The first business surveys about this economic depression appear

This morning has seen the first actual signals of the scale of the economic slow down going on. One of the problems with official economic data is the  time lag before we get it and this has been exacerbated by the fact that this has been an economic contraction on speed ( LSD). By the time they tell us how bad it has been we may be in quite a different world! It is always a battle between accuracy and timeliness for economic data. Thus eyes will have turned to the business surveys released this morning.

Do ya do ya do ya do ya
Ooh I’m looking for clues
Ooh I’m looking for clues
Ooh I’m looking for clues ( Robert Palmer)

Japan

The main series began in Japan earlier and brace yourselves.

#Japan‘s economic downturn deepens drastically in March, dragged down by a sharp contraction in the service sector, according to #PMI data as #coronavirus outbreak led to plummeting tourism, event cancellations and supply chain disruptions. ( IHS Markit )

The composite output index was at 35.8 which indicates an annualised fall in GDP ( Gross Domestic Product) approaching 8% should it continue. There was a split between manufacturing ( 44.8) and services ( 32.7) but not the way we have got used to. The manufacturing number was the worst since April 2009 and the services one was the worst since the series began in 2007.

France

Next in the series came La Belle France and we needed to brace ourselves even more.

March Flash France PMI suggest GDP is collapsing at an annualised rate approaching double digits, with the Composite Output PMI at an all-time low of 30.2 (51.9 – Feb). Both services and manufacturers recorded extreme drops in output on the month.

There was more to come.

French private sector activity contracted at the
sharpest rate in nearly 22 years of data collection
during March, amid widespread business closures
due to the coronavirus outbreak.

There are obvious fears about employment and hence unemployment.

Amid falling new orders, private sector firms cut
their staff numbers for the first time in nearly threeand-a-half years during March. Moreover, the rate
of reduction was the quickest since April 2013.

I also noted this as I have my concerns about inflation as the Ivory Towers work themselves into deflation mode one more time.

Despite weaker demand conditions, supply
shortages drove input prices higher in March…….with
manufacturers raising output prices for the first time
in three months

We could see disinflation in some areas with sharp inflation in others.

Germany

Next up was Germany and by now investors were in the brace position.

The headline Flash Germany
Composite PMI Output Index plunged from 50.7 in
February to 37.2, its lowest since February 2009.
The preliminary data were based on responses
collected between March 12-23.

This led to this analysis.

“The unprecedented collapse in the PMI
underscores how Germany is headed for recession,
and a steep one at that. The March data are
indicative of GDP falling at a quarterly rate of
around 2%, and the escalation of measures to
contain the virus outbreak mean we should be
braced for the downturn to further intensify in the
second quarter.”

You may be thinking that this is better than the ones above but there is a catch. Regular readers will recall that due to a problem in the way it looks at supply this series has inflated the German manufacturing data. This has happened again.

The headline Flash Germany
Manufacturing PMI sank to 45.7, though it was
supported somewhat by a further increase in
supplier delivery times – the most marked since
July 2018 – and a noticeably slower fall in stocks of
purchases, both linked to supply-side disruption

So the truth is that the German numbers are closer to France once we allow for this. We also see the first signals of trouble in the labour markets.

After increasing – albeit marginally – in each of the
previous four months, employment across
Germany’s private sector returned to contraction in
March. The decline was the steepest since May
2009 and was underpinned by similarly sharp drops
in workforce numbers across both manufacturing
and services.

Also we note a continuing pattern where services are being hit much harder than manufacturing, Of course manufacturing had seen a rough 2019 but services have essentially plunged at a rapid rate.

The Euro Area

We do not get much individual detail but you can see that the other Euro area nations are doing even worse.

The rest of the euro area reported an even
steeper decline than seen in both France and
Germany, led by comfortably the sharpest fall in
service sector activity ever recorded, though
manufacturing output also shrank at the steepest
rate for almost 11 years.

I am trying hard to think of PMI numbers in the 20s I have seen before.

Flash Eurozone Services PMI Activity Index(2)
at 28.4 (52.6 in February). Record low (since
July 1998)

Putting it all together we get this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

The UK

Our numbers turned up to a similar drum beat and bass line.

At 37.1 in March, down from 53.0 in February, the seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – signalled the fastest downturn in private sector business activity since the series began in January 1998. The prior low of 38.1 was seen in November 2008.

This was supported by the manufacturing PMI being at 48 but it looks as though we have at least some of the issues at play in the German number too.

Longer suppliers’ delivery times are typically seen as an
advance indicator of rising demand for raw materials and
therefore have a positive influence on the Manufacturing PMI index.

The numbers added to the household finances one from IHS Markit yesterday.

UK consumers are already feeling the financial pinch of
coronavirus, according to the IHS Markit UK Household Finance Index. With the country on the brink of lockdown during the survey collection dates (12-17 March), surveyed households reported the largest degree of pessimism towards job security in over eight years,
with those employed in entertainment and manufacturing sectors deeming their jobs to be at the most risk.

Comment

So we have the first inklings of what is taking place in the world economy and we can add it to the 40.7 released by Australia yesterday. However we need a note of caution as these numbers have had troubles before and the issue over the treatment of suppliers delivery times is an issue right now. Also it does not appear to matter if your PMI is 30 or 37 we seem to get told this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

Now I am slightly exaggerating because they have said 1.5% to 2% for the UK but if we are there then France and the Euro area must be more like 3% and maybe worse if the series is to be consistent.

