The Bank of Japan is facing enormous losses on its holdings of Japanese Government Bonds

The last few days have brought something rather significant in the financial economy of Japan. It was highlighted this morning by the Ministry of Finance issuing some ten-year Japanese Government Bonds at a yield of 1.05% on average. So Japan has issued a decent tranche of benchmark ten-year bonds (2.6 trillion Yen) at above 1% so we are seeing a big figure change. In fact that particular yield reached 1.1% at the end of last week. So we have a big figure change and we finally have reached a situation many were expecting early last year when you may recall I pointed out two reasons why it would take time.Firstly face culture and an unwillingness to embarrass the departing Governor Kuroda but also the issue of The Tokyo Whale and its enormous JGB holdings.

The Tokyo Whale

The Tokyo Whale is near a big figure change itself as it holds some 596 trillion Yen of JGBs. In fact it is over 600 trillion if you include corporate bonds. But if you hold so much of something and the yield is rising you are building up quite a stock of mark to market losses. We can do an estimate of the situation for the JGBs it bought post the Covid pandemic as all the buying pushed the JGB future above 155 whereas today it is 143. In percentage terms this is much smaller than elsewhere but this is a lot in absolute terms when you consider the scale of the purchases. Also the Bank of Japan will have the awful feeling that Paul Simon was correct.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

I have reported for years on its enormous appetite for JGBs and am reminded of this from back in 2022.

TOKYO, Nov 2 (Reuters) – The Bank of Japan’s ownership of newly issued 10-year Japanese government bonds (JGBs) exceeds the amount sold at auction,

Other central banks bought large quantities but no-one else bought more than their government was issuing. There was a type of pact in Japan where the government ran fiscal deficits which the Bank of Japan financed at very low bond yields. So the fiscal risk was changed from a fixed bond yield ( bond coupons) to a variable interest-rate.As the official rate was -0.1% there was even a profit on the deal each year.

What’s not to like about that? Well you have an enormous balance sheet risk. Whilst I was warning about this many were treating Yield Curve Control as a stroke of genius and suggesting other countries should try it. Australia did for a while although with a difference as it targeted the three-year yield. Indeed back in 2019 a man who was much of my subject of yesterday was showing what a dedicated follower of fashion he is.

(Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari on Friday said the U.S. central bank should look into controlling the yield curve as a potential tool for monetary policy, similar to an approach used by the Bank of Japan.

Governor Ueda

I have referred quite regularly to his speech on the 30th September last year and below is why and the emphasis is mine

First, the Bank’s income has been on an increasing trend. Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs…….

Nevertheless, the amount of interest payments brought about by applying interest on excess reserves has been small compared to the rising income. Therefore, the Bank’s operating profits, which are the difference between its income and expenses, have been on a rising trend with its balance sheet expanding.

At this point the Japanese state would have had Hot Chocolate on repeat.

Baby, it’s amazing just how wonderful it is
That the things we like to do are just the same.
Everyone’s a winner, baby, that’s the truth (yes, the truth)
Making love to you is such a thrill.

The government could run fiscal deficits and the Bank of Japan not only made them very cheap to finance it declared a profit on it which it remitted.

Problems Ahead

FXStreet have covered Governor Ueda’s words at the Japanese parliament overnight.

“If underlying inflation moves as we project, we will adjust the degree of monetary support,” Bank of Japan (BoJ) Governor Kazuo Ueda said on Tuesday.

Plus there was this.

If our economic, price projections and assessment of risks change, that will also be reason to change interest rate levels.

So he has again hinted at more interest-rate rises. So far he has merely taken then from -0.1% to slightly above 0%. But the Bank of Japan is no longer making a theoretical interest or running profit and further interest-rate rises will give it losses. These are small moves but of course on a large position.

A sign of the mess here is that the Bank of Japan is still chomping away.

We have maintained current pace of bond buying to avoid big discontiniuity in bond buying operations.

Or as En Vogue put it.

Hold me tight and don’t let go (don’t let go)
You have the right to lose control (don’t let go)

The control freakery has reached such a level that they are afraid to stop buying. Part of this is a simple result of how “clever” they were. The buying in the market rather stopped because you were competing with The Tokyo Whale and selling stopped too as no matter how expensive the bonds became you couldn’t make money in what became known as the “widow-maker” for bond traders as the Bank of Japan manipulated things. If we spin that around this is why it is afraid to stop as it is afraid of a surge in yields and what that will do to its holdings.

Inflation

On Friday we were told this.

The core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, rose 1.9% in May from a year earlier, matching a median market forecast and accelerating from a 1.6% increase in April. ( Reuters)

I have chosen the core number because it is one of the ones that the Bank of Japan focuses on. My point is that  it is no longer possible for it to claim emergency policies are needed to end what it calls deflation. There is an irony as the economy shrank in the first quarter but targeting 2% inflation is around its goal.

Comment

In some ways this is like a morality tale. You have hubris and apparent success.Indeed around the turn of the year I was pointing out that in Japanese terms thus looked quite a success. The change was in many ways minor as it was not that large a fall in the Japanese Yen compared to what we have seen that pressed the “bold action” button. Another way of looking at this is that controlling the bond market put the skids under the currency and in the end it is always like that. However for a variety of reasons it took a very long time for economics 101 to apply. It never conceived that something like the Carry Trade would happen and then implode.

You may be wondering why there a few pointing out this issue? This is because officially it does not exist. Here is Governor Ueda from last September.

However, central banks choose their valuation method based mainly on the developments in their bond holdings, and the impact on their financial statements varies from one central bank to another.

A bit like letting a student mark their own homework.

For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses unrealized gains/losses as reference information……….. However, this does not directly affect its actual profits/losses, as in the case of the Bank of Japan.

Japan gas now seen three quarters of either contraction or no economic growth

Today is another example where we need to look East as this was released by the Cabinet Office earlier.

Gross domestic product contracted at an annualized pace of 2% in the three months through March, the Cabinet Office said Thursday. Economists had forecast a contraction of 1.2% ( The Japan Times)

Not only was the first quarter of this year weak the past was revised lower too leaving the situation like this.

The report showed that the economy has failed to grow since last spring, as updated figures for the last quarter of 2023 were revised to show the economy flat-lining after slumping in the summer. ( The Japan Times)

Putting that in numerical terms the Japanese economy has gone -0.9% then 0% and now -0.5% as we would count it in the last three quarters. This is all rather different to the strong growth we saw as 2022 moved into 2023. Indeed the year on year rate of GDP growth is now negative at -0.2% and the figures for this quarter will have to replace strong growth (1%) at this time last year.

There are a couple of excuses.

The result reflects the negative impact of a New Year’s Day earthquake northwest of Tokyo and disruptions to auto production and sales after a certification scandal blew up at Daihatsu Motor, a subsidiary of Toyota Motor.

The Problem that is Inflation

Regular readers will be aware of my theme that inflation is bad for economic output. This not only clashes with economics 101 ( people buy now to avoid higher prices later) but also the whole concept of Abenomics where zero inflation was supposed to be replaced by 2% per annum creating some sort of economic nirvana. How is that going?

While those factors can be discounted as temporary, the continuing impact of the strongest inflation in generations is a more enduring problem. Household spending keeps falling as workers contending with persistent declines in real wages tighten their budgets. Personal consumption has now declined for four consecutive quarters, the longest stretch of retreats since the global financial crisis. ( The Japan Times)

The bit I have emphasised is essentially my theme in a nutshell. The figures for private consumption have gone -0.7%, -0.3%,-0.4% and now -0.7%.That means the annual rate of growth is now 1.9%. This reinforces the message from last week when we looked at another decline in real wages. This contrasts strongly with the rhetoric and promises.

