In the future will equities be allowed to fall?

The credit crunch era has seen an enormous expansion of monetary policy activity which has manifested itself in two main ways. We have seen interest-rates cut not only to zero but below it into negative territory. Then we saw enormous expansion of central bank balance sheets as well as Quantitative Easing style policies were added to the play book. Indeed this is continuing apace in both the Euro area and Japan and the latter of course has moved into newer areas as well. Japan Macro Advisers have updated us on the current state of play.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets, of which Japanese government securities accounted for 427.2 trillion yen.

I think we have a new candidate for the largest number we have used on here! That sends out its own message but also there is the issue that some 14.7% of the total is not purchases of Japanese government bonds or JGBs. So what might be regarded as conventional QE is already out of date as we note that the Bank of Japan calls its operations Quantitative and Qualitative Easing or QQE.

What is it buying?

You might expect this as after all both the Bank of England has recently and the ECB currently, have ventured into this area.

As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively. ( CP is Commercial Paper ).

Whether it does much good is of course another matter as it ossifies economic structures but subsidising larger companies who are able to issue such debt whereas smaller ones cannot. But the main game here is shown below.

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.

Here we see intervention in a different sphere as both property and equities are being bought here. The property purchases are relatively small, if you can say that about 90 billion! But the main game in town is the equity purchases.

For comparison here is the plan for what is conventional QE.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline.

The target level of JGB yields is around 0% for the ten-year.

The Tokyo Whale

Just over a year ago on the 25th of April I alerted readers to what was taking place.

They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank……….It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.

That begged more than a few questions as for example shareholders are supposed to hold company directors to account and sometimes provide direction to the business. How can a central bank possibly do that? There is of course the issue of potential losses as well before we get to the creation of a false market.

Let us bring this up to date with thanks to the Nikkei Asian Review.

Japan’s central bank nearly doubles ETF holdings in one year.

With the rate of purchases we looked at above I suppose that is no great surprise but there are genuine questions as to where this is taking us?

The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013.

Will stock markets be allowed to fall?

I do not mean on a day to day basis as for example the Nikkei 225 equity index dipped below 20,000 earlier today. But I am starting to wonder about this in terms of sustained corrections. Why? Well take a look at this from the Nikkei Asian Review.

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

At what point did central bankers become experts in where share prices should be at? If anybody else did this they would be facing accusations of creating a false market. The point gets reinforced later.

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

This is quite different to central banks responding to a market collapse and panic in terms of timing,size,scale and indeed intention. There is also the danger of a Buzz Lightyear “To Infinity! And Beyond!” reality as we mull the consequences of this.

The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.

So that poor battered can has been kicked into the future one more time! If we cannot allow equity market falls now how will we be able to in say 5 years time? This leaves the Bank of Japan sounding rather like Elvis Presley.

Don’t you know I’m caught in a trap?
I can’t walk out

As time goes by the situation will go from bad to worse in terms of market manipulation.

Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.

Also all the jokes and humour about a “Plunge Protection Team” stopping equity market falls move from satire to reality.

Comment

There is much for us to consider here. So far the expansion of central bank activity has not been put into reverse. Even the US Federal Reserve which has nudged interest-rates higher has only talked about reducing its balance sheet as opposed to actually doing it. Others are still chomping away like Pac-Men and Women but the scale of their purchases is increasingly posing problems for government bond markets.

Should the next recession or slow down hit before we see any form of exit strategy then there will be much less scope to buy government bonds. Now that the Bank of Japan has broken the moral barrier around buying equities and indeed property such a scenario would see others follow. If we look at the UK then as the current Bank of England Governor is a “dedicated follower of fashion” he would be likely to join the party.

There are a lot of catches here as we look forwards to a potential future. Equities are supposed to provide a form of price discovery as individuals buy and sell and hopefully there is investing in what are good ideas and people. Central banking bureaucrats are unlikely to add any value here.There attempts so far have fallen on stony ground.

Despite the initial excitement among major financial institutions, the Bank of Japan’s push for exchange-traded funds tracking companies that actively raise employee pay or invest in new equipment has run aground. ( Nikkei Asian Review)

But their loudspeakers should have Yazz on repeat in terms of equity indices..

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now

 

What next for the world of negative interest-rates?

There were supposed to be two main general economic issues for 2017. The first was the return of inflation as the price of crude oil stopped being a strong disinflationary force. The second was that we would see a rise in interest-rates and bond yields as we saw an economic recovery combined with the aforementioned inflation. This was described as the “reflation” scenario and the financial trade based on it was to be short bonds. However we have seen a rise in inflation to above target in the UK and US and to just below it in the Euro area but the bond market and interest-rate move has been really rather different.

