Japan finally sees some of the arrows of Abenomics hit the target but at what cost

A feature of 2022 has been the interest-rate increases by many central banks and the consequent rises in bond yields. But one namely the Bank of Japan has taken a different road as whilst the originator of Abenomics Shinzo Abe is sadly no longer with us the man he appointed as Governor of the Bank of Japan has continued with the same policies. So whilst the US has raised its official interest-rate to 3 3/4% to 4% Governor Kuroda has stuck to -0.1% leaving Japan as the only country with a negative interest-rate.

The Yen

One Abenomics arrow was a lower value of the Yen to boost economic competitiveness for Japan’s exporters and to get inflation higher towards the target of 2% annually. As The Japan Times reports this has been achieved this year.

From a starting point of ¥115 to the dollar at the beginning of the year, the yen reached a three-decade low of almost ¥152 to the dollar at the end of last month. And despite the Bank of Japan’s reported purchase of ¥6.35 trillion ($42.3 billion) in stealth currency intervention measures throughout October, the yen is still hovering at around ¥147 to the dollar.

I am not so sure about the “stealth currency intervention” description as it was pretty clear at the time. But finally the plans for Yen devaluation have come to fruition and in fact is anything suceeded too well as we have seen the Bank of Japan intervene to slow the fall.

Inflation

Another objective of Abenomics was to end deflation and hence the lost decade by getting inflation to run at 2% per annum. Well according to NHK News we are there.

Japanese consumers are feeling the pinch as prices continue to rise. The internal affairs ministry said on Friday that the consumer price index, excluding fresh food, climbed 3 percent in September from a year earlier.

Japan has not seen that level of increase since August 1991, except for when the consumption tax was increased.

The government and the Bank of Japan have set an inflation target of 2 percent to pull the country out of deflation. September was the sixth straight month that the figure exceeded that mark.

Actually the advance numbers for Tokyo were at 3.5% for the headline. So according to both Abenomics and the Bank of Japan this should be some sort of nirvana but as you can see Japanese consumers are not so keen presumably related to the fact that food prices are up by 6.1% on a year ago.

Where is the economic boom?

The Bank of Japan summary of opinions look positive until you realise that there estimate of potential growth is basically 0% and maybe 0,5% if you are feeling generous.

Thereafter, as a virtuous cycle from income to spending intensifies gradually, Japan’s economy is projected to continue growing at a pace above its potential growth rate.

Also they seem to immediately lose confidence in that thought.

The pace of economic recovery in Japan is likely to decelerate in fiscal 2023, mainly because
overseas economies are expected to slow.

That is a bit awkward because Japan has seen some economic growth this year with the second quarter revised up to 0.9% it has yet to reach the previous peak. Plus the timescale below shows how long Japan has been in something of a malaise.

It is important to encourage households’ long-term and stable asset formation that takes into account expenditure over their lifetime, so that economic growth will lead to an increase in their disposable income.

What about wages?

This was supposed to be the next step where wages growth picked up and drove domestic consumption. How is that going?

The labor ministry’s preliminary figures show that the average wage for the month, including base and overtime pay, was 275,787 yen… or nearly 1,900 dollars.
That’s up 2.1 percent in yen terms from a year earlier, and is the ninth consecutive month of increase. ( NHK News)

As you can see it starts well although we already note that they see fit to mention 9 months of increases meaning nominal wages have previously fallen. But then we see something very familiar.

But workers may not be feeling the benefit. The average real wage, taking inflation into consideration, dropped in September by 1.3 percent from a year earlier. That was the sixth straight month of decrease. ( NHK News)

Even the government effort to spin matters ends up admitting we remain at square one.

Ministry officials say it has been rare in recent years to see a 2 percent rise in wages in September, when companies do not usually give out bonuses.
But they say real wages remain on the decline, as prices keep rising.

If we switch back to the Bank of Japan summary of opinions I have a real problem with this bit.

In achieving the price stability target of 2 percent in a stable manner, nominal wage increases are essential. Monetary easing contributes to a rise in such wages through channels of tightening labor market conditions and of higher inflation expectations due to price rises.

As this has been going since 2013 where have the nominal wages increases been hiding. We have some now but they are below inflation.

Fiscal Policy

This provides an enormous problem. Because Abenomics which as we have noted above is succeeding ( if we assume for a moment that wages are about to finally turn a corner). But the economic growth was supposed to end this sort of thing.

