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

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

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

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

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

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

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

Is this the revenge of the Phillips Curve?

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

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

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

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

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

Returning to conventional economics there is also this to consider.

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

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

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

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

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

Inflation

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

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

And later this.

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

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

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

Comment

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

The Tokyo Whale

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

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

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

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

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

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

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

Perhaps this are suggested last November, from Reuters.

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

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

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

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

Yen

This is something that fits the famous Churchillian phrase.

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

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

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

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

Comment

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

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

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

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

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

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

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

What is happening with fiscal policy?

A feature of the credit crunch era has been the way that monetary policy has taken so much of the strain of the active response. I say active because there was a passive fiscal response as deficits soared caused on one side by lower tax revenues as recession hit and on the other by higher social payments and bank bailout costs. Once this was over the general response was what has been badged as austerity where governments raised taxes and cut spending to reduce fiscal deficits. Some care is needed with this as the language has shifted and often ignores the fact that there was a stimulus via ongoing deficits albeit smaller ones.

Cheap debt

Something then happened which manages to be both an intended and unintended consequence. What I mean by that is that the continued expansion of monetary policy via interest-rate reductions and bond buying or QE was something which governments were happy to sign off because it was likely to make funding their spending promises less expensive. Just for clarity national treasuries need to approve QE type policies because of the large financial risk. But I do not think that it was appreciated what would happen next in the way that bond yields dropped like a stone. So much so that whilst many countries were able to issue debt at historically low-levels some were in fact paid to issue debt as we entered an era of negative interest-rate.

This era peaked with around US $13 trillion of negative yielding bonds around the world with particular areas of negativity if I may put it like that to be found in Germany and Switzerland. At one point it looked like every Swiss sovereign bond might have a negative yield. So what did they do with it?

Germany

This morning has brought us solid economic growth data out of Germany with its economy growing by 0.6% in the last quarter of 2017. But it has also brought us this.

Net lending of general government amounted to 36.6 billion euros in 2017 according to updated results of the Federal Statistical Office (Destatis). In absolute terms, this was the highest surplus achieved by general government since German reunification. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

So Germany chose to take advantage of being paid to issue debt to bring its public finances into surplus which might be considered a very Germanic thing to do. There is of course effects from one to the other because their economic behaviour is one of the reasons why their bonds saw so much demand.

But one day they may regret not taking more advantage of an extraordinary opportunity which was to be able to be paid to borrow. There must be worthy projects in Germany that could have used the cash. Also one of the key arguments of the credit crunch was that surplus countries like Germany needed to trim them whereas we see it running a budget surplus and ever larger trade surpluses.

In the detail there is a section which we might highlight as “Thanks Mario”

 Due to the continuing very low-interest rates and lower debt, interest payments decreased again (–6.4%).

Switzerland

The Swiss situation has been similar but more extreme. Membership of the Euro protected Germany to some extent as the Swiss Franc soared leading to an interest-rate of -0.75% and “unlimited” – for a time anyway – currency intervention. This led to the Swiss National Bank becoming an international hedge fund as it bought equities with its new foreign currency reserves and Switzerland becoming a country that was paid to borrow. What did it do with it? From its Finance Ministry.

A deficit of approximately 13 million is expected in the ordinary budget for 2018.

So fiscal neutrality in all but name and the national debt will decline.

 It is expected that gross debt will post a year-on-year decline of 3.3 billion to 100.8 billion in 2018 (estimate for 2017). This reduction will be driven primarily by the redemption of a 6.8 billion bond maturing combined with a low-level of new issues of only 4 billion.

The UK

Briefly even the UK had some negative yielding Gilts ( bonds) in what was for those who have followed it quite a change on the days of say 15% long yields. This was caused by Mark Carney instructing the Bank of England’s bond buyers to rush like headless chickens into the market to spend his £60 billion of QE and make all-time highs for prices as existing Gilt owners saw a free lunch arriving. Perhaps the Governor’s legacy will be to have set records for the Gilt market that generations to come will marvel at.

Yet the path of fiscal policy changed little as indicated by this.

