 1996.

Today this has gone one step further or for Madness fans one step beyond,

Let us start with the most recent period from when Abenomics was first likely to be applied to now. In that time the Nikkei 225 equity index has risen from around 8000 to 21000. As this was one of the policy objectives as according to the mantra it leads to positive wealth effects for the economy it will be regarded as a success. It may also help oil the wheels in the ongoing Japanese election. But you see there is another reason for the Bank of Japan to be happy about this because since a trial effort back in 2010 it has been buying Japanese shares via Exchange Traded Funds. A more regular programme started in 2012 and this was boosted in size and scale over time and here is the current position from the September monetary policy statement.

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.

So the Bank of Japan will have some considerable paper profits right now especially in the light of a clear behavioural pattern which I looked at on the 6th of June.

The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

The Nikkei Asian Review analysed this development like this.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

There have been various rumours over the years about central banks providing something of a “put option” for equity markets leading to talk of a “plunge protection team”, well here is one literally in action. The Japanese taxpayer may reasonably wonder why it is supporting equity investors in yet another example of a policy which the 0.01% will welcome in particular. But for now let is move on with the Governor of the Bank of Japan enjoying a celebratory glass of sake as he looks at the wealth effects of the equity market high and the paper profits in the Bank’s coffers.

The “Put Option” in practice

A paper had been written by Toby Nangle and Tony Yates on this. You may well recall Tony Yates as the person I had a debate with on BBC Radio 4’s Moneybox programme and that events since have not been kind to his views. Anyway they tell us this.

 the cumulative purchases by the Bank of Japanese equities are becoming substantial. We estimate the market value to have been just below ¥20 trillion at the end of July 2017, or around 3.2% of the total Japanese stock market, making the central bank the second largest owner of Japanese stocks after the Government Pension Investment Fund.

Indeed they find themselves producing analysis along the lines of my “To Infinity! And Beyond!” theme.

Without further adjusting the pace of ETF purchases, we project that the central bank will own 10% of the market sometime between 2022-2026, depending on the interim market performance.

First they look for an announcement effect.

We control for this by examining the excess returns of Japanese stocks versus global stocks two business days post-announcement in common currency (last column in Table 1). The relationship between the scale of purchases and the price change is positive in each episode, although the confidence we have in the relationship is not strong given such few data points.

Personally I would also be looking at the days ahead of the announcement as many of these type of events are anticipated and if you like “front-run” these days. Next we see they look for an execution effect and they struggle to find one as the Japanese market underperformed in the period they looked at compared to other equity markets. However we do get a confirmation of the put option in operation.

 we find that the Bank of Japan has timed the execution of its ETF purchase programme to coincide with episodes of market weakness, potentially with the aim of dampening price volatility.

Oh and “dampening price volatility” is the new reduce and/or stop market falls as otherwise it would also sell on days of market strength.

Will it spread?

This is slightly dubious depending on how you regard the actions of the Swiss National Bank which of course buys equities abroad which I presume they regard as the difference.

Japan has been alone in purchasing equities as part of its monetary easing programme, and the question of whether the purchase of equity securities is the next step along this path is of wider interest.

But I agree with the conclusion.

 Even if central banks in the US/Eurozone/UK achieve a lasting lift-off from the zero bound, and are able to shed asset purchases from their balance sheet, low central bank rates are discounted by markets to be a fact of life for the next decade or two, and the chance of needing to have recourse to unconventional measures appears very large.

Comment

Thank you to Tony and Toby for their paper but they use very neutral language and avoid any opinion on whether this is a good idea which tends to suggest a form of approval. Yet there are a myriad of problems.

The ordinary Japanese taxpayer is very unlikely to be aware of this and what is being done both in their name and with their backing. This is especially important if we consider the exit door as in how does this end?

There is a moral hazard problem in both backing and financing a market which disproportionately benefits the already well off. This gets added to by the latest scandal in Japan as the company below has been ( indirectly) backed by the Bank of Japan.

DJ KOBE STEEL SAYS FOUND MORE INSTANCES OF SHIPPED PRODUCTS WITH QUALITY PROBLEMS ( h/t @DeltaOne )

There are real problems here and is one of the arguments against central banks buying risky assets of this form and the clue of course is in the use of the word risky.