The first quarter saw companies emerge from annual negotiations with unions pledging the largest wage hikes in three decades.

This takes me back to what I pointed out on the 9th of this month.

Japan’s latest wage figures showed pay gains have now lagged inflation every month for two years even as a measure of the deeper trend points to steady growth. ( Bloomberg

The latest annual rate of fall is 2.5% adding to 2 years of falls and yet there is supposedly a “deeper trend”. Perhaps Bloomberg journalists should be paid like that and see what they think then! Putting it another way let me take you back to my thoughts on April 28th last year.

I hope that we will see some higher rises in the spring pay rounds, but so far there is little sign of any culture shift.

Moving away from this blog I came under fire for such views from some on social media, but I have not heard from any of them since then. Maybe we will get some improvements this year but any growth first has to offset the existing losses. Or if you prefer we are back to wages being a lagging indicator. In terms of the impact Kyodo News has put it like this.

The  Mizuho Research & Technologies Ltd. institute estimates that Japanese households will pay an additional 106,000 yen ($690) or more in the current business year to March due to inflation caused by rising crude oil prices, a weak yen and other factors.

We can also see why the present government is so unpopular. From The Japan Times

In March, Kishida said preventing deflation from recurring is the purpose of his administration’s existence.

So far he has made workers and consumers worse off with inflation and real wage falls. Now he has a shrinking economy too.

Trade

In the detail were some pretty awful trade figures. Exports fell at an annualised rate of 18.7% and imports by 12.7%. No doubt there is a Daihatsu effect but even so people will be worried.

Japanese Yen

This rallied quite strongly to 153.60 in response to the GDP release but then faded to 154.40 as people wondered about this?

Financial markets expect the central bank to raise interest rates again later this year as pressure could mount on the BOJ to counter the yen’s weakness, a byproduct of its dovish stance. ( Kyodo News)

Raising interest-rates into a declining economy would be brave and perhaps even courageous. Although care is needed as the expected changes are minor. But there has been a significant change as the thirty-year yield is around 2% these days as opposed to the 1.2% of a year ago.That in Japanese terms is significant.

Debt Costs

Japan in line with the above is getting worried about the cost of its debt.

TOKYO, Feb 2 (Reuters) – Japan faces more than a two-fold increase in annual interest payments on government debt to 24.8 trillion yen ($169 billion) over the next decade, draft government estimates seen by Reuters showed on Friday……versus 9.83 trillion yen for the fiscal year ending in March 2025, the draft estimate showed.

As to total national debt the St.Louis Fed did some number crunching at the end of last year.

Notice that for Japan, the net debt-to-GDP ratio (government bonds-to-GDP ratio) found in the consolidated balance sheet is only 114%, which is much smaller than the debt-to-GDP ratio reported earlier (226% in the second quarter of 2022)…….. For example, the Bank of Japan’s holdings of Japanese government debt is equivalent to around 100% of GDP.

As you can see Japan has indulged in quite a merry go round with its national debt. But there are now two factors in play. Debt is now more expensive. Plus the balance sheet of the Bank of Japan is weaker and one way of looking at that is via the Japanese Government Bond future. This peaked above 155 in Covid times and is now 144. That may not seem a lot but when you owe so many of them it is. Also you may recall me reviewing Governor Ueda’s rather complacent speech on the subject last autumn. Well the future is now 4 points lower and he has raised his own cost of borrowing.

Comment

This is another phase of the Lost Decade crisis. How does that go with my pointing out earlier this year that Japan Inc will be happy? It stands up because the record highs in the Nikkei 225 equity index and the much weaker Japanese Yen are good news for them. Plus there is this.

Corporate profits have improved and business sentiment has stayed at a favorable level. ( Bank of Japan)

But the Japanese worker and consumer will be unhappy as the weaker Yen has helped drive the inflation which has made them poorer. If we look back this was the original critique of Abenomics that Japan Inc would win but most would lose.

Then there is the issue of the Bank of Japan. Yes as the media have been reporting it has large equity market profits. Curiously they skip the issue of the reality that anyone else would be in jail for market rigging. But more to the point taking them requires a “cunning plan” as actual sales would torpedo the profits. But on the other side of the coin the enormous bond holdings are singing along with Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

 

 

 

 

 

Japan has put itself into rather a mess as the Japanese Yen weakens again

The pace of action is picking up and again we find ourselves looking East to the Pacific where economic events are in motion. I will look at the Bank of Japan statement in a bit but we can infer it from the response to it as explained by the Japanese owned Financial Times.

The yen fell to a new 34-year low on Friday after the Bank of Japan held interest rates near zero, despite rising pressure on the central bank to tighten its policy to prop up the currency. The Japanese currency fell to ¥156.13 against the dollar….

In fact it went as low as 156.82 this morning. What we are seeing here is the same forces at play that forced Bank Indonesia to raise interest-rates on Wednesday. The rise in US bond yields with the two-year passing 5% yesterday is applying what Hard-Fi described like this.

Can you feel it?
Feel the pressure…
Pushing down on me, oh, Lord!
Pressure, pressure
Pressure pressure pressure

On Wednesday I did point out that the Japanese authorities were taking quite a risk with statements like this.

JAPAN’S OCHI: USD/JPY MOVE TO 160 COULD TRIGGER ACTION; NO ACTIVE DISCUSSION YET ( @DeltaOne)

So let us take a look at what the Bank of Japan had to say.

Bank of Japan policy announcement

As you can see it is really rather brief.

At the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:

The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to
0.1 percent.

Regarding purchases of Japanese government bonds, CP, and corporate bonds, the Bank will conduct the purchases in accordance with the decisions made at the March 2024 MPM.

Actually I quite approve of a brief statement as central bankers often waffle on these days. But the crux of the matter is that interest-rates are unchanged and thus the gap to international ones and the US Dollar in particular remains very wide. We can look at it in terms of the two-year yield as currency players often park money in short-dated bonds and with Japan having a 0.3% bond yield we see a 4.7% gap with the US. Even economics 101 realises that you expect a lower exchange-rate from this.

The Financial Times expresses the official position below.

In March, the central bank ended its negative interest rate policy, raising borrowing costs for the first time since 2007.  In the wake of this historic shift to end its ultra-loose monetary policy, governor Kazuo Ueda has indicated he would like to move gradually to raise rates.

But rhetoric about an “historic shift” changed the maths by a mere 0.1% as traders do their calculations and with higher US bond yields in fact the situation is now worse.

Over to You Bank of Japan

Perhaps the new currency level suggested a loss of face as Bank of Japan Governor Ueda was speaking as we saw this.

BREAKING: YEN SWINGS FROM LOSSES TO GAINS IN SHARP MOVE. ( @financialjuice )

Some players got really rather excited.

JAPAN MOF TROLL ASS INTERVENTION

JPY SPIKE XXX

JPY 150-200 PIP DROP ( @Capital_Hungry )

For perspective let me take you back to March 29th.

“I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US,” said Masato Kanda, vice finance minister for international affairs, in an interview Friday. “Many people think the yen is now moving in the opposite direction of where it should be going.” ( Bloomberg)

As Kanda-san is the man making the decisions here his thoughts are rather troubling. He has got the direction of monetary policy the wrong way around. I wonder who the “many people” are outside of his dinner guests? Not those who actually trade the currency as it was at 151 back then and the same Bloomberg article noted this.