Or at least it would do if something like “on an annual basis” was added. Oh and to complete the problems we are still borrowing which increases the burden on future generations. The advice should be do not get a job involving numbers! Which of course are likely to be in short supply at a treasury………..

But the principle reinforces this from our public finances report on Wednesday.

Public sector net borrowing (excluding public sector banks) decreased by £7.2 billion to £37.7 billion in the current financial year-to-date (April 2017 to January 2018), compared with the same period in the previous financial year; this is the lowest year-to-date net borrowing since the financial year-to-date ending January 2008.

So we too have pretty much turned our blind eye to a period where we could have borrowed very cheaply. If there was a change in UK fiscal policy it was around 2012 which preceded the main yield falls.

Bond yields

There have been one or two false dawns on this front, partly at least created by the enthusiasm of the Bank of Japan and ECB to in bond-buying terms sing along with the Kaiser Chiefs.

Knock me down I’ll get right back up again
I’ll come back stronger than a powered up Pac-Man

This may not be entirely over as this suggests.

“Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview on Thursday.

However we have heard this before and unless they act on it rises in US interest-rates are feeding albeit slowly into bond yields. This has been symbolised this week by the attention on the US ten-year yield approaching 3% although typically it has dipped away to 2.9% as the attention peaked. But the underlying trend has been for rises even in places like Germany.

Comment

Will we one day regret a once in a lifetime opportunity to borrow to invest? This is a complex issue as there is a problem with giving politicians money to spend which was highlighted in Japan as “pork barrel politics” during the first term of Prime Minister Abe. In the UK it is highlighted by the frankly woeful state of our efforts on the infrastructure front. We are spending a lot of money for very few people to be able to travel North by train, £7 billion or so on Smart Meters to achieve what exactly? That is before we get to the Hinkley Point nuclear power plans that seem to only achieve an extraordinarily high price for the electricity.

One example of fiscal pump priming is currently coming from the US where Donald Trump seems to be applying a similar business model to that he has used personally. Or the early days of Abenomics. Next comes the issue of monetary policy where we could of course in the future see news waves of QE style bond buying to drive yields lower but as so much has been bought has limits. This in a way is highlighted by the Japanese proposal to buy foreign bonds which will have as one of its triggers the way that the number of Japanese ones available is shrinking.

How does Abenomics solve low wage growth?

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

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

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

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

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

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

We also see something familiar from QE supporters.

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

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

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

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

Economic growth

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

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

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

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

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

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

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

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

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

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

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

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

Wages

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

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

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

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

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

Comment

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

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

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

Me on Core Finance TV

 

 

 

What are the consequences of rising bond yields?

So far in 2018 we have seen a move towards higher bond yields across the financial world. This poses more than a few questions not least for the central banks who went to unparalleled efforts in terms of scale to try to reduce them. This as I pointed out on the 6th of December led to some changes.

The credit crunch era has brought bond markets towards the centre stage of economics and finance. Before then there were rare expressions of interest in either a crisis or if the media wanted to film a response to an economic data release. You see equities trade rarely but bonds a lot so they filmed us instead and claimed we were equities trades so sorry for my part in any deception!

At the moment they are back in the news and this morning the Bank of Japan responded. From the Wall Street Journal.

The Bank of Japan took on the market and won—for now.

As Japanese 10-year bond yields threatened to break through the 0.1% mark early Friday, the bank threw down the gantlet and offered to buy out every player in the market.

If we step back for a moment it is hard not to have a wry smile at the Bank of Japan defending a yield on a mere 0.1%!  Not much of a yield or a bear market is it? It poses the question of how strong the economic recovery might be if that is all we can take. Overall it is a consequence of this.

“Today’s action was aimed at firmly implementing the bank’s policy target of guiding the 10-year yield around zero, taking into consideration recent large increases in long-term yields,” a senior BOJ official said. For the BOJ, “around zero” essentially means up to but not including 0.1%.

I am not so sure about the “large increases in long-term yields” story as in fact the thirty and forty-year yields have been dropping. But the response was as follows.