Next we have the issue of what good does it do? Yes some get an increase in their paper wealth and some will take profits. In a sense good luck to them, but as we note that this will be disproportionately in favour of the wealthy this is in my opinion a perversion of the role of a central bank.

On the other side of the coin is the current media cheerleading for equity markets of which this from Bloomberg this morning is an especially disturbing example.

To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009. Aided by an 8 percent drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount — $20 trillion — that is comparable to the total value of all equities nine years ago……… And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

You see congratulating people on doing well out of equity investments is very different to saying you should buy now at what are higher prices. Unless of course Bloomberg thinks they are more attractive at higher prices in which case perhaps it should be buying Bitcoin. Let me leave you with this which feels like something out of a dystopian science fiction piece.

Big companies are becoming huge, from Apple Inc. to Alibaba Group Holding Ltd.

Japan continues to see wages stagnate

A feature of the credit crunch era has been weak wage growth and in particular weak real wage growth. More than a few countries such as my own the UK have not seen real wages fully recover to their pre credit crunch peaks. If we look back we see that the assumptions of the Ivory Towers ( in the UK for example wage growth of ~4% and real wage growth of ~2%) were already built on rather shaky foundations as real wage growth was already fading. Sadly the Ivory Towers learned little as I note last week at its Inflation Report press conference the Bank of England was criticised for consistently over-estimating wage growth. Or if you like another Forward Guidance failure.

However the real front line for the malaise in real wage growth is to be found by looking east to Nihon or the land of the rising sun where there has been trouble for some time. The problem was described by the World Economic Forum back in June 2013.

According to a survey by Reuters in February, 85% of responding firms said they would maintain current wage levels or make further cuts this year. Japanese companies typically resort to wage cuts for workers with so-called life-long employment contracts rather than lay-offs to adjust for cyclical downturns or due to tougher price competition from abroad. As a result, the unemployment rate has been low, but wages continue to decline. Due to the strong protection of permanent workers, firms typically have redundant permanent workers, thus have no incentive to increase their wages.

People sometimes ask me about full employment but Japan has in some areas gone further and had a type of over employment. In the time I was working there people were employed to count numbers crossing walkways or to open lift doors. A nice service but not especially necessary. However there is another feature of the Japanese labour market which keeps wages low.

Worse yet, only a third of the Japanese labour force (typically older and male labour) has a permanent contract. The majority of the young and female labour force is working under a temporary contract with much lower salary and practically no job security, which creates a kind of caste system in the labour market.

Enter Abenomics

This was supposed to be something of a cure-all for the Japanese economy with higher inflation and GDP (Gross Domestic Product) growth boost wages. also the third arrow of Abenomics was supposed to be reforms to help deal with the labour market issues above. Regular readers will be aware that I doubted both routes from the beginning as Prime Minister Abe was an “insider” who in his previous term was guilty of what is called pork barrel politics. However places like Bloomberg and the Financial Times supported the new programme of Abenomics and have regularly produced headlines describing success even when the numbers do not describe that at all.

2016 was a better year

NHK News takes up the case.

Japan’s labor ministry says average monthly wages adjusted for inflation rose in 2016, the first increase in 5 years.

The data is the preliminary result of a nationwide survey.

The ministry says the average monthly wage, including bonuses and overtime pay, was about 315 thousand yen, roughly 2,800 dollars. That’s up 0.7 percent in real terms from the previous year.

The good news is that there was a rise albeit a small one. However there are several issues raised as we are 4 years or so into Abenomics and this is way below what was promised. There is also a clear fundamental flaw as wages were supposed to rise with higher inflation but instead we see this reported.

Lower consumer prices pushed the adjusted figure higher.

So exactly the opposite of what was intended! If we move to The Mainichi we see little sign of the promised reforms either.

The average monthly pay of full-time workers in 2016 increased 0.8 percent to 411,788 yen from the preceding year, while that of part-time workers was down 0.1 percent to 97,670 yen.

December

If we move to the data for the month of December we see an all too familiar pattern. From Reuters.

Japanese wages, on an annual inflation-adjusted basis, dropped in December for the first time in a year, government data showed on Monday, a setback for hopes that consumer spending can increase and help lift economic growth.

The decline was caused by a rise in the cost of living, which outpaced nominal pay hikes, officials said. Higher prices for items such as fresh vegetables have increased living costs.