Negative Official Interest-Rates

Euro area

These are still around particularly in Europe where the main player is the European Central Bank. This plays out in three main areas as it has an official deposit rate of -0.4%, it also has its long-term refinancing operations where banks have been able to borrow out to the early 2020s at an interest-rate that can also be as low as -0.4% plus of course purchasing sovereign bonds at negative yields. So whilst the rate of monthly bond purchases has fallen to 60 billion Euros a month the envelope of negative interest-rates is still large in spite of the economic recovery described earlier this week by ECB President Draghi.

As a result, the euro area is now witnessing an increasingly solid recovery driven largely by a virtuous circle of employment and consumption, although underlying inflation pressures remain subdued. The convergence of credit conditions across countries has also contributed to the upswing becoming more broad-based across sectors and countries. Euro area GDP growth is currently 1.7%, and surveys point to continued resilience in the coming quarters.

Indeed the economic optimism was turned up another notch by the Markit PMI business surveys on Tuesday.

The PMI data indicate that eurozone growth remained impressively strong in May. Business activity is expanding at its fastest rate for six years so far in the second quarter, consistent with 0.6- 0.7% GDP growth. The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic………

That is better than “resilience” I think.

Sweden

This is one of the high fortresses of negative interest-rates as you can see from the latest announcement.

The Executive Board decided to extend the purchases of government bonds by SEK 15 billion during the second half of 2017 and to hold the repo rate unchanged at −0.50 per cent. The repo rate is now not expected to be raised until mid-2018, which is slightly later than in the previous forecast.

As you can see a move away from the world of negative interest-rates seems to have moved further into the distance rather than get nearer. If you look at the economic situation then you may quite reasonably wonder what is going on here?

Swedish economic activity is good and is expected to strengthen further over the next few years. Confidence indicators show that households and companies are optimistic and demand for exports is strong. The economic upturn means that the demand for labour is still strong.

We do not have the numbers for the first quarter but we do know that GDP ( Gross Domestic Product) increased by 1% in the last quarter of 2016. If you read the statement below then it gets ever harder to justify the current official interest-rate.

Rising mortgage debt is a serious threat to Sweden’s economy while regulators need to introduce tougher measures to strengthen banks against future shocks, the central bank said in its semi-annual stability report, published on Wednesday………Swedish house prices have doubled over the last decade. Apartment prices have tripled. Household debt levels – in relation to disposable income – are among the highest in Europe.

Switzerland

The Swiss National Bank feels trapped by the pressure on the Swiss Franc.

The Swiss franc is still significantly overvalued. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are necessary and appropriate to ease pressure on the Swiss franc. Negative interest has at least partially restored the traditional interest rate differential against other countries.

You may note that they are pointing the blame pretty much at the ECB and the Euro for the need to have an interest-rate of -0.75% ( strictly a range between -0.25% and -1.25%).

Denmark

As you can see Denmark’s Nationalbank has not moved this year either.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

The 2016 move left it a little exposed when the ECB cut again later than year but it remains firmly in negative interest-rate territory.

Japan

Until now we have been looking at issues surrounding the Euro both geographically and economically but we need to go a lot further east to see the -0.1% interest-rate of the Bank of Japan. Added to that is its policy of bond purchases where it aims to keep the ten-year yield at approximately 0%. So there is no great sign of a change here either.

 

The United States

Here of course we have seen an effort to move interest-rates to a move positive level but so far we have not seen that much and it has not been followed by any of the other major central banks. Indeed one central bank which is normally synchronised with it is the Bank of England but it cut interest-rates and expanded its balance sheet last August so it has headed in the opposite direction this time around.

This theme has been reflected in the US bond market where we saw a rise in yields when President Trump was elected but I note now that not much has happened since. The ten-year Treasury Note now yields around 2.25% which is pretty much where it was back then. We did see a rise to above 2.6% but that faded away as events moved on. Even the prospect of a beginning of an unwinding of all of the bond holdings of the Federal Reserve does not seem to have had much impact. That seems extraordinarily sanguine to me but there are two further factors which are at play. One is that investors do not believe this will happen on any great scale and also that there is no rule book or indeed much experience of how bond markets behave when a central bank looks for the exit.

How much?

There was a time when we were regularly updated on the size of the negative yielding bond universe whereas that has faded but there is this from Fitch Ratings in early March.