Next I thought I would give you some number-crunching from Japan.

TOKYO (Reuters) – The Bank of Japan on Tuesday acknowledged unrealized losses of 2-3 trillion yen ($18-$27 billion) on its holdings of exchange-traded funds (ETFs) after a rout in Japanese stock prices, raising the prospect it could post an annual loss this year.

Our To Infinity! And Beyond! Theme has been in play for The Tokyo Whale and the emphasis is mine.

Its stock purchase started at a pace of one trillion yen per year in 2013 when the Nikkei was around 12,000. The buying expanded to 3 trillion yen in 2014 and to 6 trillion yen in 2016, ostensibly to boost economic growth and lift inflation, but many investors view the policy as direct intervention to prop up share prices.

Surely not! But the taxpayer may be about to get a warning of sorts.

The unrealized loss of 2-3 trillion yen would wipe out about 1.7 trillion yen of recurring profits the BOJ is estimated to make this year from interest payments on its massive bond holdings, said Hiroshi Ugai, senior economist at J.P. Morgan.

For today that will be on the back burner as the Nikkei 225 equity index rose 7% to just above 18,000 which means that its purchases of over 200 billion Yen yesterday will be onside at least as we note the “clip size” has nearly trebled for The Tokyo Whale.

 

 

Can QE defeat the economic impact of the Corona Virus?

The weekend just passed has seen more than a few bits of evidence of the spread of the Corona Virus especially in Japan, South Korea, Italy and Iran. It has been a curious phase in Japan where on that quarantined cruise ship they have seemed determined to follow as closely as they can to the plot of the film Alien. Even China has been forced to admit things are not going well. This is President Xi Jinping in Xinhua News.

The epidemic situation remains grim and complex and it is now a most crucial moment to curb the spread, he noted.

Yet later in the same speech we are told this.

Stressing orderly resumption of work and production, Xi made specific requirements to that end.

Back on February 3rd we looked at the potential impact on the economy of China but today we can look wider. Let us open by seeing the consequences of some of the rhetoric being deployed.

Bond Markets

UST 30-Year yield falls to an all-time low 1.83 ( @fullcarry )

So we see an all-time low for the long bond in the worlds largest sovereign bond market. Rallies in bond markets are a knee-jerk response to signs of financial turmoil except it is supposed to be for the certainty of yield or if you prefer  interest. The catch is that there is not much to be found even in the US now and if we look wider afield we see that in one of the extreme cases of these times there is none to be found at all. This is because even the thirty-year yield in Germany is now -0.04% so in fact it is being paid to borrow all along its maturity spectrum.

It was only on Friday that I pointed out some were suggesting that the “bond vigilantes” might return to the UK whereas the UK Gilt market has surged also today with the 50 year Gilt at a mere 0.76%.

These are extraordinary numbers which come on the back of all the interest-rate cuts and all the central bank QE bond buying. Of course the latter is ongoing in the Euro area and in Japan. So let us look at them in particular.

The ECB has already hinted in the past that a reduction in its deposit rate to -0.6% could be deployed but frankly their situation is highlighted by talking about a 0.1% move. After all if full percentage points have not helped then how will 0.1%? Even they are tilling the ground on this front as they join the central banking rush to claim lower interest-rates are nothing to do with them at all.

Interest rates in advanced economies have been on a broad downward path for more than three decades
and remain close to historical lows.[5]
As has been highlighted in many studies, the drivers of this long-term pattern largely boil down to
demographics, productivity and the elevated net demand for safe assets. ( ECB Chief Economist Lane on Friday )

Next comes the issue that an extension of QE is limited by that fact that there are not so many bonds to buy on Germany and the Netherlands. But the reality is that under pressure this “rules based organisation” has a habit of changing the rules.

Switching to Japan we see that Governor Kuroda has been speaking too.

RIYADH (Reuters) – The Bank of Japan will be fully prepared to take necessary action to mitigate the impact of the coronavirus on the world’s third-largest economy, its Governor Haruhiko Kuroda said.

Okay what?

He also repeated the view that, while the central bank stands ready to ease monetary policy further “without hesitation”, it saw no immediate need to act.

That reminds me of the time he denied any plans to move to negative interest-rates and a mere eight days later he did. The next bit seems to be from a place far,far,away.

Kuroda said there was no major change to the BOJ’s projection that Japan’s economy would keep recovering moderately thanks to an expected rebound in global growth around mid-year.

Perhaps he was hoping that people would forget that GDP fell by 1.6% in the last quarter of 2018 meaning that the economy was 0.4% smaller than a year before.Or that Japanese plans for this year involved an Olympics in Tokyo that is now in doubt, after all the Tokyo Marathon has been dramatically downsized. I write that sadly as there are a couple of people who train at Battersea Park running track with hopes of competing in the Olympics.

But the grand master of expectations here was this from the G 20 conference over the weekend.

“I’m not going to comment on monetary policy, but obviously central bankers will look at various different options as this has an impact on the economy,” Mnuchin said.

Gold

There have been various false dawns for the price of gold and of course enough conspiracy theories about this for anyone. But gold bugs will be singing along with Spandau Ballet as they note a price of US $1688 is up over 23% on a year ago.