The bank offered to buy an unlimited amount of JGBs with remaining maturities of five to 10 years at a fixed rate of 0.11%, the same level it used on two previous occasions. Yields slipped to 0.85% from 0.95%.

This poses a couple of questions. Firstly for the argument that the Bank of Japan is tapering its bond buying or QE ( which is called QQE in Japan) as offering to buy an “unlimited amount” is hardly tapering. The issue here you may note is rather like that of the Swiss National Bank defending the Swiss Franc at 1.20 which suddenly found it was intervening on an enormous scale. So what looks like tapering could morph into expansion quite easily. How very Japanese!

Also I guess if you own 40% or so of a market as the Bank of Japan does you too would be touchy and nervous about any rise in yield and fall in prices. Time for En Vogue on its tannoy loudspeakers.

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

Maybe our songstresses even had a view for us on how likely it is that the central banking control freaks will reverse course.

I know you think that if we move too soon it would all end

The UK

This is an intriguing one as you see the ten-year Gilt yield has risen to 1.58% this morning  Here is how Bloomberg reflects on this.

Ten-year gilt yields climbed five basis points to 1.58 percent as of 9:29 a.m. London time, after touching 1.59 percent, their highest level since May 2016. The yield has surged about 40 basis points this year.

This is considered a bear market which as someone who has definitely seen such moves in a day and maybe when we were ejected from the ERM in 1992 maybe an hour is hard to take. So let us settle on a QE era bear market. Also the QE link comes back in as the high for UK Gilts was driven by the panic buys of late summer 2016 when the Bank of England dove into the market like a kamikaze pushing the yield down to 0.5%. From time to time apologists for such moves claim that QE does not make losses but if you pay 120 for something and get back 100 at maturity what is that please?

Intriguingly at least one player may have been wondering about a real bear market. From James Mackintosh in the WSJ.

The trade goes like this: borrow £750 million ($1 billion) for 100 years at a time when money is basically free. Invest it in shares. Pocket the difference.

Okay perhaps not a real bear market as that would affect shares too and as you see below the money is cheap in historical terms but not free.

 The scale of that demand was shown Wednesday when Wellcome’s 100-year bond was more than four times oversubscribed with a coupon of just 2.517%, the lowest ever paid on a corporate century bond.

That is not likely to be much in real yield terms and I would much rather be Welcome that those who bought the bonds. They think along the lines I pointed out in my post on Monday on pensions and the distorted world there.

Wellcome Chief Investment Officer Nick Moakes says ultralong bonds are distorted by rules forcing insurance companies and pension funds to buy them at any price, creating an uneconomic demand he is happy to satisfy with a bond issue

Of course buying equities at what is something of a top after a succession of all-time highs might be a case of not the best timing.

The US

This is the leader of the pack on such matters on two counts. It is the world’s largest economy and it currently has a central bank which is in the process of raising interest-rates. It’s central bank is even reducing its stock of bonds albeit at a snail’s pace. If we stick with the domestic impact then it is led by the thirty-year yield which has nudged over 3%. This means that the thirty-year fixed mortgage rate is now 4.23% as we look for the clearest link between the financial world and the real economy.

If we look at the shorter end of the scale we see that the rate rises so far combined with the expectations of more have seen the two-year yield rise to 2.16% as opposed to the 1.2% of this time last year. So there has been a tightening of monetary conditions all round from this route.

Comment

There is a lot to consider here and let us start with the economics. A rise in bond yields tightens monetary conditions and in that sense is a logical response to the better economic environment. However it is awkward for central banks who have paid more than the 100 they will get from their treasury on maturity as politicians have got used to spending the explicit and implicit profits. If they sell their holdings then they will exacerbate the price falls and weaken their remaining stock.

Moving to the foreign exchanges we have seen something rather odd. If you buy the US Dollar you get 2.8% right now if you put the money in a ten-year US Treasury Note whereas if you buy the Japanese Yen you only get 0.9%. So the US Dollar is rising right? Eh no, as I have covered many times. Of course some may be buying now thinking that an US Dollar in the 109s is attractive combined with picking up a 2.7% relative yield. Similar arguments can be made for the Euro and UK Pound £ albeit with smaller yield differentials.