Rising long-term sovereign bond yields across the eurozone contributed to a decline in outstanding negative yielding sovereign debt to $8.6 trillion as of March 1 from $9.1 trillion near year-end 2016.

The fall such as it was seemed to be in longer dated maturities.

The total of negative-yielding sovereign debt with remaining maturities of greater than seven years fell significantly to $0.5 trillion as of Mar. 1 from over $2.6 trillion on June 27 2016.

Since then German bond yields have moved only a little so the general picture looks not to be much different.

Comment

I wanted to point out today the fact that whilst it feels like the economic world has moved on in 2017 in fact the negative interest-rate and yield story has changed a lot less than we might have thought. It has fallen out of the media spotlight and perceptions but it has remained as a large iceberg floating around.

One of my themes has been that we will find out more about the economic effects of negative interest-rates as more time passes. Accordingly I noted this from VoxEU yesterday.

Banks throughout the Eurozone are reluctant to cut retail deposit rates below zero, wary of possible client reactions

That has remained true as time has passed and it seems ever clearer that the banking sector is afraid of a type of deposit flight should they offer less than 0% on ordinary retail savings. That distinguishes it from institutional or pension markets where as we have discussed before there have been lots of negative yields and interest-rates. Also if we look at average deposit rates there remain quite large differences in the circumstances.

For example, the average rate on Belgian deposits has dropped to 0.03%. If Belgians took their money across the border, they could get almost ten times that in the Netherlands (0.28%). In France even, rates average 0.43%.

If we move to household borrowing rates we see that there are much wider discrepancies as we wonder if at this level we can in fact call this one monetary policy?

The Finns borrow against 1.8%, the Irish pay 3.6%

Some of the differences are down to different preferences but as the Irish borrowing is more likely to be secured ( mortgages) you might reasonably expect them to be paying less. Oh and as a final point as we move to borrowing we note that rates are a fair distance from the official ones meaning that the banks yet again have a pretty solid margin in their favour, which is somewhat contrary to what we keep being told.

The 0% problem of Japan’s economy

Today I intend to look east to the land of the rising sun or Nihon where the ongoing economic struggles have been a forerunner to what is now happening to western economies. Also of course Japan is intimately tied up with the ongoing issue and indeed problem that is North Korea. And its navy or rather maritime self-defence force is being reinforced as this from Reuters only last month points out.

Japan’s second big helicopter carrier, the Kaga, entered service on Wednesday, giving the nation’s military greater ability to deploy beyond its shores………..Japan’s two biggest warships since World War Two are potent symbols of Prime Minister Shinzo Abe’s push to give the military a bigger international role. They are designated as helicopter destroyers to keep within the bounds of a war-renouncing constitution that forbids possession of offensive weapons.

We cannot be to critical of the name misrepresentation as of course the Royal Navy badged its previous aircraft carriers as through deck cruisers! There are of course issues though with Japan possessing such ships as the name alone indicates as the last one was involved in the attack on Pearl Habour before being sunk at Midway.

Demographics

This is a crucial issue as this from Bloomberg today indicates.

Japan Needs More People

The crux of the problem will be familiar to regular readers of my work.

Japanese companies already report they can’t find people to hire, and the future isn’t likely to get better — government researchers expect the country’s population to fall by nearly a third by 2065, at which point nearly 40 percent will be senior citizens. There’ll be 1.3 workers for every person over the age of 65, compared to 2.3 in 2015.

So the population is both ageing and shrinking which of course are interrelated issues. The solution proposed by Bloomberg is rather familiar.

It’s plain, however, that he needs to try harder still, especially when it comes to immigration……..Researchers say that to maintain the current population, Japan would have to let in more than half a million immigrants a year. (It took in 72,000 in 2015.)……..He now needs to persuade Japan that substantially higher immigration is a vital necessity.

There are various issues here as for example the Bloomberg theme that the policies of  Prime Minister Abe are working seems not to be applying to population. But as they admit below such a change is the equivalent of asking fans of Arsenal football club to support Tottenham Hotspur.

In a society as insular and homogeneous as Japan, any such increase would be a very tall order.

The question always begged in this is if the new immigrants boost the Japanese economy surely there must be a negative effect on the countries they leave?

The 0% Problem in Japan

I thought today I would look at the economy in different ways and partly as a reflection of the culture and partly due to the effect above a lot of economic and financial market indicators are near to 0%. This is something which upsets both establishments and central bankers.

Real Wages

Let me start with an issue I have been writing about for some years from Japan Macro Advisers.

The real wage growth, after offsetting the inflation in the consumer price, was 0% YoY in February.