The yen has lost about 7% this year against a broadly advancing dollar, making it among the weakest major currencies.

Also we see the problem with making grand statements.

“We are currently monitoring developments in the foreign exchange market with a high sense of urgency,” said Kanda. “We will take appropriate measures against excessive foreign exchange moves without ruling out any options.” ( Bloomberg)

You might be thinking he has acted today Shaun. But as I have been typing this the currency markets have returned the Japanese Yen to 156.66. So it was like a brief shower on a summer’s day and it was gone. It feels like the Bank of Japan was sent in to check prices but did not take the advice proffered back in the day by Nils Lofgren.

(Back it up baby) I found out love just ain’t enough
I need devotion to back it up (Back it up now)
I found out love just ain’t enough (Back it up baby)
I need devotion to back it up (Back it up now)

Comment

Let us now switch to the Japanese economy and we can start with a bit of an irony.

The core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, increased 1.6% in April from a year earlier, slowing from a 2.4% gain in March. It was much lower than a median market forecast for a 2.2% rise.Services prices rose 1.6% in April from a year earlier, slowing from 2.7% in March, due largely to the Tokyo metropolitan government’s decision to make some tuition free, the data showed. ( Reuters)

As you can see there was a government intervention via an education subsidy but the leading indicator for Japanese inflation suggests it will be below the 2% target. Looking ahead there are upwards influences from the Yen decline and higher price of crude oil but at least Japan is facing it from a lower base.

As to economic growth the Bank of Japan is more downbeat.

Comparing the projections through fiscal 2025 with those presented in the previous Outlook Report, the projected real GDP growth rate for fiscal 2023 is lower, mainly
reflecting lower private consumption due in part to the effects of the suspension of production and shipment at some automakers. The projected growth rate for fiscal 2024 is somewhat lower, given that the GDP growth rate for the second half of fiscal 2023 is expected to be fairly lower than previously projected. The rate for fiscal 2025 is more or
less unchanged.

That is a lot of words to essentially say 1% per annum and remember it thinks that is fast.

Japan’s economy is likely to keep growing at a pace above its potential growth rate.

If we take all of this in the round there are consequences. I doubt many will be reporting that at 196 versus the Japanese Yen the UK Pound £ is now above pre-Brexit levels. Plus there is the issue of the currency war between the Chinese Yuan and the Yen. Here is how the Asahi Shimburn is covering the changes.

In February, Toyosu Senkyaku Banrai, a commercial facility with more than 50 eateries, opened on Tokyo’s waterfront, adjacent to the Toyosu Market.

When the line-ups of expensive menu items were revealed, many Japanese quickly made fun of them on social media, naming them “inbaun-don” (inbound-donburi)……..

Poh Meng Quek, 52, who came from Singapore, was enjoying a 2,900-yen kaisen-don at the facility with his work colleague Suzanne Lim, 63.

“It is very nice to be able to eat fresh, delicious fish at such a reasonable price,” Poh said.

He came to Japan before the COVID-19 pandemic. This time, Poh said, it felt comparably inexpensive, which is why he was frequently splurging on a taxi.

Japan and China are back in the forefront of the currency wars

We find ourselves starting the week by looking East again and in one clear context economics 101 might be struggling with this as a response to the interest-rate rise in Japan.

But the first rise in Japanese borrowing costs in 17 years — coming at a time when other major central banks are contemplating rate cuts — has the potential to fundamentally change the yen’s role in financial markets, said investors and economists. ( Financial Times)

They are discussing the Carry Trade.

The end of negative interest rates in Japan threatens to bring a new era of volatility for the yen, denting some of its allure to international investors and foreign governments seeking a reliable vehicle for low-cost borrowing. ( Financial Times)

They seem to have rather confused themselves though with this.

Japan’s currency has held a unique position in foreign exchange markets since the 1990s, as the Bank of Japan kept rates low or negative to spur economic growth and stave off deflation. This has helped keep the yen stable, trading within a relatively tight range for much of the past 35 years. ( FT)

So stable in fact that they did this in 2022.

TOKYO, Oct 31 (Reuters) – Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said, with investors keen for clues about how much more the authorities might step in to soften the yen’s sharp fall.

I also remember the “flash crash” when it went pretty much overnight to 103 versus the US Dollar. If we look at things more strategically the policy of Abenomics and the efforts to weaken the Japanese Yen were a response to it being strengthened by the Carry Trade.

But anyway the rise in interest-rates has been accompanied by a decline in the Yen. From Reuters today.

The USDJPY level surged to four-month highs last week even as the Bank of Japan raised interest rates for the first time in 17 years.

At 151.42 versus the US Dollar we are back in the zone where Japan intervened back in 2022. So it was no great surprise to see this on the wires.

The Japanese yen saw some strength on Monday, with the USDJPY pair falling 0.1% after a top Japanese currency diplomat offered a verbal warning on potential intervention by the government.

Masato Kanda, vice finance minister for international affairs, said that recent weakness in the yen did not reflect the currency’s fundamentals, and that the government remained ready to respond to the yen’s slide.  ( Reuters)

As you can see the Japanese state has begin open mouth operations to support the value of the Yen. The next step is for such words to be translated as “bold action” which means that actual intervention is getting nearer. As an aside it is always amusing to here officials claim that “fundamentals” do not reflect the move when usually they do. Currency markets are not always correct but they are not stupid.

Japan’s economy

Whilst the economy has revised itself out of the recession it thought it was in during the latter half of 2023 the economy still contracted over that period. This morning the Cabinet Office has released its summary of business conditions and described them as.

“Weakening”

Our valiant diplomat above will be hoping people do not spot that one. Whilst the Coincident indicator was revised up it has fallen from 115.9.5 in December to 112.1 in January. The accompanying chart goes back 3 years and this is the sharpest decline on it. The leading index fell slightly as well to 109,5.

China

Last week the Chinese Yuan was under pressure as well.

SHANGHAI, March 22 (Reuters) – China’s yuan declined to a four-month low against the dollar on Friday on expectations of monetary easing, breaching a key threshold and prompting state-owned banks to step in to defend the currency.In the spot market, the onshore yuan fell to the weak side of the psychologically important 7.2 per dollar level in early trades to hit a low of 7.24, its softest since Nov. 17, 2023.

There is something of an irony in the statement below as this time around monetary easing is put as the driving force.

The yuan has fallen roughly 2% in three months, and has been pressured by growing market expectations of further monetary easing to prop up the world’s second-largest economy as well as a weaker Japanese yen .

So the find themselves with a touch of The Vapors.

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

There is common ground in the sense of economic struggles. If we look at our theme of the bursting of the property bubble putting a brake on the economy it is in the news today.

Chinese real estate developer China South City issues a profit warning on HKEX, projecting an after-tax loss of HK$4-5 billion for FY2023. ( CN Wire)

These things feed into each other as already struggling property developers find it harder to make payments on US Dollar borrowings.

We can look at the official view this morning.

BEIJING, March 25 (Xinhua) — The central parity rate of the Chinese currency renminbi, or the yuan, strengthened 8 pips to 7.0996 against the U.S. dollar Monday, according to the China Foreign Exchange Trade System.

But there is still a problem.

Offshore yuan broke the 7.25 mark and up by over 300 pips against the USD after the PBOC set a stronger fixing rate for the yuan on Monday morning. ( CN Wire)

What we are seeing here is the start of intervention. First we see that the PBOC runs a type of managed float and the message is no fall today and in fact they have raised it very marginally and backed it up.