Higher inflation driving real wages lower is somewhat awkward for Abenomics which plans for exactly the reverse! If we look at the numbers cash earnings were 0.1% higher than a year before so inflation did not have to be much to push real wages lower. The worst sector to be in was the utility one where wages fell by 2.8% and the best was the real estate sector where they rose 4.5%. This meant that real wages fell by 0.4% on a year before and December with its high level bonus payments meaning it is the peak month ( around 60% higher than the average) is the worst month for this too happen.

Prospects

Earlier I quoted from a wages survey from 2013 so how is that going now? From Reuters.

Nearly two-thirds of Japanese companies do not plan to hike their workers’ wages this year, a Reuters poll showed, a blow to Prime Minister Shinzo Abe’s campaign for higher pay to spur a recovery and a way to end two decades of deflation.

The Reuters Corporate Survey, conducted Jan. 4-17, also found that most wage gains over the past four years since Abe came to power have been minimal and that nearly one-quarter of firms have implemented none at all.

Indeed Reuters appears to have been reading me.

On the other hand, prices may increase as oil prices rebound, which will curb (inflation-adjusted) real wages and hurt households’ purchasing power,

Also this next bit makes grim reading for those in the media who have proclaimed success on the wage front in Japan.

The Corporate Survey also asked companies how much they have raised wages since 2012. Some 23 percent said they have kept overall wages unchanged, while 51 percent have raised them around 0.5-1.5 percent. Only 26 percent said wages had risen by about 2 percent or more.

Comment

Back on the 15th of May 2015 I pointed out my fears in this area.

If we look at real wages I note the number of references in rising wages in Governor Kuroda’s speech. Except real wages fell by 2.6% in the year to March which means that they have fallen in every month of the two years of QQE now.

There has been an improvement on an annual basis which you can see if I give you the real wages data, 2013 -0.9%,2014 -2.8%,2015 -0.9% and 2016 +0.7%. So it is possible to argue that there is an improving trend. Except the elephant in that particular room is that it is lower inflation which has driven that ads opposed to the higher inflation Abenomics is so keen on. Also you can see that the overall number for real wages is lower.

If we look back wages rose in Japan at the end of the last century but have fallen this and it is hard to avoid the thought that the numbers below have impacted here. From The Economist.

The number of 20- to 29-year-olds in Japan has crashed from 18.3m to 12.8m since 2000, according to the World Bank. By 2040 there might be only 10.5m of them. Cities like Tama are therefore playing not a zero-sum game but a negative-sum game, frantically chasing an ever-diminishing number of young adults and children.

It also looks at the Okatuma region.

Children have become so scarce that the large primary school is only about one-quarter full. Residents in their 70s outnumber children under ten by more than five to one

The Bank of Japan can do all the “yield curve management” it likes but even if it ends up buying the Japanese government bond market how will that improve the real economy and in particular wages? Still it could be worse you could be one of the footballers invited to play at the Fukushima TEPCO plant.

welcomes professional soccer players at Daiichi to show progress made at the power station

 

Central banks face up to Super Wednesday

One of the features of the times is the way that financial markets spend so much of their time front-running central banks. This creates quite an atmosphere today as they wait for the Bank of Japan early tomorrow UK time and then later in the day the US Federal Reserve. We have seen already an example of skittish trading as the Euro pushed above 1.12 versus the US Dollar for no apparent reason. Also it will be a nervous day in bond markets where the “tantrum” I wrote about on the 12th if this month is ongoing and of course has pushed markets in the opposite direction to all the central banking bond buying. The ten-year bond yield in Germany has nervous poked its head into positive territory albeit only at 0.02% as I type this and yet the ECB QE (Quantitative Easing) bond buying continues and across all the eligible Euro area nations (not Greece) it had reached some 1.034 trillion Euros as of the end of last week.

Bank of Japan

This faces quite a list of problems which adds to its conundrum as in many ways it is the central bank which has gone furthest. If you do a check list you go negative interest-rates, QE albeit called QQE, corporate bond purchases, commercial paper ( where it is as far as I recall alone)  as well as equities and commercial property via exchange traded funds.

Those wondering about the equity purchases might like to look back to my article on the Tokyo Whale as the Bank of Japan must own two-thirds of that market by now. Here is an update on this subject from Bloomberg last week.

The central bank is on course to become the No. 1 shareholder of 55 companies in Japan’s Nikkei 225 Stock Average by the end of 2017, according to estimates compiled by Bloomberg last month.