Gold
(Gold)
Always believe in your soul
You’ve got the power to know
You’re indestructible, always believe in, ‘cos you are ( Spandau Ballet )

Equity Markets

This have faced something of a conundrum as fears of a slowing world economy have been been by the hopium of even more central bank easing. Last week the Dax 30 of Germany hit an all-time high and today it is down 3.6% at 13,070 as I type this. So for all the media panic today it remains close to its highest ever.

Currencies

There are two main trends here I want to mark. The first is that we seem to be again in a period of what might be called King Dollar. Also there is this.

SNB propping up 1.0600 in $EURCHF ( @RANSquawk )

Trying that at 1.20 imploded rather spectacularly in January 2015. For newer readers the Swiss Franc (CHF) has been strong as the reversal of the pre credit crunch carry trade has been added to by the perceived strength of Switzerland. This was exacerbated as its neighbour the Euro area kept cutting interest-rates and went negative. So the Swiss National Bank are presently intervening against a safe haven flow towards the Swissy.

I have suggested for a while now I could see the Swiss National Bank cutting interest-rates to -1% and expect not to be “so lonely” as The Police put it. Also I would remind you that 20% of the intervention will be reinvested in the US equity market.

Comment

Who knew that interest-rate cuts and QE could be effective cures for the Corona Virus? Especially as they have not worked for much else. Although there are also whispers that it can cure climate change too. This highlights the moral and intellectual bankruptcy at play as central bankers try to offer more central planning to fix the problems of past central planning. The Corona Virus is of course not their fault but anything unexpected was always going to be a problem for a group determined not to allow a recession and thus any reform under creative destruction.

Meanwhile the rest of us wait to see the full economic impact as we mull the flickers of knowledge we get. For example Jaguar Land Rover saying it only has 2 weeks supply of some parts or reports that for some US pharmaceuticals 80% of the basic ingredients come from China. So the latter could see large demand they cannot supply and higher prices just as we see lower demand and inflation elsewhere. More conventionally there is this for France which must send a chill down the spine of Italy to its boot.

The drop off in tourist numbers is an “important impact” on France’s economy, Bruno Le Maire, the country’s finance minister, said…….France is one of the most visited countries in the world, and tourism accounts for nearly 8% of its GDP.

Podcast

 

 

 

 

Japan sees quite a GDP contraction in spite of the Bank of Japan buying 8% of the equity market

Overnight the agenda for today was set by news out of the land of the rising sun or Nihon. Oh and I do not mean the effort to reproduce the plot line of the film Alien ( Gaijin) for those poor passengers on that quarantined cruise ship. It was this reported by the Asahi Shimbun.

Gross domestic product declined by a seasonally adjusted 1.6 percent in the quarter from the previous three months, or an annualized 6.3 percent, the Cabinet Office figures showed.

The contraction of 6.3 percent was far worse than expectations of many private-sector economists, who predicted a shrinkage of 4 percent or so.

Just to clarify the quarterly fall was 1.6% or using the Japanese style 6.3% in annualised terms. What they do not tell us is that this means that the Japanese economy was 0.4% smaller at the end of 2019 than it was at the end of 2018. So quite a reverse on the previous trend in 2019 which was for the annual rate of growth to pock up.

The Cause

Let me take you back to October 7th last year.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

I pointed out back then that I feared what the impact of this would be.

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

As you can see this was a risky move and it came with something of an official denial of the economic impact.

 about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan.

The 2014 rise in the Consumption Tax ( in rough terms the equivalent of VAT in the UK and Europe) had hit the Japanese economy hard, so the official claim of that the new impact would be a quarter was something I doubted. Now let us return to the Asahi Shimbun this morning.

Japan’s economy shrank in the October-December period for the first time in five quarters, as the sales tax hike and natural disasters pummeled personal consumption, according to preliminary figures released on Feb. 17.

The exact numbers are below.

Personal consumption, which accounts for more than half of Japan’s GDP, grew by 0.5 percent in the July-September period.

But the figure plunged to minus 2.9 percent for the three months from October, when the government raised the consumption tax rate to 10 percent from 8 percent.

We had previously looked at the boost to consumption before the tax rise as electrical appliances in particular were purchased. This will have flattered the economic data for the third quarter of last year and raised the GDP growth rate. But as you can see the party has had quite a hangover. On its own this would have led to a 2.2% decline in quarterly GDP.

The spinning has continued apace.

Yasutoshi Nishimura, minister in charge of economic revitalization, gave a positive outlook for personal consumption in a statement released on Feb. 17.

“The margin of decline in personal consumption is likely to shrink,” he said.

As John Lennon points out in the song Getting Better.

It can’t get no worse

As ever there is a familiar scapegoat which is the weather.

Destructive typhoons that hit eastern Japan and the warmer winter also fueled the slowdown in personal spending, such as purchases of winter clothes.

Although as @Priapus has pointed out there was an impact on the Rugby World Cup and the Japanese Grand Prix.

Investment and Exports

These will be on people’s minds as we try to look forwards. According to the Asahi Shimbun the situation for investment is also poor.

Investment in equipment by businesses, for example, shrank by 3.7 percent, a sharp decline from a rise of 0.5 percent in the preceding quarter, while housing investment tumbled 3.7 percent from an increase of 1.2 percent.

New housing starts have also been waning since the tax hike.

Many companies’ business performances are deteriorating, particularly in the manufacturing sector.

The business investment fall was presumably in response to the trade war and the deteriorating conditions in the Pacific economy we looked at in the latter part of 2019 and of course predates the Corona Virus. By contrast the Bank of Japan like all central banks will be more concerned about the housing market.