Reuters reported that the People’s Bank of China had instructed state-owned banks to buy yuan and sell dollars in the open market, to support the Chinese currency.

This has posed an issue in the way that they have widened the gap between the onshore and offshore Yuan. Yes they stopped the fall in the offshore Yuan which had gone as low as 7.28 but it still fell on the day.

Comment

Back on the 30th of June last year I pointed out this.

We see that the countries with the most mercantilist trade policies are also running a plan for a lower currency. In one case it is a depreciation and the other more of a devaluation but the end game is the same. ……. They may step in from time to time but do they really want to stop the fall? I do not think so which may leave Japan’s previous intervention in an awkward place.

In the meantime the Yen has weakened and the Yuan is at a similar level but we are entering the period when the latter fell last year. Will it do the same again?

Yet whilst in one way China and Japan have the same influences in another they do not.

The US and Japan are planning the biggest upgrade to their security alliance since they signed a mutual defence treaty in 1960 in a move to counter China. ( FT)

Podcast

 

 

 

Financial markets in China are being affected by the ongoing property crisis

This morning the economic news and agenda is being set by events in China. We can start with this.

Chinese stock collapse accelerating. SHENZHEN COMPONENT INDEX FELL MORE THAN 3% CHINEXT INDEX FELL 2.4% SHANGHAI COMPOSITE INDEX FELL 2.7% ( CN Wire)

So a rough start to the week and it feels even worse in Hong Kong.

Another day, another dip for the Hang Seng Index, down 2.3% today. It’s plunged back to 1997 levels and is just a few points shy of hitting its lowest since April 2009. Interestingly, in just 15 trading days this year, it’s already slumped over 12%. Confidence in investing in China seems to still be shaky right now for many. ( @wallstengine)

Some are pointing out that the Hang Seng is now back to the levels seen back in 1997 when Hong Kong was handed over by the British to China.

So we see the equity markets in China are struggling and this contrasts pretty strongly with the western capitalist imperialists. For example the US S&P 500 had a record high close on Friday. Also if we stay closer to home for China we see that the Nikkei 225 equity index has broken above 36,000 today continuing the story I wrote about on the 9th of this month and putting a smile on the face of The Tokyo Whale. Some in Japan may be beginning to dream of a new post Lost Decade high there. If we look at the two countries equity markets it is rather hard to press the view that China is the future and Japan the past.

Also we may see something of note for Hong Kong if this carries on.

India is set to overtake Hong Kong to become the world’s fourth-largest stock market. It may happen this week assuming current trajectories hold. ( @DavidInglesTV)

The Yuan or Renminbi

Because the Chinese currency is to some extent managed we see the impact of financial struggles on intervention as well as the exchange rate itself.

SHANGHAI/BEIJING, Jan 22 (Reuters) – China’s major state-owned banks moved to tighten yuan liquidity in the offshore foreign exchange market on Monday, actively selling U.S. dollars onshore, four sources with knowledge of the matter said.The goal was to prevent the yuan from falling too fast as China’s A shares plunged, said one of the people.Offshore yuan tomorrow-next forwards jumped to a more than two-month high of 4.25 points, reflecting signs of tighter liquidity conditions.

Another facet to the situation was provided by Bloomberg last week.

China’s citizens are finally traveling in force again, and their rush to spend may further pressure the weakening yuan. Chinese households spent a net $20.67 billion on overseas services in December, the largest monthly expenditure since August 2018, according to data from the State Administration of Foreign Exchange. The same month, increasing demand for international trips contributed to $32.66 billion in foreign currency sales by banks for their clients’ services, the most since June 2017.

That maybe so but with China’s export surplus this feels more like a reshuffling of some deck chairs. Also China has large foreign exchange reserves although with prices at these levels it may not be that keen on drawing on its US Treasury Bond holdings as it would be taking a loss there.

Fiscal Stimulus

This opening from Bloomberg raised a wry smile.

China’s slowing economy is in dire need of more fiscal stimulus.

I have written many times about how we always seem to need a fiscal stimulus and can look at that more tomorrow when the latest UK numbers are published. But this is an issue that gets ignored in terms of why is this co and what are the causes? Instead we get this.

Policymakers are considering $139 billion of new debt issuance under a special sovereign bond plan, Bloomberg reported — which would be only the fourth on record. If realized, this could mark the country’s latest effort toward a more sustainable government borrowing model to spur growth.

It does not seem to occur to Bloomberg that the need for special bonds may lead investors and others to wonder what is going on here? That is before we get to the issue of why what is supposed to be a nation strongly growing needs fiscal support. As to the next bit it is hard not to laugh.

These — unlike general bonds — are not included in the country’s deficit calculations.

Anyone worth their salt will add them as we see another issue. Trying to hide government borrowing is usually a sign of trouble too.

Property Crisis

To my mind the theme of a property and therefore balance sheet crisis continues. It comes up in the fiscal plan above.

The local governments that used to provide such support are now struggling with a debt hangover and falling income due to the property crisis. ( Bloomberg)

Indeed China has a local government debt problem.

The amount of sovereign debt outstanding is around $4 trillion, less than a third of the local debt stockpile including some borrowing by local government financing vehicles, according to Bloomberg calculations based on data from the Ministry of Finance and the International Monetary Fund.

It is not alone in having local government problems as for example some authorities in the UK are in trouble. But in China local government was used to pump prime the property market which was fine in the boom but less so in the bust. The latter has not been dramatic in terms of eye-catching falls but when everything is primed for profit and indeed greed this from last week is enough.

Of the 70 cities in the NBS home price data, 62 reported a fall in prices in monthly terms, up from 59 in November. Home prices in December declined at the fastest pace in nine months, down 0.4% year-on-year after a 0.2% fall in November.For the home resale market, prices among 70 cities all fell year-on-year for the seventh straight month in tier-one, tier-two and tier-three cities. ( Reuters)

The overall situation is really rather awkward for official policy which pumped this up, then reverse course, and is now trying to do a reverse ferret on the latter.

This bust has had consequences near me.

Guangzhou R&F Properties said Friday it is repurchasing the Vauxhall Square mixed-use project in south London from Hong Kong-based Far East Consortium. The buyback comes five months after the developer sold the undeveloped site at a 42 percent discount in a desperate move to pare its debt. ( Mingtiandi September 2022)

There were other examples of Chinese investment in the Nine Elms site not for from me. There is however something of an irony though. That is because the site for a while looked in danger of becoming a white elephant but demand came from Hong Kong as the crisis there developed. Thus Nine Elms has begun to fill up.

Comment

To my mind the financial developments above are a consequence of the property crisis we have been watching for the past few years. It has lacked the drama of the collapses in price we saw in Ireland and Spain back in the day. But in some ways that is worse as things grind on without there being urgency for a solution and this has fed into financial markets. These, of course ebb and flow but there does look to be a pattern here.

Japan’s Nikkei 225 Index just hit its highest level since February 1990. India’s Nifty 50 index, which is made up of 50 of the largest Indian companies, is hovering just below its recent record high.  China’s Shanghai Composite just fell to the lowest level since the depths of the Covid pandemic in March 2020. ( Jesse Cohen)

Meanwhile in the property market the drumbeat continues.

BlackRock is seeking to sell an office complex in Shanghai at about a 30% discount to its purchase price. BlackRock bought two towers at Waterfront Place from PGIM Real Estate for a reported 1.2 billion yuan (US$167M) in 2018. They have a total area of 27,805 sq m (299,290 sq. ( @Byron_Wan)

Podcast

The Tokyo Whale will be very happy today as the Nikkei hits a 3 decade high

This morning has brought news that will make the Bank of Japan happy and indeed given us a step forwards for the Abenomics strategy.