The Yen

This will be on the mind of the members of the Bank of Japan because it is not behaving as they would have hoped and expected. In the early days of Abenomics the Yen fell and against the US Dollar reached a nadir of just below 124 in early May 2015. The rally in the Yen began at the start of 2016 and has seen it move by 20 points from just below 122 to just below 102. Even worse for the Bank of Japan a fair bit of the strengthening followed this announcement in January,

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary.

We saw that the application of negative interest-rates with the hint of more worked for 24 hours in Yen terms. It went on a wild ride where it weakened for about a day but then surged and has with the occasional halt and back track continued in the same direction until now.

So another Ivory Tower has come crashing down as more QE ( called QQE in Japan as QE has become discredited) and negative interest-rates have led to a stronger and not weaker Yen in 2016.

Inflation

This is a clear area where things are made awkward for Abenomics as the stronger Yen means that there will be downwards pressure on inflation as commodities and oil get cheaper. That makes it harder for the Bank of Japan to hit its target of consumer inflation rising at 2% per annum. Here is the latest data on the subject.

The consumer price index for Japan in July 2016 was 99.6 (2015=100), down 0.2% from the previous month, and down 0.4% over the year….  The consumer price index for Ku-area of Tokyo in August 2016 (preliminary) was 99.6 (2015=100), up 0.1% from the previous month, and down 0.5% over the year.

As you can see prices are falling again which collapses another row of Ivory Towers as expanding the monetary base on this scale should lead to inflation in their models.

Now we get to something awkward which is that the lower rather than higher inflation is achieving an Abenomics objective. It has given Japan some real wage growth but by a completely different route to the one envisaged. Under Abenomics higher inflation was supposed to be accompanied by some sort of wages fairy which would sprinkle magic dust on the numbers.

So by an unexpected route Japan is getting an economic boost. Accordingly I can only completely disagree by this from Gavyn Davies in the Financial Times.

As a result, the inflation credibility of the BoJ has sunk to a new low, and the policy board badly needs to restore confidence in the 2 per cent inflation target.

The economy

This is not going so well as Bank of Japan policymaker Funo told us last week.

Looking ahead, sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow.

He was more specific later on the numbers.

the medians of the Policy Board members’ forecasts for the economic growth rate are 1.0 percent for fiscal 2016, 1.3 percent for fiscal 2017, and 0.9 percent for fiscal 2018, and the economy is expected to continue growing at a pace above its potential through the projection period.

Is he really saying that growth at such a low-level is above potential?Yes he is.

Japan’s potential growth rate, as estimated by the Bank, has declined to the range of 0.0-0.5 percent,

 

On a collective level we got news today on the population and ageing problem that Japan has. According to its Statistics Bureau the population fell by another 300,000 in the 6 months to the beginning of this month making it 126.6 million now. There are now 10.5 million people over 80 which only the “dismal science” would conclude is a bad thing.

Deposit Rates

Have raised the issue of people saving more when interest-rates get very low let me give you the Bank of Japan data on deposit rates. The ordinary depositor gets 0.002% and if you do a time deposit for a year you get 0.016% and for ten years between 0.2% and 0.3% per annum.

The Federal Reserve

It has been a dreadful year for Forward Guidance from the US central bank. The “three to five” interest-rate increases promised at the start of 2016 by John Williams of the San Francisco Fed have morphed into zero so far. As we approach the election changes will be less likely but not impossible. So it is now or after the election you would think. Except now relies on someone as cautious as Janet Yellen taking a risk. So I think we can expect yet more Open Mouth Operations and promises of future rises just like we have seen all year.

Comment

My job as an options trader in UK interest-rate markets used to involve predicting what central banks will do and whilst I had quite a few successes it is also true that sometimes it teaches you some humility. Let me remind you of another view of Japan which I have been pointing out on here in 2016. On an individual or per capita basis its performance is in fact okay and might point at us in the UK. So in my view it does not need all the monetary splashing around. Where the catch comes is the level of the national debt compared to output which in gross terms is very high (250% or so of GDP according to the IMF) and rising due to the fiscal deficit which does not fit well with a shrinking and aging population. Is it all about the debt then? Pretty much I think the idea that it will boost the economy is all Imagination.

It’s just an illusion, illusion, illusion

Illusion, illusion, illusion, illusion