Switching to trade itself the position appears brighter.

In contrast, external demand pushed up GDP by 0.5 percentage point.

But in fact this was due to imports falling by 2.6% so a negative and exports fell too albeit by a mere 0.1%. That pattern was repeated for the annual comparison as exports were 2.2% lower than a year before and imports 4.3% lower. It is one of the quirks of the way GDP is calculated that a fall in imports larger than a fall in exports boosts GDP in this instance by 0.4%. Thus the annual comparison would have been -0.8% without it.

Comment

Sometimes the numbers are eloquent in themselves. If we look at the pattern for private consumption in Japan we see that it fell from 306.2 trillion Yen to 291.6 trillion in the first half of 2014 as the first tax rise hit. Well on the same seasonally adjusted basis and 2011 basis it was 294 trillion Yen in the last quarter of 2019. If we allow for the fact that 2014 saw a tax based boost then decline then consumption in 2019 had barely exceeded what it was before the first tax rise before being knocked on the head again. Or if you prefer it has been groundhog day for consumption in Japan since 2013. That is awkward on two counts. Firstly the Japanese trade surplus was one of the economic world’s imbalances pre credit crunch and expanding consumption so that it imported more was the positive way out of it. Instead we are doing the reverse. Also one of the “lost decade” issues for Japan was weak consumption growth which has just got weaker.

This leaves the Japanese establishment in quite a pickle. The government has already announced one stimulus programme and is suggesting it may begin another. The catch is that you are then throwing away the gains to the fiscal position from the Consumption Tax rise. This poses a challenge to the whole Abenomics programme which intended to improve the fiscal position by fiscal stimulus leading to economic growth. I am sure you have spotted the problem here.

Next comes the Bank of Japan which may want to respond but how? For newer readers it has already introduced negative interest-rates ( -0.1%) and bought Japanese Government Bonds like it is a powered up Pac-Man to quote the Kaiser Chiefs, But the extent of its monetary expansionism is best highlighted by this from Etf Stream earlier.

According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.

Hence the nickname of The Tokyo Whale.They think the rate of buying has slowed but I think that’s an illusion because it buys on down days and as The Donald so regularly tweets equity markets are rallying. Just this morning the German Dax index has hit another all-time high. But what do they do next? They cannot buy that many more ETFs because they have bought so many already. As you can see they are already a material player in the equity market and they run the Japanese Government Bond market as that is what Yield Curve Control means. Ironically the latter has seen higher yields at times in an example of how water could run uphill rather than down if the Bank of Japan was in charge of it. It will be wondering how the Japanese Yen has pretty much ignored today’s news.

Also as a final point. More and more countries are finding it hard to raise taxes aren’t they?

Podcast

 

 

 

Are falling real wages the future for us all?

The issue of wage growth is something we have found ourselves returning to time and time again. The cause is in one sense very simple there has been a lack of it. There are two components of this of which the first is just simply low numbers but the second is another reversal for the economics establishment . This is where we have seen employment gains and in some cases record low levels of unemployment but the wage growth fairy has turned out to be precisely that. As an example if we look back we see that the UK Office for Budget Responsibility opened with equations that would have UK wage growth above 5% in today’s environment rather than the 3% we have.

Japan

The leader in the pack in this regard continues to be Japan so let us go straight to the data released at the end of last week.

The inflation-adjusted average monthly wage fell 0.9 percent from a year earlier in 2019, dragged down by an increase in part-time workers, the labor ministry said Friday.

Average monthly cash earnings per worker, including bonuses, fell 0.3 percent to ¥322,689 ($2,900) on a nominal basis, the first decline in six years, according to preliminary data by the Ministry of Health, Labor and Welfare. ( Japan Times)

If we for the moment stick with the fact that wages fell we can then note that this happened in spite of this.

The unemployment rate was unchanged in December from the previous month, at 2.2 percent, reflecting an ongoing labor shortage due to the rapidly graying population, government data showed Friday.

In the reporting month the number of unemployed was 1.45 million, down 140,000 from a year earlier, according to the Internal Affairs and Communications Ministry. ( Japan Times January 31)

Although they do not mention it this equals the record low for the unemployment rate and we get more detail on the labour shortage below.

The number of people with jobs grew for the 84th straight month, up 810,000 from a year earlier at 67.37 million in December. Of those, 30 million were women, up 660,000 from a year earlier, and 9.02 million were 65 or over, up 470,000.

This is a success for the Japanese economy which has reached I think what economists used to call “full employment”. Actually if they saw the numbers below they would be predicting it would be party time for wage growth.

Separate data from the Health, Labor and Welfare Ministry showed that the job availability ratio in December stood at 1.57, unchanged since September. The ratio indicates that there were 157 job openings for every 100 people seeking jobs.

But reality has not been kind to that particular and it has discombobulated some Ivory Towers so much that they believe in it regardless. A case of Restaurant at the end of the Universe thinking.

Reality is frequently inaccurate

If we go back to the wages data we started with there were two components beginning with a real fall but also a nominal one. The latter I point out because when we look at Japan’s public debt burden it is not going to be solved with income taxes with nominal incomes falling. It is the opposite of what we call inflating away the debt.

The situation is so troubling that a scapegoat is required which are part-time workers.

The proportion of workers that are part-time reached a record 31.53 percent, up 0.65 percentage point from the previous year.