Japan’s Nikkei 225 Stock Average climbed Tuesday as a rally in technology companies helped push the blue-chip gauge to its highest level since the nation’s bubble economy era more than three decades ago.

The gauge rose 1.2% to close at 33,763.18 in Tokyo, a level unseen since March 1990, after the Nasdaq 100 Index rebounded from last week’s slump and U.S. Treasury yields dropped. The benchmark Topix index, which some funds prefer to follow because it’s more comprehensive, gained 0.8%. ( The Japan Times)

The reason for this is that the Bank of Japan began buying equities and it whilst it was not one of the formal arrows of Abenomics it became a feature of what we now call QQE ( Quantitative and Qualitative Easing). When it bought more in response to the Covid pandemic it passed the government pension fund and became the largest owner of Japanese equities. According to its end of year accounts the book value was 37.2 trillion Yen. The actual position on a mark to market basis is much better as this from Reuters shows.

The BOJ’s ETF holdings as of March 2023 stood at 37 trillion yen ($265.75 billion) in book value, and 53 trillion yen in market value, according to the central bank’s earnings data.

Just taking a rough rule of thumb from levels back then puts its holdings above 60 trillion Yen at this morning’s levels. If we look back we see that it piled into the market post Covid as described below by the Financial Times in March 2020.

The Bank of Japan took its controversial equity-buying programme deeper into uncharted territory on Monday, doubling its annual purchasing target to ¥12tn ($112bn)

If we return to The Japan Times I find it interesting that the Bank of Japan buying does not get a mention.

The Nikkei 225’s fresh three-decade high wasn’t a surprise given that “Japanese stocks have been cheap for a long time, along with corporate governance reforms and the effect of Warren Buffett from last year,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, referring to the Berkshire Hathaway chairman’s increasing his stockholding in Japanese trading firms.

It does pose something of a question though because there is a sort of implied logic from the words of Sera San that central banks might pick up. Should they buy equities which are cheap? Of course we immediately hit the issue of how you would define cheap.

Japanese Government Bonds

This is a much more usual policy for a central bank these days. But the Bank of Japan was the first to start large-scale purchases and it has done so with such enthusiasm that it holds some 592.2 trillion of them as of the end of 2023. I note that this morning’s financial news tells us this.

The Bank of Japan announced buying of 10-year to 25-year debt that suggested it will purchase less of those bonds in all of January, in line with what it signaled late last year. ( Bloomberg )

You may note the framing as we are guided towards it buying less when perhaps the real news is that it continues to buy at all. After all the other major central banks are either setting out plans to reduce their holdings or actively selling some of them as the Bank of England did yesterday. Whereas in Japan we see this.

Bank of Japan now owns almost 60% of Japanese government bonds. ( @GameofTrades )

This poses a question at a time of higher bond yields as the value of the portfolio drops. Back on the 2nd of October last year I noted that it took Governor Ueda some 26 pages to cover the issue.

First, the Bank’s income has been on an increasing trend.
Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs. In addition, the dividends received from its holdings of ETFs and other assets have grown to a sizable amount over the past few years.

As you can see he was putting a positive spin on things and from the point of view of the equity holdings things look all gravy as we have dividend income to add to the mark to market profits. But the JGB position not so much.

TOKYO — The Bank of Japan’s unrealized losses on its Japanese government bond holdings swelled to 10.5 trillion yen ($71.2 billion) at the end of September, according to financial statements released Tuesday, as rising yields dragged down bond prices.
This marked the central bank’s third straight half-year paper loss on JGBs, and the largest since it began valuing them under its current method in 2004, ( Nikkei Asia )

This has been a concern for the Bank of Japan as its latest official Minutes show.

On this basis, some members expressed the view
that, although the Bank’s profits could be subject to downward pressure temporarily, it was
important to explain clearly to the public that such developments in profits would not set a
limit on the Bank’s conduct of appropriate monetary policy to achieve price stability.

Ah “temporarily!” You might think that central bankers would now avoid that word.

However things have so far pretty much gone its way. What I mean by that is that if we use the March futures contract we see the price dipped below 147 overnight. But that is not much different to this time last year. For all the news about changes in bond yields there has been something which Elvis sang about.

A little less conversation, a little more action, please
All this aggravation ain’t satisfactioning me
A little more bite and a little less bark

Whilst other bond markets took punishment in 2023 Japan managed to dodge much of it. There are losses here in that it bought as high as 155 or so in futures terms after the pandemic but they are so far relatively small and the position is oiled by the fact that Japan has a negative interest-rate. So buying produces a yield of 0.61% to which we add the negative interest-rate of 0.1%.

Thus The Tokyo Whale has dodged something of a bullet here so far at least. Putting it another way whilst being short the Japanese bond market is no longer the “widow maker” it was you would have been better off pretty much in every other bond market.

Japanese Yen

I thought I would add this is as whilst exchange rate intervention is explicitly on behalf of the finance ministry it is part of what we might call Japan Inc. Here things have begun to look a fair bit brighter as I pointed out on the 7th of December the winds of change were blowing in Japan’s favour. At an exchange rate of 144 to the US Dollar the situation is for now calmer and the intervention is making a small profit.

Comment

If we look at the present situation the Bank of Japan can not only have a wry smile it can have something of a beam. The equity position is presently going from strength to strength and the bond position had a much better 2023 than it might have done. Even the foreign exchange market has begun to move favourably. Switching from the financial to the real economy this morning saw another move in the right direction.

The headline inflation rate for Japan’s capital city of Tokyo slowed to 2.4% in December, from 2.6% in the month before.

Inflation rate has declined for a second straight month and is at its lowest level in 18 months. ( CNBC )

However there is a shark in the water which is the balance sheet risk. Whilst the Bank of Japan has equity profits how does it ever take them? Who will be willing to buy that much of the market when the central bank is selling? Outright sales of assets are not going so well if the Bank of England is any guide. After all the market price reflects ordinary volumes not one enormous seller.

Next up is the risk created by the enormous position in the bond market which is that in both absolute and relative terms. Should the grip of The Tokyo Whale loosen then it would look awful pretty quickly. Putting it another way then I find it revealing that the Japanese owned Financial Times omits Japan in the article below.

Investors warn governments about high levels of public debt

Was the Bank of Japan right not to raise interest-rates?

I thought that today I would step back and take a look at the present position of the Bank of Japan and do so from the perspective of it. We can start from trading today which in one area may well be a case of Sake all round. This is because the Japanese Yen has surged 2 big figures to 145.15 versus the US Dollar.  In a way it is hard to avoid a wry smile at this from Monday.

Hedge Funds increase Japanese Yen short position to largest size in 19 months ( @Barchart)

So the size of the move has probably been exacerbated by such traders being caught out and stops being triggered, as we are reminded one more time that crowded trades bring their own risks.

But continuing the theme we can look back to yesterday’s post as a factor here in that lower bond yields and in this instance I mostly mean US ones have reduced the pressure on the Yen. If we look wider we see that only recently we had noted a new low versus the Euro in the 160s but now it is 156.50.

Governor Ueda

He gave evidence at the Japanese Parliament earlier and this part caught my eye.

Regarding the outlook, it is likely to be above 2 percent through fiscal 2024 and then decelerate in fiscal 2025. Meanwhile, through fiscal 2025, the Bank expects that underlying CPI inflation will increase gradually toward achieving the price stability target of 2 percent.