The official real wage data has gone 0%,0%,0.1%, -0.1% and now 0% so in essence 0% and is appears on a road to nowhere. This is very different to what you may have read in places like Bloomberg and the Financial Times which have regularly trumpeted real wage growth in their headlines. There is a reason why this is even more significant than you might think because let me skip to a genuine example of economic success in Japan.

Given the prevalent labor shortage situation in Japan, there should be an economic force encouraging wages to rise. At 2.8%, the current unemployment rate is the lowest since 1993. (Japan Macro Advisers )

Actually in another rebuttal to Ivory Tower economics we see that unemployment is above what was “full employment”.

One could argue it is a matter of time, but it has already been 2.5 years since the unemployment rate reached 3.5%, the level economists considered as full-employment equivalent. (Japan Macro Advisers )

Inflation

The latest official data hammers out an increasingly familiar beat.

The consumer price index for Japan in February 2017 was 99.8 (2015=100), up 0.3% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

If you compare 99.8 now with 100 in 2015 you see that inflation has been in essence 0%. This is quite a reverse for the policy of Abenomics where the “Three Arrows” were supposed to lead to inflation rising at 2% per annum. An enormous amount of financial market Quantitative Easing has achieved what exactly? Here is an idea of the scale comparing Japan to the US and Euro area.

As we stand this has been a colossal failure in achieving its objective as for example inflation is effectively 0% and the Japanese Yen has been reinforcing this by strengthening recently into the 108s versus the US Dollar. it has however achieved something according to The Japan Times.

Tokyo’s skyline is set to welcome 45 new skyscrapers by the time the city hosts the Olympics in 2020, as a surge of buildings planned in the early years of Abenomics near completion.

Although in something of an irony this seems to cut inflation prospects.

“This could heat up competition for tenants in other areas of the city”

A cultural issue

From The Japan Times.

Naruhito Nogami, a 37-year-old systems engineer in Tokyo, drives to discount stores on weekends to buy cheap groceries in bulk, even though he earns enough to make ends meet and the prospects for Japan’s economic recovery are brighter.

“I do have money, but I’m frugal anyway. Everyone is like that. That’s just the way it is,” he says.

Jaoanese businesses have responded in a way that will be sending shudders through the office of Bank of Japan Governor Kuroda.

Top retailer Aeon Co. is cutting prices for over 250 grocery items this month to lure cost-savvy shoppers, and Seiyu, operated by Wal-Mart Stores, cut prices on more than 200 products in February.

More of the same?

It would seem that some doubling down is about to take place.

The Abe government on Tuesday nominated banker Hitoshi Suzuki and economist Goshi Kataoka to the Bank of Japan Policy Board to replace two members who have frequently dissented against the direction set by Gov. Haruhiko Kuroda. ( Bloomberg)

Also Japan seems ever more committed to a type of centrally planned economic culture.

Japanese government-backed fund eyes Toshiba’s chip unit (Financial Times )

With the Bank of Japan buying so many Japanese shares it has been named the Tokyo Whale there more questions than answers here.

Comment

There is much to consider here but let me propose something regularly ignored. Why does Japan simply not embrace its strengths of for example full employment and relatively good economic growth per capita figures and abandon the collective growth and inflation chasing? After all lower prices can provide better living-standards and as  wages seem unable to rise even with very low unemployment may be a road forwards.

The catch is the fact that Japan continues to not only have a high national debt to GDP (Gross Domestic Product) ratio of 231% according to Bank of Japan data but is borrowing ever more each year. It is in effect reflating but not getting inflation and on a collective level not getting much economic growth either. Let is hope that Japan follows the lead of many of its citizens and avoids what happened last time after a period of economic troubles.

For us however we are left to mull the words of the band The Vapors.

Turning Japanese
I think I’m turning Japanese
I really think so

Let me finish with one clear difference we in the UK have much more of an inflation culture than Japan.

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

 

Will we see unlimited bond buying from the Bank of Japan?

After a difficult 2016 to say the least Governor Kuroda of the Bank of Japan has some reasons to be cheerful. So let us remind ourselves of the view of Ian Dury and the Blockheads about this.

Reasons to be cheerful, part 3
Reasons to be cheerful, part 3
Reasons to be cheerful, part 3
Reasons to be cheerful – 1, 2, 3

Part 1

If we look for reason one well that is easy as DailyFX have already pointed out.

USD/JPY hits 111.125 its highest since May 31, as reflationary Trump-trade rolls on. Perhaps only Thanksgiving can put a temporary brake on.