For those who want to know how much the Japanese get paid here you are.

Average monthly wages for full-time workers increased 0.3 percent, to ¥425,288, while those of part-time workers stayed flat at ¥99,758.

December wages are especially important in Japan as they are the main bonus season meaning they are around 175% of the average. So bonuses are low and whilst we do not get much of a sectoral breakdown we see that total manufacturing wages were 2.6% lower in December in real terms.

The index for real wages is now 99.9 or slightly lower than the 2015 average. This is quite a critique of the official policy of Abenomics which was supposed to raise wages in both nominal and real terms but as you can see has not done so.

Regular readers will know I have been concerned since the advent of Abenomics that it was really just another version of Japan Inc under the covers. Well in that scenario Japanese companies would be doing well but not raising wages.

The retained earnings of Japanese companies combined hit a record ¥463 trillion last year. Corporate earnings — which remain near record levels despite the setbacks of the past two years — have clearly not been invested enough in manpower.  ( Japan Times )

Whereas according to the Nikkei Asian Review the longer-term picture is this.

The growing ranks of nonregular workers puts pressure on average nominal wages, which remain 13% below their peak in 1997. From 2012 to 2018 nominal wages grew only 2.6%, labor ministry figures show.

United States

Friday lunchtime in the UK produced this.

Total nonfarm payroll employment rose by 225,000 in January, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in construction, in health care, and in transportation and warehousing.

This continued a pretty strong picture especially at this stage in the cycle.

After revisions, job gains have averaged 211,000 over the
last 3 months.

Now if we switch to wage growth we see this.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $28.44. Over the past 12 months, average hourly earnings have increased by 3.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees
were $23.87 in January, little changed over the month (+3 cents).

In nominal terms this is much better than in Japan but if we switch to real terms then we need to compare with this.

From 2018 to 2019, consumer prices for all items rose 2.3 percent.

I am taking the numbers as a broad sweep because we do not have the January data yet, But we see that whilst there is some real wage growth it is a bit under 1% per annum so not much.

Comment

The difference between the US and Japan is that there is some real wage growth in the former there is none in the latter. Can we explain that? There are two possible causes of which the first is demographics where Japan has a shrinking and ageing population whereas the US is growing. Also there is a structural issue where the Japanese are very resistant to price rises which in a reversal of the wages and prices spirals of the 70s and 80s in my home country seems to have infected wage growth too. The fear as Lily Allen would put it might be a case 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
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…

For the economics establishment there is only pain because they continue to plough ahead with “output gap” style theories. Even worse because they failed in the GDP or economic output arena they switched to the labour market. It has turned out to be like playing 3 at the back in football and losing 3-0 and thus switching to 4 at the back and losing 5-0. That is because the labour market has is some places gone beyond what was called full employment and yet real wage growth is weak at best and has gone backwards in Japan which has a stellar employment situation at least according to conventional metrics.

Moving to the UK we finally got some real wage growth but we need to cross our fingers and there is still some distance to travel before we get right back where we started from. Hopefully we can at least regain the previous peak.

Podcast

 

Where next for the Japanese Yen and the Bank of Japan?

As the third most traded currency the Japanese Yen is one of the bedrocks of the world economy. In spite of the size and strength of the Japanese economy the currency tail can wag the economy dog as we saw on the period of the “Carry Trade” and its consequences. For newer readers I looked at the initial impact back on the 19th of September 2016.

 Ironically if done on a large-scale as happened back in the day with the Swiss Franc and the Japanese Yen it lowers the currency and so not only is the interest cheaper but you have a capital gain. What could go wrong? Well we will come to that. But this same effect turned out to make things uncomfortable for both Japan and Switzerland as their currencies were pushed lower and lower.

At that point borrowers were having a party as the got a cheaper borrowing rate and a currency gain but the Japanese ( and Swiss) saw their currency being depressed. However the credit crunch ended that party as currency traders saw the risk and that people might buy Yen to cover the risk. Thus there was a combination of speculative and actual buying which saw the Yen strengthen from over 120 Yen to the US Dollar to below 80.

There were various impacts from this and starting in Japan life became difficult for its exporters and some sent production abroad as the mulled an exchange rate of around 78 to the US Dollar. For example some shifted production to Thailand. Looking wider the investors who remained in the carry trade shifted from profit to loss. On this road in generic terms the typical Japanese investor often described as Mrs. Watanabe was having a rough patch as in Yen terms their investments went being hit. Actually that is something of a generic over my career for Mrs Watanabe as timing of investments in say UK Gilts or Australian property has often been poor. Of course as it turns out property in Oz did work but you would have needed plenty of patience.

Enter the Bank of Japan

The next phase was a type of enter the dragon as the Bank of Japan in 2013 embarked on an extraordinary monetary stimulus programme. Under the banner of Abenomics that was designed to weaken the Yen although it was not officially one of the 3 arrows it was supposed to fire. For a while this worked as the Yen fell towards 125 to the US Dollar. But just as economics 101 felt it could celebrate a rare triumph the Yen then strengthened again and actually rallied to 101 in spite of negative interest-rates being deployed  leading to yet another new effort called QQE and Yield Curve Control in September 2016.

So we see that Japan had some success in weakening the Yen but that then ended and even with negative interest-rates and the purchases by the Bank of Japan below there was a fizzling out of any impact.

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

But you see these things have unintended consequences as Brad Setser points out below.