TOKYO, Oct 27 (Reuters) – Japan will unveil on Friday a fresh spending package of more than $200 billion that includes steps to curb electricity bills, sources told Reuters, which could tame inflation next year and help the central bank justify keeping ultra-low interest rates.

To be specific the economic growth partly helped by a fiscal boost that was temporary would lead to economic growth which would improve the fiscal position. Whereas not only have we seen stimulus packages become like a carousel I note that this one is set to reduce the inflation that has been the policy objective!

“Of components that make up the consumer price index, the subsidies would affect electricity and gas bills. Technically, they will push down Japan’s inflation rate in January-March,” analysts at Daiwa Securities said in a research note.

Implied in the stimulus package is the view that wages will not cover inflation. Thus we see that Jaki Graham was right.

Round and around and around round
Round and around and around round -That’s what you do
Round and around and around round.

So we end up with government debt levels like the one below.

TOKYO — Japan’s government debt per capita surpassed 10 million yen, or roughly $75,000, for the first time at the end of June, data released Wednesday shows, as Tokyo poured money into tackling both the coronavirus pandemic and inflation. ( Nikkei Asia)

Comment

On a superficial level policy in Japan is working as they now have inflation and a lower Yen. But with it comes costs and let me now bring in the demographics issue of an ageing and shrinking population.

The resultant narrower pay gap with emerging Asian nations has made it particularly difficult for Japan’s construction and nursing-care industries to hire the workers they need. ( Nikkei Asia)

Japanese wages have struggled plus the Yen has fallen. So there is an issue here. On addition a lower Yen is raising energy costs at a time they have risen anyway. Japan negotiated long-term deals which was wise but new deals will be expensive and an issue for the future.

Whilst Japanese industry has done pretty well this has not filtered through to its workers.

Considering that corporate profits have been at high levels on the whole ( Bank of Japan)

Also looking ahead things are deteriorating.

Japan Leading Economic Index below expectations (101.6) in September: Actual (97.4)……..Japan Consumer Confidence Index came in at 29.9, below expectations (31.5) in October. ( FX Street )

That is a little awkward when you already have your foot to the monetary floor.

 

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Abenomics has succeeded in a way as we reach 150 Yen but sadly Abe-san is gone

One way of looking at the news from Tokyo this morning is that there has been something of a triumph for one of the arrows of Abenomics. Whilst it was not always explicitly stated that the policy of aggressive monetary easing would lead to a lower level for the Japanese Yen it was implied. Thoughts have changed in the meantime about the effect of QE bond purchases ( mostly because pretty much everyone has been at it) but at the time it was believed to push the currency lower. In essence it did for a while and then did not,probably at least partly because QE turned out to be contagious.

But today one of my currency targets has been reached.

The yen’s rate against the U.S. dollar breached the key ¥150 mark Thursday to hit a fresh 32-year low, amplifying concerns that the weak currency will keep adding more fuel to inflation pressure. ( The Japan Times)

As you can see there is an element of be careful what you wish for as now they are worried about inflation rather than trying to create it. Actually that is a familiar pattern of behaviour for establishment thought. Things are so bad that Nomura have had to divert themselves from being stopped out on their parity call on the UK Pound £

“If it takes several months to calm down the weakening trend, (the yen’s rate) could drop to the mid 150 range or possibly close to 160,” said Takahide Kiuchi, executive economist at Nomura Research Institute, during a TV Tokyo program on Tuesday.

They seem suddenly not so sure about their own policy.

Kiuchi, a former BOJ policy board member, said rising inflation is taking a toll on the Japanese economy, so the BOJ should be more flexible with its monetary policy and create expectations among the public that the current “bad weak yen” trend won’t last for long.

Which is why they intervened last month.

On Sep. 22, the government intervened in the currency market with yen purchasing for the first time in 24 years after the depreciating of the yen tumbled to the ¥145 level. The ¥2.8 trillion intervention briefly propped up the currency to around ¥140, but the effects were short-lived.

I will return to the issue of intervention later but for now we can content ourselves with a common theme at the moment which is central banks losing money, although mostly we see it in another sphere. Also there has perhaps been a switch to open mouth operations.

“We will take appropriate actions against excessive fluctuations in a decisive manner,” Finance Minister Shunichi Suzuki told a parliament committee on Thursday, before the rate hit the ¥150 mark.

Well it hasn’t be very decisive so far has it?

Problems

The weak Yen is echoing the thoughts of Britop in the film Snatch when he asked “Is this a bad time?”