As the policy of Abenomics has a lower Yen as perhaps its major weapon and objective its recent fall will be welcome to the Japanese establishment. It was at 103 just before the election of Donald Trump so quite a fast decline although we should not overplay his impact as the Yen had been weakening since the near 100 of late September. Even the poor battered UK Pound £ has seen a bounce versus the Yen from the 125 of middish October to 137 overnight.  If we look at the battle of the currency depreciators of the Far East then I note that it now takes just over 16 Yen to buy in Chinese Renminbi or Yuan as opposed to just over 15 in late September. Cue smiles from Tokyo and frowns from Beijing.

Part 2

This is something which is associated with the weaker currency as we note something which all central bankers love these days. As they are keen to proclaim wealth effects then a higher equity market is close to their heart. There has been quite a push higher to 18,106 in the Nikkei 225 equity index from the below 15,000 of  June 24th. It is now in a bull market although of course that is merely another way of saying it has risen under the modern definition of a 20% rise.

Part 3

Economic growth as measured by GDP was relatively strong in the quarter just passed as Japan Macro Advisers point out.

According to the preliminary estimates by Cabinet Office, the Real GDP grew by 0.5% from the previous quarter (QoQ), or by 2.2% on annualized terms. The pace of the growth was significantly stronger than the prior market expectation.

It was to say the least export led.

The external demand added 0.5% point to the GDP growth on the account of rising exports and a fall in imports.

At this point Governor Kuroda might be considering joining the Japanese version of Strictly Come Dancing as those suggesting “innovation” in monetary policy seem to do these days. However whilst he might be smiling even the recent better silver lining had a cloud. If we stay with Japan Macro Advisers.

A key point from the preliminary estimate is that weak domestic activity continues to cast doubts on a sustainable recovery of the Japanese economy as there has been virtually no growth in private consumption nor private expenditure.

Okay so sadly same as it ever was in this regard and the day after the report Governor Kuroda did not seem that optimistic about more export growth.

Against this background, exports and production are expected to start increasing moderately.

You may wonder about the start but you see he does not think that Japan’s exports have been doing that well.

Exports as a whole have therefore been flat. Against this background, production also has been almost flat.

The past was bright

Back on the 30th of September I pointed out that using a new methodology the Bank of Japan has decided things were much better than they previously thought.

According to an experimental index prepared by the BoJ, Japan’s economy expanded 2.4 per cent in 2014, rather than falling 0.9 per cent as the official data showed.

They use the income version of GDP to get this as we not that the moral hazard meter rises perhaps even to the mythical 11 out of 10 described by Spinal Tap.

Unlimited bond buying

Back on the 21st of September the Bank of Japan introduced “QQE with Yield Curve Control” as described below.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent).

Actually very little happened here as things as I have pointed out carried on pretty much as before although the change of language did obtain a fair bit of comment and claims of a clear change. For those wondering why QE is called QQE or Quantitative and Qualitative (monetary) Easing in Japan the answer is easy as so many versions of QE led to it being discredited.

On Thursday the Wall Street Journal was on the case again.

The Bank of Japan on Thursday offered to buy an unlimited amount of Japanese government bonds at fixed rates for the first time since the introduction of a new policy framework—a sign of its concerns over recent rises in yields.

There is an issue here as I note that the ten-year Japanese Government Bond yield is at 0.03% above zero. It is up 0.08% over the past 30 days according to Bloomberg which gives a different perspective on the media reports of success. Also how do claims of unlimited buying face up to the extraordinary buying which was already happening?

This is yet another market where the Bank of Japan has become the Tokyo Whale. Here is something of an update of how it is progressing on the Tokyo Whale front elsewhere.

It’s the No. 1 shareholder in piano maker Yamaha Corp., Bloomberg estimates show, after its ownership stake via ETFs climbed to about 5.9 percent…..The BOJ is set to become the top holder of about five other Nikkei 225 companies by year-end, after boosting its annual ETF buying target to 6 trillion yen last month. By 2017, the central bank will rank No. 1 in about a quarter of the index’s members.

How do “wealth effects” made by the central bank benefit the consumer?

Comment

There is much to consider here. If we consider the use of the phrase “unlimited buying” how did that work out for the foreign exchange purchases of the Swiss National Bank? That too was portrayed as a triumph until the engine blew a gasket. Also whilst the government of Japan offers a ready supply of newly printed Japanese Government Bonds via its fiscal deficit the supply is not unlimited so we have to ask what happens if they run out of bonds to buy? Not so long ago that would have seemed not far off crazy.