In his analysis of inflation he is echoing other central bankers in that they expect inflation to be around 2% in 2025. But there is a crucial difference because as we stand Japan will have done so whilst not raising interest-rates as opposed to pretty much everyone else who has. In fact Japan is still easing policy rather than being restrictive.

The Bank considers that sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and that it is important to closely monitor whether a virtuous cycle between wages and prices will intensify. In this situation, it will patiently continue with monetary easing under Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to support Japan’s economic activity and thereby facilitate a favorable environment for wage increases.

We can go further because Japan has come under pressure in terms of relative bond yields it has not moved that much.

In October, the Bank decided to conduct yield curve control with the upper bound of 1.0 percent for 10-year Japanese government bond (JGB) yields as a reference and to control the yields mainly through large-scale JGB purchases and nimble market operations. This decision was based on the assessment that it was appropriate for the Bank to increase the flexibility in the conduct of yield curve control.

In practice it has got nowhere near the 1% that many have argued is so significant. That is in spite of today’s move.

Japan’s 10-year bond yield rises 10.5 bps, the most in a year. ( @Sino_Market )

In terms of the Japanese bond market a fall in March futures of 1.3 points is significant in a market which has been mostly becalmed for years. But other bond markets have been having those sort of moves and more this week albeit the other way. Also there is a crucial point which is that the yield is 0.75% so in strategic terms after all the talk and hype Japan has given very little ground here.

Indeed if we switch to the balance sheet position the Bank of Japan will consider it is winning as well. One of the features of the present position is that other central banks have created losses for themselves by raising their own cost of funds when they increased interest-rates. But as Governor  Ueda reminded us only recently the Bank of Japan is gaining and not paying carry. Let me explain as it charges itself -0.1% on the QQE funds so makes a small amount each year, but buying a bond at 0.75% means it has net interest of 0.85% a year. By contrast the Bank of England would lose around 1.1% per year if it bought more bonds today. Plus the existing holdings make interest each year for the Bank of Japan as opposed to losses at other central banks. Or as I noted using his words on the 2nd of October.

First, the Bank’s income has been on an increasing trend.
Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs. In addition, the dividends received from its holdings of ETFs and other assets have grown to a sizable amount over the past few years.

Care is needed as the Bank of Japan has an enormous potential liability via its ownership of 600,064,740,284,000 Yen’s worth of Japanese Government Bonds. You can add in the 6,336,183,184,000 of Corporate Bonds if you like. As an aside I never thought that 6 trillion of something might feel rather insignificant! In a way that is revealing in itself.

Interest-Rates

Rather like the ( St.Louis Fed) Governor Waller speech I analysed yesterday there was something rather significant not in the speech.

“We have not made a decision yet on which interest rate to target once we end our negative interest rate policy,” he told parliament. ( Reuters )

Trading Economics have him going somewhat further.

Bank of Japan Governor Kazuo Ueda said the central bank has several options on which interest rate to target once it ends its negative interest rate policy. “We could either keep the interest rate applied to reserves (financial institutions park with the central bank), or revert to a policy targeting the overnight call rate,” Ueda said. He also added: “Whether we keep short-term rates at zero or move them to 0.1%, and at what speed we will push up rates to 0.25% or 0.50%, would depend on economic and financial conditions at the time.“

An end to negative interest-rates might not be the move that many think it to be as this reminds us.

Japan’s regional banks called on the Bank of Japan to scrap its negative interest rate when executives met with central bank officials last month, according to people familiar with the matter………..There are merits and demerits to prolonged monetary easing, but the negative rate has squeezed profits by shrinking interest margins, Kumagai said, according to the people. He also acknowledged that easy policy has supported the overall economy to a certain extent, they said. ( @business)

The last sentence shows a very Japanese way if operating where any criticism is very gentle. But the point here is that Japan Inc. has never really liked negative interest-rates and we have a case of The Precious! The Precious! reminding the Bank of Japan.

Comment

There is an increasing possibility that Japan will exit this phase with only minor changes to monetary policy. Pressure from the policy of other countries has eased as they/we shift towards a “pivot” or lower interest-rates in 2024. In more private moments the Bank of Japan may have a good chuckle at the “Higher for Longer” rhetoric which seems to be missing the longer bit. So from the point of view of the Bank of Japan it has large profits on its “The Tokyo Whale” equity holdings with the Nikkei 225 a bit below 33,000, they have avoided so far problems with their QQE bond holdings and in fact will declare a profit and have avoided raising interest-rates.

Another factor moving in their favour has been the recent fall in natural gas prices in Europe. As a large energy importer Japan will welcome an improvement as it is likely to see cheaper prices too. Suddenly the inflation picture and the growth one improves. From their point of view and face culture an interest-rate rise may seem reasonable now but might simply be to 0%. As to speculation about this month I would caution about reading too much into the move by the Japanese Yen which was exacerbated by the short positions that were being held by hedge funds.

Japan sees exports surge and imports plunge in response to its competitive devaluation of the Yen

Over the past 18 months or so Japan has stood aside from the consensus at the other main central banks which has had various consequences.Let me hand you over to Asia Nikkei on this subject.

TOKYO — The long-suffering Japanese yen now sits at a year-to-date low and is threatening to tumble below last year’s nadir of 151.94 to the dollar.

Here is their summary of the recent state of play.

One factor prompting yen-selling is the widening interest rate gaps between Japan and overseas markets. The Institute for Supply Management’s nonmanufacturing purchasing managers index for August, released Wednesday morning U.S. time, outperformed market expectations. This prompted U.S. rates to rise and gave momentum to yen-selling, dollar-buying moves. It took a little more than 147 yen to buy a dollar on Thursday’s Tokyo foreign exchange market, renewing the year’s weak point.

At the moment most shorter-dated interest-rates and yields in the US are above 5% and Japan is still doing this.

The BOJ alone still maintains a negative rate policy.

So if you buy the US Dollar you pick up 5% per year even if nothing happens. Indeed this is true for pretty much everyone.

The gap between Japan’s policy rate and the average of policy rates around the world has reached 4.8 percentage points, according to JPMorgan Chase Bank.

In terms of potential relief the trend is not presently the friend of those long the Japanese Yen.

You wouldn’t have thought it but the Dollar is on pace for its longest winning streak since 2014 8 positive weeks in a row ( @CNBCjou)

Indeed it has brought back an old friend and I mean that in the Paul Simon way.

Hello darkness, my old friend
I’ve come to talk with you again

The Carry Trade

The interest-rate differential does echo back.

This exceeds the difference around 2007, during the heyday of the yen-carry trade, in which investors borrow yen at low-interest rates only to exchange it and seek gains with a stronger currency. It is also the widest discrepancy since 2001.

Indeed it is back.

Interoffice account assets of foreign banks’ Japanese branches, which reflect the size of carry trades, totaled 10 trillion yen in July, remaining below half the peak level reached in 2007.

Whilst it may only be half last time that would still have quite a bit of destructive power should we see a reversal. Or rather constructive for the Yen which would be at 120 and maybe higher in no time. But for the moment the heat is on and the Japanese equivalent of a strongly worded letter has not done much to change this.

Kanda, who was speaking on Wednesday, used stronger words than he had in earlier statements, trying to head off foreign speculators actively selling the yen.

Inflation Persists

With the Japanese Yen weak then there is not much of a fundamental change here. The Tokyo CPI number was 2.9% in July and whist the monthly increase was only 0.1% there will be worries looking ahead from a price of Brent Crude Oil that is over US $90 per barrel.