The yen just tumbled to the lowest level since 1990. That’s making Japan’s energy imports very expensive

Brent oil is up ~18% year to date

 In yen terms, oil is up nearly 50% ytd

Japan is quite dependent on overseas fuel denominated in USD

This is echoing around other areas.

Global coal miner Glencore and Japanese power utility Tohoku Electric have entered into a long-term contract for supplies of thermal coal from Australia at a record high price of $395/mt FOB, basis 6,322 kcal/kg GAR for delivery between October 2022-September 2023, market sources aware of the development told S&P Global Commodity Insights Oct. 11……..saw over a threefold jump from the settled price of $109.97/mt FOB in June 2021.

So they are now ramping up purchases of coal in case they cannot get gas and according to Bloomberg they are getting ready to intervene in gas markets too.

The Japanese government plans to buy liquefied natural gas in the event companies can’t secure cargoes, as the resource-scant nation steps up efforts to compete over the scarce fuel.

Plus well you can see for yourselves.

The framework will also allow the minister to order large-scale gas consumers to restrict usage when supplies are tight.

Japan’s manufacturers may well face rationing too. Well the ones that can afford to continue operating as high energy prices will already have thinned out the herd.

If we switch to industrial production then monthly growth of 3.4% for August sounds good but the index is at 100.2.So if you will indulge me for 0.2 then production has been on a road to nowhere since 2015.  Shipments look worse at 97.5. Whilst looking at the numbers I noted that services ( Tertiary Industry Activity) were at 100 as well in August and to get that we are relying on seasonal adjustment because the base index is at 98.2. So we have another feature of the lost decade(s).

Trade

Here is how NHK News reported this morning’s figures.

The latest data shows Japan’s trade deficit rose to a record level in the first six months of the fiscal year, underscoring the extent to which a weakening yen is undermining the country’s purchasing power.

Preliminary data released by the Finance Ministry shows a trade deficit of 11 trillion yen for the April-to-September period. That’s equal to about 73 billion dollars.

It’s the highest half-year number in yen terms since officials started keeping comparable data in 1979.

Japan exported more

This outpaced the 19.6 percent increase in exports, which was driven by strong automobile and steel product sales.

Best of luck relying on automobile and steel sales going forwards.But anyway it was dwarfed by this.

Imports surged 44.5 percent to over 400 billion dollars. The weaker yen and soaring energy prices contributed to the increase.

Looking at the data imports of “Mineral Fuels” were up 118% at 3.28 trillion Yen.

Real Wages

These have been another feature of the lost decade period and as a reminder the arrows of Abenomics were supposed  to end this malaise. So with inflation at 3% the falls should be over.

TOKYO : Japan’s real wages fell in August for a fifth straight month, government data showed on Friday, as a plunge in the yen lifted consumer prices at the fastest pace in eight years, outstripping modest pay growth. ( Channel News Asia)

How much?

Inflation-adjusted real wages dropped 1.7 per cent in August from a year earlier, labour ministry data showed, following a revised 1.8 per cent fall in the prior month.

Comment

There is a lot to consider here as unfortunately Abe-san is no longer with us. But his policies have remained and in a curious twist of fate have progressed in 2022. But as you can see it is not really working and in the case of a key variable ( real wages) has made things worse. Now we find that Japan is worried how far the Yen will fall? Also they they seem unsure what their policy is now?

JAPAN TOP CURRENCY DIPLOMAT KANDA: WE WILL NOT COMMENT ON WHETHER WE ARE INTERVENING NOW OR HAVE INTERVENED TODAY. ( @financialjuice1)

Perhaps they could start by telling us what a “top currency diplomat” actually does?

The other side of the coin is that Japan is standing against any interest-rate rises which is what has helped drive the Yen lower. But it is feeling the strain here too.

BOJ YCC break is a possibility you can’t ignore. JPY swap market reflects the desperation for a hedge. 10y swaps trade 30bps above the BOJ’s 25bp bond yield target – just as stretched as in mid June when US yields last topped ( Valerie Tytel of Bloomberg)

Yield Curve Control is under pressure but holding for now. In the end they will have to choose between it and the Yen.

Oh and I have missed something out because it has been missing.Surges in the value of the Yen come when any repatriation of Japan’s large foreign investments is expected.But “Mrs Watanabe” seems to be investing more for yield and thus sending money abroad and not back.