Japanese investors have been big buyers of foreign bonds—and U.S. bonds in particular. The lifers, the Japanese government through the government pension fund (GPIF), the Japanese government through Post Bank (which takes in deposits and cannot make loans so it buys foreign bonds since it cannot make money buying JGBs), and Norinchukin*

So a policy to weaken the Yen has a side-effect of strengthening it and even worse makes the global financial system more risky. Back to Brad.

In broad terms, a number of Japanese financial institutions have become, in part, dollar based intermediaries. They borrow dollars from U.S. money market funds, U.S. banks, and increasingly the world’s large reserve managers (all of whom want to hold short-term dollar claims for liquidity reasons) and invest in longer dated U.S. bonds.

What about now?

Things are rather different to this time last year when we were trying to figure out what had caused this?

The Japanese yen soared in early Asian trading on Thursday as the break of key technical levels triggered massive stop-loss sales of the U.S. and Australian dollars in very thin markets. The dollar collapsed to as low as 105.25 yen on Reuters dealing JPY=D3, a drop of 3.2 percent from the opening 108.76 and the lowest reading since March 2018. It was last trading around 107.50 yen………. ( Reuters )

That was from January 3rd whereas overnight we see this.

The major was trading 0.1 percent up at 110.09, having hit a high of 110.21 earlier, its highest since May 23.  ( EconoTimes )

On its own this may seen the Governor of the Bank of Japan have a quiet smile and a celebratory glass of sake. But falls in the Yen are associated with something else which will please the head of The Tokyo Whale.

TOKYO (Kyodo) — Tokyo stocks rose Tuesday, with the benchmark Nikkei index ending above 24,000 for the first time since mid-December, as investor sentiment improved on expectations for further easing of U.S.-China trade tensions. ( The Mainichi)

The Mainichi seems to have missed the currency connection with this but no doubt Governor Kuroda   will be pointing out both thresholds to Prime Minister Shinzo Abe.

Has something changed?

On Monday JP Morgan thought so. Via Forex Flow.

But because in recent years the yen is no longer being sold off in the first place, it is not acting as much like a safe-haven currency as in the past.

Okay so why?

if interest rates increase in other countries (opening a wider gap with rates in Japan)

Well good luck with that one! Maybe some day but the credit crunch era has seen 733 interest-rate cuts. However the Financial Times has joined in.

First, Japan is running trade deficits, which would imply a weaker currency. Second, domestic asset managers are busy buying higher-yielding foreign assets. Third, Japanese companies, confronting a chronic shortage of decent ways to deploy their capital at home, are increasingly spending it on deals overseas.

The last point is a really rather devastating critique of the six years of Abenomics as one of the stated Arrows was for exactly the opposite. Also there us more trouble for economics 101 as a lower Yen has seen a trade surplus switch to a deficit. Actually I think that responses to exchange rate moves can be very slow and measured in years so with all the ch-ch-changes it is hard to know what move is in play.

Comment

There is much to reflect on here. For example today may be one to raise a smile at the Bank of Japan as it calculates the value of its large equity holdings and sees the Yen weaken across a threshold. But it is also true that exactly the same policies saw the “flash rally” of over a year ago. In addition we see that the enormous effort in play to weaken the Yen has seen compensating side-effects which raise the risk level in the international finance system. Really rather like the Carry Trade did.

A warning is required because in the short-term crossing a threshold like 110 Yen sees a reversal but we could see the Yen weaken for a while. This is problematic with so many others wanting to devalue their currency as well with the Bank of England currently in the van. From a Japanese perspective this will be see as a gain against a nation they have all sorts of issues with.

“China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,” US Treasury Secretary, Steven Mnuchin, said.

President Donald Trump has repeatedly accused China of allowing the value of the yuan to fall, making Chinese goods cheaper.

But, on Monday, the US said that the value of the yuan had appreciated since August, at the height of the trade war. ( BBC )

How will that play out?

 

 

 

The mad world of negative interest-rates is on the march

Yesterday as is his want the President of the United States Donald Trump focused attention on one of our credit crunch themes.

Just finished a very good & cordial meeting at the White House with Jay Powell of the Federal Reserve. Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.

I guess he was at the 280 character limit so replaced negative interest-rates with just negative interest. In a way this is quite extraordinary as I recall debates in the earlier part of the credit crunch where people argued that it would be illegal for the US Federal Reserve to impose negative interest-rates. But the Donald does not seem bothered as we see him increasingly warm to a theme he established at the Economic Club of New York late last week.

“Remember we are actively competing with nations that openly cut interest rates so that many are now actually getting paid when they pay off their loan, known as negative interest. Who ever heard of such a thing?” He said. “Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.” ( Reuters )

That day the Chair of the US Federal Reserve Jerome Powell rejected the concept according to CNBC.

He also rejected the idea that the Fed might one day consider negative interest rates like those in place across Europe.

The problem is that over the past year the 3 interest-rate cuts look much more driven by Trump than Powell.

Of course, there are contradictions.Why does the “best economy ever” need negative interest-rates for example? Or why a stock market which keeps hitting all-time highs needs them? But the subject keeps returning as we note yesterday’s words from the President of the Cleveland Fed.

Asked her view on negative interest rates, Mester told the audience that Europe’s use of them “is perhaps working better than I might have anticipated” but added she is not supportive of such an approach in the United States should there be a downturn.

Why say “working better” then reject the idea?  We have seen that path before.