There is another irony for 2016 which goes as follows. When the Bank of Japan acted in 2016 things went wrong for it but when it talked but did nothing it saw the Yen fall and Nikkei rise. One in the eye for the central planners!

Another problem for the central planners in that in some ways Japan is not doing too badly. What I mean by that is that any economic growth may be an achievement compared to an ageing population which is also doing this according to The Japan Times.

Japan’s population excluding resident foreign nationals fell last year at the fastest pace yet, down 271,834 from a year earlier to 125,891,742 as of Jan. 1,……Japan’s population peaked in 2009 at 127,076,183 and has since been declining.

So the performance per head is better than the headlines. This of course brings us to something of a crunch because the official medicine for ever fewer people seems to be policies to accommodate an ever larger national debt. Also the current establishment mantra is for lower interest-rates and easier fiscal policy, well that’s Japan……..

However another issue currently on the sidelines is the price of crude oil as Japan via its lack of natural resources is perhaps the biggest gainer from lower oil prices.

Central banks are giving us a “head fake” on more QE bond buying

Today it is time for a journey into what is an old stomping ground of mine which is bond markets. Actually reminders of such things have been about because this week has been the 30th anniversary of the “Big Bang” in the UK which I just made. Let me immediately point out that those 30 years have been an extraordinary bull market for bonds although there have of course been ebbs and flows. It should be a sobering thought for the latter-day central planners at the central banks that prices were rising and yields falling way before they enacted extraordinary monetary policies and QE (Quantitative Easing). However I will throw in one morsel which is that you could argue that the era of inflation targeting by central banks has turned out to be a very good one for bond investors. Frankly beyond most of their dreams. But to quote out new Nobel Lauriet Bob Dylan there are concerns that.

The Times They Are A-Changin’

A Step Back In Time

We only have to go back a few days or so to see an example of a group of investors looking to continue to front run a central bank, in this case the ECB (European Central Bank). From the Financial Times.

This week Austria sold government debt that will not mature until 2086 — highlighting the risk investors are willing to run for positive yields.

Well played to the Austrian taxpayer who saw this happen on their behalf according to Bloomberg.

The nation sold 2 billion euros ($2.2 billion) of the bunds this week, taking advantage of historically low borrowing costs.

How is that going?

A buyer of 10 million euros of the securities saw a paper loss of more than 500,000 euros by the end of Thursday, according to data compiled by Bloomberg.

As a short-term trade this has turned out to be appalling as you see it will take more than 3 years at the original yield of 1.53% to get that back or if we get a little more technical investors have felt the whiplash of what is called duration.

Its relatively low coupon and long maturity help produce a high duration factor, meaning it’s price is more volatile.

Now market prices change  but as we stand the Austrian taxpayer has played a stormer here and they have not been alone.

Before Austria’s 70-year offering, Italy, France, Belgium and Spain had sold half-century debt this year in syndicated deals — which are co-ordinated by banks.

The UK has in fact a history in this area and sold a 39 year Gilt in August and has had several goes at a 30 year one both this month and last. In fact around 4 years ago I was interviewed on Russia Today about a possible 100 year Gilt which seemed cheap then (for taxpayers) and would be even cheaper now.

This from the FT shows how brains have been scrambled by what has been taking place.

Luke Hickmore at Aberdeen Asset Management says the prices for long-dated debt look “shocking, yet at the same time they still make sense in the current environment”.

Another perspective has just been sent to me on Twitter from John Murray about the 70 year Austrian bonds.

How long’s a lifetime?

What has changed?

Inflation

This returns me to my subject of Wednesday which was on the rising trajectory for inflation ( oh and if I may be so bold I did point out what a bad deal that Austrian bond was). If we stick with the inflation issue take a look at this from Germany this morning.

Now this is only a relatively minor amount of inflation but if you wished to match it to your yield then you would have to buy a thirty-year bond. Those with bonds up to the nine-year maturity would be facing negative yields as well as the inflation.

Fiscal Policy

There have been various hints of looser fiscal policy around the world. Perhaps the clearest has come from Japan where Prime Minister Abe has launched yet another stimulus although as ever some of it was in fact pre-existing. Also the UK seems to be heading that way if the latest public finances numbers were any sort of guide. The IMF started its campaign in April 2015.

fiscal policy can contribute substantially to macroeconomic stability, through the workings of automatic stabilizers. By doing so, fiscal policy can also unlock significant growth dividends.

Hard to believe that in the Euro area it did exactly the reverse isn’t it? My advice is never to buy any tyres or brakes from the IMF as the screeching U-Turns will have damaged them.