 

The world of negative interest-rates shrinks to just the Bank of Japan

This week has been all about interest-rates and this morning has brought something really rather significant. One of the signals of that sort of thing is that few mention it. So without further ado let me hand you over to Switzerland.

The SNB is tightening its monetary policy further and is raising the SNB policy rate by 0.75 percentage points to 0.5%. In doing so, it is countering the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected. It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term.

One of the main bastions of the icy cold world of negative interest-rates has left the room. To illustrate the road to Damascus style conversion here let me take you back to the 16th of December last year.

The SNB is maintaining its expansionary monetary policy. It is thus ensuring price stability and supporting the Swiss economy in its recovery from the impact of the coronavirus
pandemic. It is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%, and remains willing to intervene in the foreign exchange market as necessary, in
order to counter upward pressure on the Swiss franc.

What a difference 9 months makes. Also I would point out that “ensuring price stability” has in fact turned into this.

Inflation rose to 3.5% in August and is likely to remain at an elevated level for the time being.

Inflation was supposed to be 1%. So we are observing another central banking failure although as you can see partly via the strength of the Swiss Franc Switzerland  has so far avoided the worst inflation excesses seen elsewhere.

Also we see a clear change in the view on the Swiss Franc.

To provide appropriate monetary conditions, the SNB is
also willing to be active in the foreign exchange market as necessary.

So after saying it was too strong at 1.20 versus the Euro it is now too weak at er the much higher 0.95? It is hard to know where to start with that. Still they have foreign currency reserves of 884 billion Swiss Francs so should they start it would be quite some time before the ammunition locker looked empty. There would however be consequences for other markets as they bought large quantities of Euro area government bonds and also hold US equities.

Bank of Japan

By contrast the Bank of Japan announced this earlier today.

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

 

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

So -0.1% and 0% although even “without setting an upper limit” has perhaps the beginnings of an echo of the Swiss in January 2015.

In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

So 0.25% is the new Zero.

The Yen

This was the state of play.

TOKYO, Sept 22 (Reuters Breakingviews)…….The yen , currently trading around 144 per dollar, is at its weakest since 1998, but more important is the rate of change. It has lost 29% since a peak in December 2020, and is down 47% over the last decade due to two quick, steep corrections in 2012 and 2014, respectively.

That was a curious view from someone with a weak grasp of mathematics because the real move has been this year not in 2012 or 14. Thus their view below is flawed too.

That’s a byproduct of Shinzo Abe’s successful war on deflation

Actually the plunge continued and reached another new low this morning as the Yen adjusted to US interest-rates some 0.75% higher and unchanged Japanese ones. It did not quite make 146 before the Bank of Japan started playing The Stranglers on its loudspeakers.

Something’s happening and it’s happening right now
You’re too blind to see it
Something’s happening and it’s happening right now
Ain’t got time to wait
I said something better change
I said something better change.

Intervention Time

There was an early warning.

Japan Top Forex Diplomat Kanda: There May Be Cases Where We Conduct Stealth Intervention ( @LiveSquawk)

According to IGIndex he added this.

WON’T NECESSARILY COMMENT ON WHETHER WE INTERVENED IN MARKET

That lasted less than a few hours.

JAPAN’S TOP FX DIPLOMAT KANDA: HAVE TAKEN BOLD ACTION IN MARKETS

*JAPAN’S KANDA: HAVE INTERVENED IN FX MARKET *JAPAN’S KANDA: WILL MONITOR WITH HIGH SENSE OF URGENCY ( @Investing.com)

If there is a role of top FX diplomat holders of the role have had an easy life since 1998, but not today. The Bank of Japan surged into the currency markets like a bull in a China shop. Through 145 then 144 and 143. That highlights one of the problems of intervening which is that the professional players will withdraw. You can pick off existing orders in the initial wave but after that there will be some option hedges perhaps ( if you are long option volatility then you owe the Bank of Japan a decent bottle of sake) but not much else.After all why take on a central bank?

This is the problem of intervention as I have pointed out before.In the initial stage the central banker can stride around the ring like a heavyweight champion. Indeed with its 8.9 trillion Yen of foreign currency assets to play with we could say like a super-heavyweight champion. The problem is that like a boxer it will run out of puff as it cannot stay there forever. Its reserves are large but in the end they will decline away. So it will have to pick its punches carefully.

By contrast this remains every single hour of the day.

In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate.  ( Federal Reserve )

So the carry in favour of the US Dollar will be 3% and rising.That creates another problem because say the Bank of Japan flexes its muscles and pushes the exchange-rate to 140.Then the carry deal is even better because you are buying the US Dollar more cheaply.