Here is another thought for you. Imagine a Swiss or German version of Wellcome if there is one and how cheaply they could borrow for 100 years. Actually with its international position it could presumably have borrowed in Euros. Perhaps it is bullish of the UK Pound £……..brave if you look back 100 years.

Meanwhile if the bond bear market and its consequences are all too much there is apparently something which can take the pain away.

 

 

What is going on at the Bank of Japan?

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

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

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

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

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

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

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

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

Bond Markets

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

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

The real economy

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

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

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

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

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

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

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

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

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

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

Comment

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

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

 

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

 

What does the lack of wage growth in Japan tell us about our future?

As the credit crunch era has developed we have seen many countries discover that past relationships between the level of unemployment and the rate of wage growth no longer exists. Actually if we look back we see that there had been changes before the credit crunch but it has both exacerbated them and brought them into focus. This issue is particularly pronounced in Japan where the unemployment and employment numbers are very strong. From Japan Macro Advisers.

The Japanese economy keeps adding jobs. 200K new jobs were added in August 2017. The unemployment rate was unchanged at 2.8% in August, remaining at the lowest rate in 23 years.

The stand out number is an unemployment rate of a mere 2.8% which is rather extraordinary especially if we recall estimates of full employment from the past as it is below them! How can this be? Well as even economic concepts do not mean what they say as for example central bankers talk of “price stability” when they mean inflation stability usually at 2% per annum. The concept of full employment was and indeed is like that as it does not mean everyone has a job. It always assumed some frictional unemployment or people temporarily out of work and that implied a higher unemployment rate than Japan now has. If we look at other measures the numbers are also strong.

Japan’s job offers to applicant ratio also remained constant in August at 1.52, the highest ratio since February 1974. The new job offers to applicant ratio slightly declined to 2.21 from 2.27 in July, but it is still close to its historical high and continues to show there are more than two vacant jobs to one applicant.

However we also need to note that there is a particularly Japanese feature to this which is on its way to other countries with demographics issues.

The work age population in Japan, defined as the population of the age between 15 and 64, has been shrinking rapidly. In 2016, it fell by 0.7 million people. In 2017, it is projected to shrink further by 0.8 million in 2017. While the Japanese economy is making ends meet by higher labor participation from its senior citizens, the labor resource limitation is an issue Japan needs to address soon.

Work till you drop is perhaps the new theme here.

What about wages?

The story of my time online covering Japan is that since the Abe government came to power there has been prediction after prediction that wage growth will pick up. Regular readers will be aware that some news organisations such as Bloomberg have regularly reported that wage growth has picked up but the truth is that so far there has been no real sign. If we move from the past hype to reality we see that according to the official data real wages fell by 0.9% in 2013, 2.8% in 2014 and 0.9% in 2015 before rising by 0.7% in 2016. Putting it another way the real wage index which was 103.9 in 2013 was 100.7 in 2016.

If we return to Japan Macro Advisers we see this.

The wage report for August was encouraging. Total wages rose by 0.9% year on year (YoY), the highest increase in the last 12 months. Basic and overtime wages rose by 0.6% YoY, the highest rise since April 2016.

We learn a lot there as growth of a mere 0.9% is “encouraging”?! If we switch to real wages the picture is not because they were 0.1% lower than a year before. They are optimistic because of what is essentially a challenge to the unemployment data as they hint at a change in underemployment.

The report shows that 30.5% of workers covered in the survey were part-time workers, a decline of 0.2% point from a year ago. The government does not publish a seasonally adjusted series, but in our own estimation, we see a clear sign that the part-time ratio is starting to decline.

This matters because.

Part-time workers receive one-third of wages that regular workers receive. There are other important benefits such as social security, and the job security is far stronger for regular workers.

Why might wages growth remain weak?

An interesting facet of the issue was highlighted yesterday by the Wall Street Journal.