For the Japanese who have become used to so little inflation then an 8.2% increase in food costs will be quite a shock. It is especially bad if you like Cuttlefish which are up 60.5% but much better if you like Welsh Onions at -5.2%. So whilst food inflation was flat on the month prices remain high.

Wages

This is another theme of economic life in Japan and may even be the number one facet of what has become called The Lost Decade. Real wages have fallen for such a long period that Decade has morphed into Decades.

TOKYO, Sept 8 (Reuters) – Japanese real wages extended their fall to a 16th consecutive month in July, government data showed on Friday, as salaries failed to keep up with rising prices……….Inflation-adjusted real wages, a barometer of consumers’ purchasing power, slid 2.5% in July from a year earlier following a 1.6% slump in the month before.

Those who follow my social media output will know that there were some who contacted me to say that this year would be different, as in the wage rises would be more permanent. The reality was back to my theme.

Nominal pay growth in July slowed to 1.3%, after a 2.3% jump in June and 2.9% hike in May, which marked the fastest growth in nearly three decades.

Japanese employers returned to what has become normal wage setting behavior as quickly as they could. Those who claimed to be hedge fund advisors have disappeared as quickly as they appeared but Japanese life carried on as before.There was a brief blip in wage growth but that ended. Switching to real wages they have fallen on every month on 2023 and with the annual fall ranging from -0.9% to -4.1% things are in fact worse rather than better.

One subplot for you comes from July’s data is that wages for the real estate sector rose by 9.5%. Some of this is bonuses but contractural pay rose by 6.7%. Does this mean that The Vapors will have to record a “Turning British” version of their biggest hit?

Household Spending

Earlier this week we saw what I think is a consequence of the weak wages growth.

The household spending fell 5.0% in July from a year earlier, official data showed on Tuesday, sliding for five consecutive months and more than the median market forecast for a 2.5% decline.

On a seasonally adjusted month-on-month basis, household spending was down 2.7%, versus an estimated 0.5% gain. ( Reuters)

This is a different situation because in some respects things were looking good for Japan.

Competitive Devaluation?

I wrote about this issue most recently on the 30th June and it comes to mind reading this mornings revision of the GDP numbers for the second quarter. Whilst there was a downwards revision GDP growth of 1.2% is very strong for a quarter and would have been good for more than a few whole years.

But it is the breakdown that I think is significant as domestic demand fell by 0.6% so what we saw was something of an export surge as they rose by 3.1%. But there was something else significant which is a boost to GDP but may be a harbinger of trouble as imports fell by 4.4%.

Returning to the competitive devaluation theme we have a much lower Yen leading to a 1.8% quarterly boost to GDP via trade. 0.7% is via exports and 1.1% via lower imports.

Comment

As you can see there are some themes of Japanese economic life that not only feel relentless they have been. The headliner has been wages. But we are also seeing what was a lynch pin of the Abenomics policy of the former PM. Sadly he is no longer around to see what he wanted which is a lower Yen to drive trade.In the short term that works but there are two problems.

The first is inflation and the second is a consequence of this. Economics 101 talks about “sticky wages” but means in a downward direction whereas in Japan they are sticky upwards. That as we have noted today in the household spending numbers is rather ominous for domestic demand.

 

What just happened at the Bank of Japan?

Late yesterday there were rumblings about a change of monetary policy in Japan. For a while it was obscured somewhat by markets adjusting to the words of ECB President Christine Lagarde. She spent most of her press conference denying there would be a pause in the interest-rate rises after another 0.25% and then right at the end suggested there would be!

You asked, do we have more ground to cover. At this point in time, I wouldn’t say so.

Classic Lagarde. But the real issue here was a falling Euro which it then transpired was mostly being driven by Japanese Yen buyers.Having started the morning rising above 156 Yen it was sold below 153 as leaks emerged about this.

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to conduct yield curve control with greater flexibility.

The statement continues in rather Japanese fashion and nimble may have to go into my financial lexicon for these times.

In this context, taking account of extremely high uncertainties for economic activity and prices, it is appropriate for the Bank to enhance the sustainability of monetary easing under the current framework by conducting yield curve control with greater flexibility and nimbly responding to both upside and downside
risks to Japan’s economic activity and prices.

An absolutely fascinating claim when you consider they imposed this yield curve control when economic uncertainty was at its height due to the Covid pandemic. But this is what we now have.

The Bank will continue to allow 10-year JGB yields to fluctuate in the range of around plus and minus 0.5 percentage points from the target level, while it will conduct yield curve control with greater flexibility, regarding the upper and lower bounds of the range as references, not as rigid limits, in its market operations.

So things will be the same ( 0.5% range and lets face it that means a 0.5% cap at this time) but we might change it if we feel like it. If they do then there is this.

The Bank will offer to purchase 10-year JGBs at 1.0 percent every business day through fixed-rate purchase
operations, unless it is highly likely that no bids will be submitted.

There was quite a bit of confusion at first and the Yen lost its gains before regaining the ground when the Bank of Japan did turn up at 1% rather than 0.5%. So we have seen a classic “face” operation where you avoid any potential embarrassment to the previous Governor ( Kuroda) by publicly continuing his policy and then change it anyway. This led to this.

The benchmark 10-year government bond yield jumped to an eight-year high of 0.575% before easing back slightly to 0.55%. ( Reuters)

Regular readers may recall that there have been some bond vigilantes who had shorted Japanese Government Bonds and they had a good day with the prospect of more to come as yields will at some point head for 1%. It would not have been very Japanese for yields to rush towards 1% and no doubt there were messages about the speed and pace of the decline that the Bank of Japan would accept as otherwise it would return to this.

the Bank will continue with large-scale JGB purchases

Why Now?

There have been two driving forces here which have been the value of the Japanese Yen and inflation. They are of course linked as a weaker Yen as we were seeing makes the inflation position worse. Also although they are unlikely to put it like this Japan is a large energy importer and as the Yen fell into the 140s again versus the US Dollar worries will have risen again.

As to inflation they think this.

Japan’s recent inflation rates, as measured by the consumer price index (CPI), are higher than projected in the April 2023 Outlook Report, and wage growth has risen, partly on the back of this year’s annual spring labor-management wage negotiations.

If we start with the numbers then overnight we got these.

Japanese Tokyo CPI (Y/Y) Jul: 3.2% (exp 2.9%; R prev 3.2%) – Tokyo CPI Ex-Fresh Food (Y/Y) Jul: 3.0% (exp 2.9%; prev 3.2%) ( @LiveSquawk)

It is tempting to say what’s the problem? As this is much lower than in many western countries and of course the Bank of Japan spent years trying to raise inflation. They tried so hard they invented a new policy called Abenomics. So they are now saying that circa 3% is too much.

Switching to wages they did rise by 2.9% in May. But much of this was bonuses presumably in response to the inflation as scheduled earnings only rose by 1.6%.Real wages fell by less but continued to fall ( by 0.9%). Looking at the numbers the development below is hardly a surprise.

Signs of change have been seen in firms’ wage- and price-setting behavior, and inflation expectations have shown some upward movements again.

A lot of the issue here is that they have continued to try to raise inflation whilst it was rising anyway.

If upward movements in prices continue, the effects of monetary easing will strengthen through a decline in real interest rates, while on the other hand, strictly capping long-term interest rates could affect the functioning of bond markets and the volatility in other financial markets.

Actually the bond market has been broken as the Japanese government issues and the Bank of Japan buys meaning many others have moved on to pastures new.

International Consequences

In simple terms higher JGB yields will put pressure on other bond markets. If you want a more complicated view Efficient Markets Hype has crunched some numbers.