Comment

The US Dollar has been something of a wrecking ball in currency markets in 2022. It has sent pretty much everyone else to multi-decade lows exacerbating their inflation problem due to its role as the reserve currency. We have seen Japan respond today in a curious fashion because actually they dislike negative interest-rates and yet they continue to sing along with Toto.

Hold the line
Love isn’t always on time
Whoa oh oh
Hold the line

The problem is that they now find themselves trying to hold the line at 145 Yen as well. Indeed the central planning is out of control as they set not only interest-rates but bond yields then intervene in the equity market because they think it is too low and now in the exchange-rate because it is also too low for them. Is there anything else left?

Also they did try to get to 140 but look what happens when they step back.

 DOLLAR/YEN <JPY=EBS> PARES LOSSES, NOW DOWN 0.52% AT 143.34 COMPARED TO SESSION LOW OF 140.3

Can the Bank of Japan intervene to support the Yen whilst it is intervening to weaken it?

One of the financial developments of 2022 has been the decline of the Japanese Yen. This week saw a new low as it passed 145 versus the US Dollar after the US consumer inflation figures disappointed and markets switched to wondering if the US Federal Reserve might raise interest-rates by 1% next week. This is a saga we have long been following and back on the March 28th I pointed out this.

The yen weakened to more than 121 against the dollar on Tuesday, a level not seen since February 2016.

Also we can have a wry smile at this from Nikkei Asia back then.

“I think we could see an exchange rate of 125 yen to the dollar by the end of the year,” said one forex dealer who further shorted the yen. The Japanese currency last hit this range in August 2015.

Well the trader was correct and if they held the position have had an excellent year. Back then I pointed out that there was more to come.

One of my themes is that the central planning of the central bankers has consequences and side-effects and these are in play in Japan today. There were many fans of Yield Curve Control on the basis that it looked like what economics text books call a free lunch. The problem is that if you create a false market it creates problems elsewhere in the system which is why they are illegal ( well for everyone except the establishment itself).

The fans of Yield Curve Control have mostly melted away but the Bank of Japan has remained resolute whilst things have moved against it.

Relative Interest-Rates

The Bank of Japan is trying to hold interest-rates as close to 0% as it can. It’s official rate is -0.1% and it is holding the ten-year yield at a maximum of 0.25%. It holds some 549.3 trillion Yen of Japanese Government Bonds and is willing to buy as many as it takes to keep the yield there.

But elsewhere the world has changed and let me give you the clearest example of that.

The Governing Council today decided to raise the three key ECB interest rates by 75 basis points……The Governing Council took today’s decision, and expects to raise interest rates further,

I have picked out the ECB because back in March it was still claiming it would not increase interest-rates with its President Christine Lagarde telling us inflation was a “hump”. So it was toeing the Bank of Japan line until events forced it to change. But now there is a significant carry in favour of the Euro as you can get 1.75% for German ten-year bonds or 1.5% more than Japan. If you are more of a gambler you can pick up 3.75% on Italian bonds as it yields over 4% and the likely risk is lowered by the fact that the ECB is still buying.

Against the US there is a 3.2% pick-up and the UK around 2.9%.

This part id significant because the Bank of Japan is actively operating against the next bit of the saga. From back in March.

The example here is of controlling the bond market and finding that the currency is taking the strain. It would be embarrassing to say the least if they had to intervene in the currency as a result of their intervention in the bond market.

Oh well as Fleetwood Mac would say.

Intervention Time?

Nikkei Asia released this

日銀が「レートチェック」 為替介入の準備か

Which if we look further was this.

It turned out that the Bank of Japan conducted a “rate check” to ask market participants about the market price level in preparation for foreign exchange intervention on the 14th. This was confirmed by several officials. It seems to be a move to prepare for foreign exchange intervention by inquiring about the trend of the exchange market.

So the Bank of Japan wants people to think it will intervene to defend the Yen. As a tactical move that was always going to be a success because it has just surged 2 big figures to 145 and was over-extended. Or as Nikkei Asia put it.

The yen exchange rate on the 14th was in the 144 yen range against the dollar, but there was a scene where the yen was bought back to the 142 yen range.

The Bank of Japan has large currency reserves and could do that easily if it chose to do so.