The Euro area

As to working better then a deposit-rate of -0.5% and of course many bond yields in negative territory has seen the annual rate of economic growth fall to 1.1%. Also with the last two quarterly growth readings being only 0.2% it looks set to fall further.

So the idea of an economic boost being provided by them is struggling and relying on the counterfactual. But the catch is that such arguments are mostly made by those who think that the last interest-rate cut of 0.1% made any material difference. After all the previous interest-rate cuts that is simply amazing. Actually the moves will have different impacts across the Euro area as this from an ECB working paper points out.

A striking feature of the credit market in the euro area is the very large heterogeneity across countries in the granting of fixed versus adjustable rate mortgages.
FRMs are dominant in Belgium, France, Germany and the Netherlands, while ARMs are prevailing in Austria, Greece, Italy, Portugal and Spain (ECB, 2009; Campbell,
2012)

Actually I would be looking for data from 2019 rather than 2009 but we do get some sort of idea.

Businesses and Savers in Germany are being affected

We have got another signal of the spread of the impact of negative interest-rates .From the Irish Times.

The Bundesbank surveyed 220 lenders at the end of September – two weeks after the ECB’s cut its deposit rate from minus 0.4 to a record low of minus 0.5 per cent. In response 58 per cent of the banks said they were levying negative rates on some corporate deposits, and 23 per cent said they were doing the same for retail depositors.

There was also a strong hint that legality is an issue in this area.

“This is more difficult in the private bank business than in corporate or institutional deposits, and we don’t see an ability to adjust legal terms and conditions of our accounts on a broad-based basis,” said Mr von Moltke, adding that Deutsche was instead approaching retail clients with large deposits on an individual basis.

So perhaps more than a few accounts have legal barriers to the imposition of negative interest-rates. That idea gets some more support here.

Stephan Engels, Commerzbank’s chief financial officer, said this month that Germany’s second largest listed lender had started to approach wealthy retail customers holding deposits of more than €1 million.

Japan

The Bank of Japan has dipped its toe in the water but has always seemed nervous about doing anymore. This has been illustrated overnight.

“There is plenty of scope to deepen negative rates from the current -0.1%,” Kuroda told a semi-annual parliament testimony on monetary policy. “But I’ve never said there are no limits to how much we can deepen negative rates, or that we have unlimited means to ease policy,” he said. ( Reuters )

This is really odd because Japan took its time imposing negative interest-rates as we had seen 2 lost decades by January 2016 but it has then remained at -0.1% or the minimum amount. Mind you there is much that is crazy about Bank of Japan policy as this next bit highlights.

Kuroda also said there was still enough Japanese government bonds (JGB) left in the market for the BOJ to buy, playing down concerns its huge purchases have drained market liquidity.

After years of heavy purchases to flood markets with cash, the BOJ now owns nearly half of the JGB market.

In some ways that fact that a monetary policy activist like Governor Kuroda has not cut below -0.1% is the most revealing thing of all about negative interest-rates.

Switzerland

The Swiss found themselves players in this game when the Swiss Franc soared and they tried to control it. Now they find themselves with a central bank that combines the role of being a hedge fund due to its large overseas equity investments and has a negative interest-rate of -0.75%.

Nearly five years after the fateful day when the SNB stopped capping the Swiss Franc we get ever more deja vu from its assessments.

The situation on the foreign exchange market is still fragile, and the Swiss franc has appreciated in trade-weighted terms. It remains highly valued.

Comment

I have consistently argued that the situation regarding negative interest-rates has two factors. The first is how deep they go? The second is how long they last? I have pointed out that the latter seems to be getting ever longer and may be heading along the lines of “Too Infinity! And Beyond!”. It seems that the Swiss National Bank now agrees with me. The emphasis is mine.

This adjustment to the calculation basis takes account of the fact that the low interest rate environment around the world has recently become more entrenched and could persist for some time yet.

We have seen another signal of that recently because the main priority of the central banks is of course the precious and we see move after move to exempt the banks as far as possible from negative interest-rates. The ECB for example has introduced tiering to bring it into line with the Swiss and the Japanese although the Swiss moved again in September.

The SNB is adjusting the basis for calculating negative interest as follows. Negative interest will continue to be charged on the portion of banks’ sight deposits which exceeds a certain exemption threshold. However, this exemption threshold will now be updated monthly and
thereby reflect developments in banks’ balance sheets over time.

If only the real economy got the same consideration and courtesy. That is the crux of the matter here because so far no-one has actually exited the black hole which is negative interest-rates. The Riksbank of Sweden says that it will next month but this would be a really odd time to raise interest-rates. Also I note that the Danish central bank has its worries about pension funds if interest-rates rise.

A scenario in which interest rates go up
by 1 percentage point over a couple of days is not
implausible. Therefore, pension companies should
be prepared to manage margin requirements at
all times. If the sector is unable to obtain adequate
access to liquidity, it may be necessary to reduce the
use of derivatives.

Personally I am more bothered about the pension funds which have invested in bonds with negative yields.After all, what could go wrong?

 

 

Japan and Korea have chosen a bad time to fire up their own trade war

This is a story influenced by a brewing trade war but not the one that you might think. It is between Japan and Korea and the latest phase started in July when Japan imposed restrictions on trade with Korea for 3 chemicals. This gets more significant when you realise that they are crucial for smartphones ( displays on particular) and that according to CNBC Japan is responsible for 90% of the world’s supply of them. This affects quite of bit of Korean industry with Samsung being the headliner. Them Japan dropped Korea from its whitelist of trusted trading partners making trade more difficult before Korea did the same.