Facing the tightest labor market in Japan in 43 years, Gatten Sushi recently hired two Chinese kitchen workers and a Filipino waitress who calls out “Welcome” to customers, each for about $10 an hour.

For a country which in many respects prides itself on being homogenous the situation below represents quite a change.

Japan added 400,000 foreign workers in the four years through 2016, surpassing one million for the first time, or nearly 2% of the workforce, labor ministry data show. That is still low compared with the U.S.’s 17% of foreign-born workers but enough to sway the labor market in urban centers like Tokyo.

This is something familiar these days where countries in effect import immigrants to help cope with poor demographics such as an ageing population but there is a catch.

RDC’s Mr. Fukui said foreign workers help the company keep prices flat, especially at budget places like a conveyer-belt sushi restaurant where Vietnamese workers in masks and plastic gloves place fish atop small rice balls formed by a robot. They are useful in other ways too: Sometimes they help out by serving foreign tourists in their own languages, and Mr. Fukui hopes they will continue working with the company even when they go back home to help it expand overseas.

There is a clear implication here that foreign workers are being used as a way of keeper wages lower. This can work because whilst the wages are low for Japan they are high for elsewhere.

Minimum wage in Japan, too low to attract many native-born workers, is still generous for many other Asians. In 2015, Japan’s minimum wage was 21 times higher than that of Vietnam, 12 times higher than in Nepal, and triple that of China, data from Dai-Ichi Research Institute show.

As to this being a permanent situation well maybe not.

Most foreign workers cannot stay permanently owing to immigration rules. Mr. Abe has repeatedly said he doesn’t want large numbers of immigrants in low-paying jobs coming to Japan for the long term.

Government policy

This has been announced since last weekend’s election according to Reuters.

Japan’s government is considering expanding tax incentives for companies to encourage them to raise wages, three people involved in discussions told Reuters, as many firms remain hesitant to spend their cash reserves on salary increases.

As the existing tax breaks are not working this sounds rather like the approach to QE ( QQE in Japan) where like Agent Smith in The Matrix series of films the cry always goes up for “More”

Comment

There are lessons here because Japan has for some time run a policy of declaring pretty much full employment. What I mean by that is that when I worked in Tokyo some 20 years ago people were employed to count you walking across bridges and lifts in the Ghinza shopping district had operators to save you from the arduous task of pressing a lift button! Of course many other countries are now facing up to the issue of what low levels of unemployment really mean.

The next issue is demographics where Japan is the leader of a pack you would rather not be in. Yes it is welcome people are living longer but it has a shrinking population too. Even it has accepted some immigration but as you have seen earlier on its own terms. As the Abe administration is nationalistic that could easily change, But the immigration that has taken place looks like it has affected wages in some occupations. If we look at the restaurant sector it seems clear that to attract Japanese labour wages would have had to have risen if viable.

That conclusion is not far off dynamite as we are so often told that immigration does not depress wages as this from Noah Smith of Bloomberg reminds us.

Normally immigrants don’t depress native wages, but in Japan, given investment constraints, they actually might. Still…skeptical.

If you have workers coming in from much poorer countries to work in particular sectors then surely it must depress wages in them or make them rise more slowly. I can see that there are areas it is unlikely to affect as for example Eastern European construction workers in the UK or Vietnamese/Chinese restaurant workers in Japan may have no impact at all on many other skills but to say they have no impact in their areas seems strange. Also what happens in their home country?

But if we return to the pattern of Japan upon which immigration has been only a recent thin screen then we see that for all the media and Ivory Tower hype the road on what it has been on for 2 “lost decades” now poses a question for our future.

Wages in Japan has been steadily falling in Japan since 1998. Between 1997 and 2012, wages have fallen by 12.5%, or by 0.9% per year on average. ( Japan Macro Advisers).

But we cannot just simply assume we will be “Turning Japanese” in every respect as this from the UK Office for National Statistics has reminded us today.

UK population projected to grow from 65.6 million in 2016 to 72.9 million in 2041

 

Me on Core Finance TV

http://www.corelondon.tv/uk-gdp-0-4-pleasant-number/