Japan’s reserve assets totaled $ 1,292,072 million as of August 31, 2022, down $ 30,962 million from the end of July. ( Ministry of Finance)

However whilst the reserves are large in scale we know that markets would soon shift to factors like depletion rates and how much is left? So in fact the effective amount is a fair bit less than the headline. Also rather awkwardly upi are providing those looking for carry a better deal. If say the Bank of Japan drove the Yen fro, 145 to 135 with a flurry of intervention then those picking up carry maybe encouraged to think that their chances of capital gains have just risen. As Britney put it.

Oops, I did it againI played with your heart, got lost in the game

So far all we have had have been open mouth operations and even they do not seem to be rather convinced as this morning we have seen this. From ForexLive

Japan ruling party official Katayama:

Japan lacks effective means to combat yen’s sharp falls

conducting solo fx intervention likely won’t be that effective in stemming sharp yen falls.

Actually he is wrong on the second bit as dealing with sharp falls is where FX intervention can work as I have just explained. The problem is once it is over and you face the same set of circumstances, or as the Undertones put it.

Its going to happen – happen – till your change your mindIts going to happen – happen – happens all the timeIts going to happen – happen – till your change your mind

But he has rather undermined the open mouth operations.

Comment

The issue that has been missed by most analysis is that the Bank of Japan has been working against itself. It can threaten currency intervention as much as it likes but the reality is that its Yield Curve Control means that there is a carry pick-up against the Yen. That has been getting larger as other central banks have raised interest-rates and as ever the main player is the US Federal Reserve. No doubt Mrs.Watanabe ( for those unaware this is the stereotypical Japanese investor) is one of those buying abroad for yield.

That matters because Japan has large external assets. The classic cases of it buying were property in California and Australia back in the day. In terms of numbers the gross investment is around 1360 trillion Yen and the net 448 trillion Yen. In the past it has only taken a sniff of some of that money going home for the Yen to surge and we have seen it go to 103 a couple of times over the years including in the “flash crash”, but this year it has been a dog that has lost its bark.

Another factor is trade flows. It was a support for the Yen for a very long time whereas overnight we learnt this.

TOKYO, Sept 15 (Reuters) – Japan ran its biggest single-month trade deficit on record in August as imports surged on high energy costs and a slump in the yen, exposing the economy’s vulnerability to external price pressures.

Imports jumped 49.9% in the year to August, driven by costs of crude oil, coal and liquefied natural gas (LNG), and causing the trade deficit to swell to 2.8173 trillion yen ($19.71 billion), the biggest shortfall on record.

No longer as you can see.

 

Why do China and Japan have much lower inflation than us in the West?

As the rise in inflation and the subsequent cost of living crisis become ever bigger news in the West we have seen that some countries in the East and in particular the Orient have so far avoided much of it. For example we have seen confirmation this morning that inflation in Germany was 8.5% on the Euro area measure and would have been even higher without this.

Two measures in the relief package have had a slightly dampening effect on overall inflation since June 2022: the 9-euro ticket and the fuel discount. In July 2022, the EEG surcharge was abolished,” says Dr. Georg Thiel, President of the Federal Statistical Office.

The EEG surcharge is a Green Levy.

In July 2022, the EEG surcharge, which had been 3.7 cents per kilowatt hour of electricity since the beginning of the year, was also abolished.

We will get the latest US inflation numbers this afternoon but in the West we have inflation in many places of the order of 9%.

China

Now let me hand you over to the Chinese Bureau of Statistics

In July 2022 , the national consumer price rose by 2.7% year-on-year . Among them, the city rose by 2.6% , and the rural area rose by 3.0% ; food prices rose by 6.3% , non-food prices rose by 1.9% ; consumer prices rose by 4.0% , service prices rose by 0.7% On average from January to July , the national consumer price rose by 1.8% over the same period of the previous year .

As you can see the numbers are far lower than in the West. Let is look at the area which has the highest level in the breakdown above.

In July , the prices of food, tobacco and alcohol rose by 4.7% year-on-year , affecting the CPI (Consumer Price Index) by about 1.28 percentage points.

Thus on an initial basis we see that tobacco and alcohol prices have fallen in the past year. That seems extraordinary but let us stay with the food issue.