Central Banks

These have of course fed the most recent stage of the bond market boom with their interest-rate cuts and indeed their bond buying for which they invented a long impressive sounding name, Quantitative Easing. As of the end of last week the ECB for example had spent some 1.3 trillion Euros on buying the sovereign bonds of its constituent nations and the buyers of the 70 year Austrian bond no doubt had their eye on additions to the 27.9 billion Euros spent on Austrian bonds.

Now though we see that those trying to front-run such purchases are facing issues such as the supposed ECB Taper where fewer bonds would be purchased going forwards. Also the Bank of Japan seems to be replacing action with ever more rhetoric and open mouth operations. Even the Bank of England faces the issue of claiming a “sledgehammer” is appropriate for an economy which has just seen quarterly growth of 0.5% as opposed to what it told us in August.

Their current levels, if sustained, would be consistent with a contraction in output in Q3

This has led to concerns that there will be less QE and hence fewer opportunities to front-run central banks. This has been added to by the US Federal Reserve repeating its regular routine from 2016 of claiming that a second interest-rate increase is just around the corner, the same corner it has been just around since last December! We will find out a little more on that front perhaps when we get the new GDP report later.

Comment

The simple fact is that central banks have driven sovereign bond markets to completely the wrong set of prices and created a false market. This has dangers in addition to the obvious one as they have broken the economic signals and links that used to be at play. It has added to the junkie style culture where we need ever large doses of the “medicine” but the fact we regularly need another hit provides its own critique.

In my opinion they are presently trying to address this by providing a head fake. The ECB with its taper rumours and the Bank of Japan with its new strategy want yields higher for a bit. Then they will follow the model set out by the Swedish Riksbank yesterday.

Prior to the monetary policy meeting in December, the Executive Board is prepared to extend the purchases of government bonds……..The repo‐rate path now also reflects a greater probability that the rate could be cut further.

In other words they are still singing along to Trouble by Coldplay.

Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,

And I never meant to cause you trouble,
And I never meant to do you wrong,
And I, well, if I ever caused you trouble,
Oh no, I never meant to do you harm.

So whilst buyers of that 70 year Austrian bond exposed their investors to a barrel load of risk they may yet be bailed out by ever more QE. At which point the Jedi Mind Tricks of the central bankers will be exposed.

 

More problems emerge with the use of GDP statistics

The credit crunch era has not be kind to users of Gross Domestic Product or GDP statistics. Or to be more precise they have not been kind to those who use them as the measure of economic well-being. Regular readers will be aware that I have written more than a few articles explaining their short-comings of which the most recent was the extraordinary goings on in Ireland where earlier this year the first quarter of 2015 saw GDP growth revised up to 21% for it alone. The number itself provides its own critique really. Today sees an update from the UK on the second quarter of 2016 but there have also been a couple of developments illustrating yet more GDP trouble.

Discovering Japan

If we take the advice of Graham Parker and the Rumour then we need to remind ourselves of two facts. The first is that the GDP series in Japan has been particularly troubled which has 2 main causes. These are that they have struggled to get the data at times and also that the “lost decade” experience has put the numbers under even more pressure. The second is that whilst most countries use the output version of GDP Japan uses the expenditure version ( if memory serves me right New Zealand does too). Only 2 links I can think of there which are the Pacific Ocean and rugby union and neither helps.

Just as an explainer there are three ways of measuring GDP which are to use output (by far the most common), expenditure or income. As they are measuring the same thing they should come to the same answer but they invariably do not. As an example I looked at the numbers for Portugal around 3 years ago and there was a variation of 4%. I will let that sink in as readers recall that these numbers are judged to 0.1%! There are varying ways of dealing with this problem which was dealt with in the UK by a past Chancellor Nigel Lawson who gave orders for the numbers to be merged and the differences therefore to be hidden. I discovered this when I asked for them as officially they are the same now.

This matters as in the credit crunch there was evidence from the United States that the income series was in fact performing the best. Hence I wanted to take a look at the UK. This comes up in the Japanese experience.

Bank of Japan

This has done some research into the subject and concluded this. From the Financial Times.

Japan has begun a revamp of its gross domestic product numbers because of rising concern about their accuracy, following a Bank of Japan report that suggests a huge understatement of growth in 2014………..According to an experimental index prepared by the BoJ, Japan’s economy expanded 2.4 per cent in 2014, rather than falling 0.9 per cent as the official data showed.

The shift here has been from the expenditure data ( what people spend) to the income data or what they earn and with thanks to Simon Cox of the Economist GDP growth now looks like this.