US10s swapped back to yen yield ~0.056% currently. So you can start to see why allowing JGB10s to rise above 0.5% starts to become an attractive proposition for japanese bondholders and a negative flow dynamic for ROW ( Rest of World)

This is why we have seen the US ten-year push above 4% and the UK ten-year rise to 4.4%. Some of it will be a literal response but much will be expectations depending on whether and how quickly you expect the JGB yield to rise to 1%.

Comment

There are so many different strands here and let me illustrate with the words of Governor Ueda via Reuters.  Inflation is getting out of control.

The inflation forecast for this fiscal year has been revised up quite significantly. We had been under-estimating upward pressure on prices. We haven’t changed the 2024 and 2025 forecasts much, but many board members appear to see risks skewed to the upside.

No it isn’t

“There’s no change to our view there is some distance to achieving our price target as a trend. It’s appropriate to maintain our easy monetary policy..

Next up

“We’d like to have market forces drive bond yield moves more.”

They could hardly move them much less.

So far I have looked at the financial economy as there are impacts for bonds and the currency. But for the real economy they are minor and as Japan has recently seen some growth maybe a window of opportunity has just been missed. After all the could have taken the chance to move from NIRP to ZIRP.

The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

If they were really brave they could have matched the yield curve level of 0.5%. But as I have pointed out several times it all comes down to Face. Also it has been so long perhaps they have forgotten where the interest-rate switch is, or as Joe Walsh put it.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

 

Are China and Japan the new currency devaluers?

2023 has been a year of higher interest-rates in the main. But not everyone has joined the game and I note a particular difference if we look st some parts of the Pacific Region. This has led to some changes in the currency world. Below is the latest from the Japanese owned Financial Times on the Yen.

Japan’s yen declined against the dollar on Friday, briefly touching a threshold last crossed seven months ago and reigniting speculation that authorities in Tokyo were moving closer to an intervention to support the currency. The yen fell about 0.2 per cent to ¥145.07 a dollar in morning trading in Asia, crossing the ¥145 level for the first time since mid-November and close to the ¥145.8 level that prompted Japan’s finance ministry to intervene last September.

Regular readers will be aware that I follow events in Japan’s economy closely partly due to the time spent working there. It has felt for a while that the Yen is to quote Paul Simon slip-sliding away. One issue here is the previous currency intervention.

two significant bouts of intervention last year in September and October, when authorities spent a total of $65bn on yen purchases

For a while this looked like a masterstroke from the Ministry of Finance as in January the Yen strengthened through 128 so it was making a large mark to market profit. Now that is mostly gone and the markets mean it is signing along with Queen and David Bowie.

Pressure pushin’ down on me
Pressin’ down on you, no man ask for
Under pressure that brings a building down
Splits a family in two, puts people on streets

The Driving Force

First up is this from Reuters.

Stronger-than-expected economic data on Thursday backed expectations that the Fed will keep interest rates higher for longer. Treasury yields- which move inversely to prices – moved up, with 10-year and two-year yields hitting their highest since March 10 and 9, respectively, while some curve inversions intensified.

This followed some rhetoric from the Chair of the Federal Reserve at Sintra.

Fed Chair Jerome Powell indicated that the central bank would likely raise rates two more times this year. Powell on Wednesday reiterated that two more hikes this year were likely, including an increase widely expected next month.

There is a technical issue adding to this as currency players tend to park their money in shorter-term bonds.

Yields on five year Treasuries were as many as 24.5 points above those on 30-year Treasuries on Thursday, the most inverted that portion of the curve has been since March, according to Refinitiv data.

Whereas the new head of the Bank of Japan Ueda-san told listeners and viewers this.

“We haven’t had any serious monetary tightening in 30 years. So in terms of that, the lag in monetary policy could be at least 25 years.”

As we stand on Japan goes with an official interest-rate of -0.1%. If we stay with my suggestion that currency investors park their money in short-term bonds then between the Yen and the Dollar there is a 5% gap between two-year yields.

Carry Trade Again

Is it back? Someone thinks so.

One big reason I am gung-ho about financial assets is due to the huge ‘Carry trade’ that is playing out in Japan.

1. The Japanese Yen is weak.

2. Interest rates in Japan are negative.

3. You are getting high-interest rates elsewhere.

4. Investors may also find certain equity markets interesting based on earnings yield.

So, borrow in Japanese Yen and invest in financial assets in other countries. ( @AmarAmbami)

Those who followed the previous outbreak of the Carry Trade will recall that I labelled the Swiss Franc and the Japanese Yen the “Currency Twins”. Well not this time around.

Swiss franc/Japanese yen has just broke 44-year high made in December 1979. Neat ( @HarpyFin)

It takes over 160 Yen to buy a Swiss Franc these days convincingly breaking the old relationship. Continuing the theme you cannot play the Carry Trade in Euros either because the ECB has been playing the interest-rate game.

Japan’s Economy

As we stand Japan is not under any particular domestic pressure to change. Overnight we were told that Tokyo saw no inflation in June with the annual rate being 3.1%. So there are some pressure points ( food inflation is 7.9%) but this is lower than in many other places. Also GDP growth was 0.7% in the first quarter.

China

There is a difference here in two ways as CNBC notes.

China’s monetary stimulus last year did little to boost loan demand in the second quarter — even though borrowing costs for businesses were lower than a year ago, according to China Beige Book survey released Friday.

It suggests rate cuts by the People’s Bank of China in August may have had limited effect in spurring growth, and throws doubt on whether the latest round of rate cuts in mid-June will be effective.

So we have the economic weakness we have been observing for some time now added to by interest-rate cuts. To that we can add the latest news.

BEIJING, June 30 (Reuters) – China’s factory activity declined for a third straight month in June and weakness in other sectors deepened, official surveys showed on Friday, adding pressure for authorities to do more to shore up growth as demand falters at home and abroad.

So China is getting increasingly touchy about the level of the Yuan according to Bloomberg.

The central bank set its so-called fixing for the managed currency at a stronger-than-expected level on Friday, after the offshore yuan extended a seven-month low. The move came after reports that regulators have stepped up scrutiny of currency trading and cross-border capital flows, in a bid to stabilize the yuan.

They do not want to stop it just slow it down a bit.

Officials appear to be increasingly uncomfortable with the slide in the yuan, which has dropped about 2% this month against the dollar and is one of Asia’s worst performers.

After all a lower Yuan would give a boost to this sector of the Chinese economy.

The charm offensive is a prelude to an aggressive export drive by the Hefei-based company and other Chinese carmakers that threatens to reshape Europe’s automotive landscape, dethroning its powerful incumbents and forcing governments to choose between protecting their industries and embracing competition and consumer choice.
“We want to be in the top three” brands in the region by the end of the decade and number one “if we can”, says Michael Shu, European chief of leading Chinese automaker BYD. The company, backed by US investor Warren Buffett, has been name-checked by former Volkswagen chief executive Herbert Diess as the carmaker that the German juggernaut should fear the most. ( Financial Times)

Comment

We see that the countries with the most mercantilist trade policies are also running a plan for a lower currency. In one case it is a depreciation and the other more of a devaluation but the end game is the same. Of course they will say that the West is doing this to itself and they have a point as it is us which is raising interest-rates at what has become a rapid pace. They may step in from time to time but do they really want to stop the fall? I do not think so which may leave Japan’s previous intervention in an awkward place.

Let me finish with something that Alannis may consider to be ironic. They are doing better than us on inflation too. Maybe that will not last but what does?