Among food, the price of fresh fruit rose by 16.9% , affecting the CPI rise by about 0.30 percentage points; the price of fresh vegetables rose by 12.9% , affecting the CPI rise by about 0.24 percentage points; the price of livestock and meat rose by 8.4% , affecting the CPI rise by about 0.27 percentage points, of which pork prices rose by about 0.27 percentage points. The price of eggs rose by 20.2% , affecting the CPI by about 0.27 percentage points; the price of eggs increased by 5.9% , affecting the CPI by about 0.04 percentage points; the price of grain increased by 3.4% , affecting the CPI by about 0.06 percentage points; the price of aquatic products fell by 2.9% , affecting the CPIdown about 0.06 percentage points.

The rise in the price of eggs gives perhaps a reminder of the days of bird flu. As to the price of fish falling that is rather different to the West. We learn more as we note the German breakdown.

Price increases were observed for all food groups in July 2022. Edible fats and oils (+44.2%) as well as dairy products and eggs (+24.2%) became significantly more expensive. Double-digit inflation rates were also determined for other food groups, including meat and meat products (+18.3%).

It turns out that eggs are relatively similar whereas the meat category was very different with Germany more than double or around 10% higher.

If we switch to transport we similar numbers but only after considerable intervention by the German government.

China: Among them, the prices of transportation and communication, education, culture and entertainment increased by 6.1% 

Germany: inflation in the transport sector has therefore weakened (+5.4%). Inflation was +8.3% in June and +16.3% in May. 

If we switch ti the services sector which as a generic has seen much lower inflation rates than for goods we see quite a difference.

China: service prices rose by 0.7% 

Germany: In July 2022, the prices for services as a whole were 2.0% higher than in the same month of the previous year.

Smaller numbers of course but one is nearly treble the other.

If we switch to the month on month numbers we see again higher ones from Germany (0.9% compared to 0.5% ). There was something which stood out in the Chinese numbers.

 non-food prices fell 0.1%

The monthly inflation was food with much of it being the staple we have looked at many times before.

of which the price of pork increased by 25.6% , affecting the CPI increase by about 0.32 percentage points;

But returning to the way that non-food prices fell the thoughts of Michael Pettis are interesting.

Non-food prices actually declined in July, more evidence of the very weak domestic demand from which China suffers. In the rest of the world prices are rising partly because of supply disruptions and partly because of demand-side stimulus……..In China, however, almost all stimulus is supply-side stimulus, even though China’s main problem is on the demand side, and as a result rising global prices are not reflected in Chinese prices.

Japan

The idea of lower inflation being a lack of demand issue would on its own make me think of Japan. This is because the “lost decade” period which began with the bust in the early 1990s has had at its core weal domestic demand or as it has usually been expressed consumption. This led the Bank of Japan to think this.

The potential growth rate seems to have been in
the range of 0.0-0.5 percent recently.

There are various factors in this but one of them is clearly demographics with the Japanese population not only ageing but also shrinking. This morning we were told this.

TOKYO :Japanese wholesale prices rose 8.6 per cent in July from a year earlier, data showed on Wednesday, slowing from the previous month’s pace in a sign inflationary pressure from higher fuel and raw material costs was easing………The increase in the corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, marked the 17th straight month of gains but slowed from a revised 9.4 per cent rise in June, the data showed. ( Channel News Asia )

Again this is very different to what we are experiencing in the West where rates have gone as high as the 43.6% seen in Spain.

We can bring in another theme as Japan has seen costs rise because of the fall in the Yen.

The yen-based import price index spiked 48.0 per cent in July, bigger than a revised 47.6 per cent gain in June, a sign the yen’s decline was playing a major role in pushing up inflation.

Yet we end up with a consumer inflation rate of 2.4%

Comment

We have found one contributory factor to explain the inflation gap between the West and both China and Japan which is low domestic demand. However one of the reasons I have made a comparison with Germany today is that it too is an exporting nation and a lack of domestic demand there was a factor in some explanations of the credit crunch and indeed the Euro area crisis. So there is more to this particular saga I think.

There is another factor in Japan in that they indulge in their own version of shrinkflation where goods specifications and ingredients are changed to keep prices down and inflation low. The inflation numbers should allow for that but I do not believe that they do.

 

 

 

The Bank of Japan is winning the bond war but not the economic one

Last week brought a couple of developments that will have raised a wry smile in the land of the rising sun or Nihon. The first has been the fall in bond yields we have been seeing which picked up pace. In itself that poses a question for central banks that have raised interest-rates and the obvious example is the US Federal Reserve. Over the last 2 policy meetings it has raised its official interest-rate by 1.5% but the benchmark US ten-year yield has fallen by around 0.75%, and is 2.68% as I type this. This poses a question for the US Federal Reserve but also remember that the Bank of Japan is doing this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero
percent

When we last looked at this the Bank of Japan was singing along with Queen and David Bowie.