As you can see the most marked difference is in the year of the Consumption Tax rise where a recession becomes strong growth. This is how it was done.

Using comprehensive data from tax returns, instead of the surveys underlying the official GDP numbers, BoJ economists calculated an independent figure for gross domestic income — adding up all the earnings in the economy, which should, in theory, be identical to GDP. (He means official GDP here).

This gives them a higher number.

Those estimates suggest that not only did the economy grow but real output was significantly higher, at ¥556tn compared with ¥525tn in the official figures for 2014.

Why might this be so?

One is that young companies are not answering the official economic census, so those growing fastest are missed by the GDP numbers but covered when they file their tax returns.
Another possibility is that companies misreported their sales in 2014, using the old consumption tax rate of 5 per cent rather than the new figure of 8 per cent, biasing the numbers downwards for that year.

Personally I find it a bit hard to believe that companies did not know the Sales Tax rate! The first argument has some validity and is of course true in most places. Also there is a problem with this.

But the explanation almost certainly rests with a single underlying problem: fewer and fewer people willing to answer official surveys.

That is intriguing as it seems so un Japanese to me.

What is happening here?

By switching series has the Bank of Japan changed the measurement but not reality? That is a danger here and there is a strong possibility that there is a deflator problem ( how inflation is measured) and an element of this is confusing nominal with real GDP. It was an unusual time of inflation changes in Japan due to the Consumption Tax change.

Has it found something? Quite possibly as for example it fits with the business surveys or PMIs from back then although there is a world of difference between saying there was no recession and declaring 2.4% growth. It is odd though that the ordinary Japanese have not been telling is that there economic experience was better than this and we have the problem that we know ( UK and Euro area) that sales tax rises did depress economies there.

Of course there is an enormous moral hazard problem in the Bank of Japan declaring a new set of numbers which if we look at its policies would have it singing along with the Beach Boys.

Wouldn’t it be nice if we could wake up
In the morning when the day is new……..

Maybe if we think and wish and hope and pray it might come true

There was a more specific rebuttal according to The Japan Times.

The Cabinet Office disagreed with the assessment and the methodology used to calculate business profits. It’s unlikely that the economy in 2014 continued as strongly as the previous year, considering that 2013 growth was pushed up by people buying ahead of the tax increase, according to Testuro Sakimaki, executive research fellow at the Cabinet Office research bureau.

One more time we are reminded to wonder exactly what it is that we think we are measuring?

Imputed Rent

I would like to switch to the UK bit continue looking at the income version of GDP. In the UK this has received regular boosts in recent times from Imputed Rent which is where the numbers assume that people who are owner-occupiers get a notional rent for the property. I have described in the past how there have been substantial revisions to the series with no clear explanation of why. Well in 2016 they have changed yet again for once it looks like lower but again there is no clear explanation. Here from the Office for National Statistics is a statement from earlier this year.

Further, because the method is naturally aligned with the CPIH, the discontinuity in 2010 can be removed and the whole of the series will be on a comparable basis.

Ah excellent! It is now consistent with something which has been a shambles or as they put it “Not a National Statistic” The impact?

Their effect is to raise the level of the estimates of imputed rental and to lower the growth of the pre-2010 series.

Does it matter?

Imputed rental represents around 10% of GDP as measured by expenditure.

Whilst some of this is from the spring the issue is live again and I am chasing it up as the explanations such as they are do not convince.

Comment

On today’s journey we learn to have even less trust in the GDP numbers. This is not the fault of the statisticians who mostly do their best it is that they have been sent on a journey that has elements of a fool’s errand. Add in some political interference and you have quite a toxic mixture. The income series on which the Bank of Japan is so keen has its uses but also as I have highlighted its problems.

Ironically in a way the UK had some good news this morning.

UK GDP in volume terms was estimated to have increased by 0.7% in Quarter 2 2016, revised up 0.1 percentage points from the second estimate of GDP published on 26 August 2016.

Although of course what does 0.1% tell us? There was a welcome rise in investment which so many told us would not be happening and places which pushed a post EU leave vote crisis theme like the FT  will need  a large slice of humble pie in reporting this. From the UK ONS.

0.4% growth in services in July, driven by retail, films and computer programming.

I guess we will not hear from Bank of England Governor Mark Carney today either!

Meanwhile those who remember my theme that our numbers for the important services sector need urgent work can smile and be worried simultaneously by this.

When comparing Quarter 2 2015 with Quarter 2 2016…. 11.6% growth in exports of services, which contributed 1.3 percentage points to GDP growth.