According to Bloomberg Citigroup have tried to downplay this today but I note these bits of it.

Meanwhile, boycotts in South Korea have led to a plunge in sales of Japanese consumer goods and a decrease in tourists to Japan, who may have decided to travel domestically instead, according to Citi………Last month, South Korean exports to Japan fell 14 percent, while imports from Japan slid 23 percent. South Korea’s trade ministry attributed the declines to industrial factors rather than trade actions.

Ah an official denial! We know what that means.

The issue has deep roots in the past and the Japanese occupation of the Korean peninsula a century ago as well as its later use of Korean “comfort women.” That explains the Korean issue with Japan and on the other side the Japanese consider themselves superior to Koreans and in my time there were quite open about it. Whilst he initially made moves to calm the situation there was always going to be an issue with a nationalistic politician like  Shinzo Abe running Japan.But let us move on noting that both countries will be experiencing an economic brake.

Japan Economic Growth

Let me hand you over to The Japan Times which gives us the position and some perspective.

In the third quarter the world’s third-largest economy grew an annualized 0.2 percent, slowing sharply from a revised 1.8 percent expansion in April to June, according to preliminary gross domestic product data released by the government Thursday.

It fell well short of a median market forecast for a 0.8 percent gain, and marked the weakest growth since a 2.0 percent contraction in the July-September period last year.

So over the past six months Japan has grown by 0.5% and we also get an idea of the erratic nature of economic growth there.This is partly due to the way that Japan does not conform to stereotype as it has struggled more than elsewhere to measure GDP. Partly due to last year’s third quarter drop. annual growth has picked up to 1.3% but that looks like being the peak.

Why? Well the 0.2% growth was driven by a 0.9% rise in domestic demand ( both numbers are annualised) just in time for the consumption tax to be raised. Actually private consumption was up 1.4% in the quarter suggesting that purchases were being made ahead of the rise.

At the end of last month this was reinforced by this.

The Consumer Confidence Index (seasonally adjusted series) in October 2019 was 36.2, up 0.6 points from the previous month.

Yes it was up but you see the number had fallen from around 44 at the opening of 2018 and these are the lowest readings since 2011.

Korea Economic Growth

Real gross domestic product (chained volume measure of GDP) grew by 0.4 percent in the third quarter of 2019 compared to the previous quarter……Real GDP (chained volume measure of GDP) increased by 2.0 percent year on
year in the third quarter of 2019.

In a broad sweep this means that economic growth has been slowing as it was 3.2% in 2017 and 2.7% in 2018. Rather unusually Korea saw strong export growth especially of we look at what was exported.

Exports increased by 4.1 percent, as exports of goods such as motor vehicles and semiconductors expanded. Imports were up by 0.9 percent, owing to increased imports of transportation equipment.

Also manufacturing grew.

Manufacturing rose by 2.1 percent, mainly due to an increase in computer, electronic and optical products.

However the economy has been slowing and if either of those reverse will slow even more quickly. Back on the 18th of October we noted this response.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

This was more of an external rather than an internal move as last week we learnt this.

During September 2019 Narrow Money (M1, seasonally adjusted, period-average) increased by 0.6% compared to the previous month.

So whilst it had been weak as annual growth was 3.3% in June it has risen since to 5% which is slightly above the average for 2018.

However they could cut on inflation grounds as this from Korea Statistics shows.

The Consumer Price Index was 105.46(2015=100) in October 2019. The index increased 0.2 percent from the preceding  month and was unchanged from the same month of the previous year.

According to the Bank of Korea the outlook is for more of the same.

 The Producer Price Index increased by 0.1% month-on-month in September 2019 – in year-on-year terms it decreased by 0.7%.

Exchange Rate

This is at 10.68 Won to the Yen as I type this and is up over 7% over the past year. So an additional factor in the situation will be that the Korean’s have been winning the currency war. This of course, will be annoying for Shinzo Abe who’s Abenomics programme set out to weaker the Japanese Yen. As we stand Korea has an official interest-rate some 1.35% higher so there is not a lot the Bank of Japan can do about this.

Comment

As we stand it initially looks as if Korea will be the relative winner here.

“Domestic demand had made up for some of the weakness in external demand, but we can’t count on this to continue,” said Taro Saito, executive research fellow at NLI Research Institute.

“A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum.” ( Japan Times)

But the argument it is in a stronger position weakens somewhat if we switch to its Gross National Income.

Real gross domestic income (GDI) increased by 0.1 percent compared to the previous quarter.

Over the past year it has gone on a quarterly basis -0.3%,0.2%,-0.7% and now 0.1%.

Korea is looking to use fiscal policy to stimulate its economy which sets it in the opposite direction to the consumption tax rise in Japan. But as they use a time of trouble to posture and scrap let us look at something that they share.

Korea’s potential output growth is expected to fall further in the long term, as the productive population declines in line with population aging and the low fertility rate……In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate. ( Bank of Korea Working Paper )

I wonder what the latter bit really means?

Meanwhile this is the last thing Japan needs right now.

(Reuters) – Japan’s Nissan Motor Co Ltd (7201.T) has said it is recalling 394,025 cars in the United States over a braking system defect, causing concerns that a brake fluid leak could potentially lead to a fire.

Podcast