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

Which meant that there has been some flexibility applied.

In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

In practical terms the Bank of Japan was holding the line at a yield of 0.25% rather than 0%.

But this morning the picture looks different to when we were noting an array of hedge funds surrounding the Bank of Japan looking to break the Yield Curve Control threshold. Here is Bloomberg on the state of play from last week.

BlueBay Asset Management is committed to its bet against Japanese bonds despite a global debt rally that has led to a sharp retreat in yields…….“As at this morning 10-year yields are at 0.21%,” he said Tuesday. “We entered the position at 0.23% so truthfully speaking nothing has really happened.”

This morning it is at 0.18% and is more significant than they are letting on. This trade has been called the “Widowmaker” for good reason although the loss so far is as much as in capital tied up rather than large losses.

The Yen

The Bank of Japan will be pleased about this although there is a nuance.

LONDON, Aug 1 (Reuters) – The U.S. dollar sank to its lowest in more than six weeks versus the Japanese yen on Monday……….The dollar sank to its lowest level versus the yen since mid-June at 132.07 , down more than 5% from a late 1998 peak of nearly 140 yen hit last month.

It will not have liked the way that the fall became a rout at times but of course under Abenomics a lower value for the Yen was effectively an “arrow” of policy. The irony was that after the initial falls not much happened and at times we saw Yen strength such as the “flash crash” to around 103.

Inflation

Reuters got rather excited about the latest numbers.

Japan’s core consumer inflation remained above the central bank’s 2% target for a third straight month in June, as the economy faced pressure from high global raw material prices that have pushed up the cost of the country’s imports.

But it was a number other central banks can only dream of presently.

The nationwide core consumer price index (CPI), which excludes volatile fresh food costs but includes those of energy, rose 2.2% in June from a year earlier, government data showed.

The headline at 2.4% was as you can see very little different and even dipped slightly on last month. So the Bank of Japan is after many years actually pretty much on target. But it took a surge in energy costs and a currency fall to get there.

With the producer price index having been over 9% for all of 2022 so far I think it is reasonable to question the numbers? But the official series has not moved much.

Real Wages

The wages series suggests a typical monthly wage of around 277,000 Yen but we get a reminder of one of the major players in the “lost decade” period as we note it is only up by 1% on a year ago. The highest paid group is the information and communication sector at 448,000 Yen and the lowest the hospitality sector at 127,346.

The real wages series tells us that they were some 1.8% lower in May than a year before. This is a regular drumbeat for Japan and I will return to it.

The Economy

Bank of Japan Deputy Governor Iwate-san told us this on Thursday.

In terms of the medians of the Policy Board members’ forecasts, Japan’s real GDP growth rate is expected to be at 2.4 percent for fiscal 2022, 2.0 percent for fiscal 2023, and 1.3 percent for fiscal 2024.

Not stellar levels but well above its potential.

As Japan’s recent potential growth rate is estimated to be
in the range of 0.0-0.5 percent, the forecasts show that the economy is projected to continue
growing at a pace above its potential growth rate for four consecutive years when including
fiscal 2021.

Also Japan has lagged its peers.

The level of GDP is expected to recover to the pre-pandemic level (the 2019
average) around the second half of this fiscal year. However, the pace of recovery has been
slower than in Europe and the United States

The issue I have is the supposed logic for the recovery now. Japan’s producers will be affected by the rises in costs especially energy ones.

Japan is battling its worst energy crisis in recent history that has exposed its energy security vulnerability, as scorching weather and surging oil and gas prices have led to spiking electricity rates, prompting calls from the Japanese government for residents to conserve power. Japan is extremely dependent on imported energy, with more than 90% of domestic consumption reliant on foreign oil and gas……..and Moscow’s shock nationalisation of the Sakhalin 2 LNG and oil project in the Russian Far East. ( Natural Gas News)

Could there be rationing? One response has been the re-opening of some nuclear plants.

Also the rise on employee income is not coming from real wages as we have already seen.

Meanwhile, employee income has improved moderately, reflecting rises in the number of
employees and wages associated with a recovery in economic activity. Such improvement
in employee income is projected to continue; supported by this, private consumption is
expected to keep increasing steadily from fiscal 2023 onward, although the pace of
materialization of pent-up demand is likely to slow.

Comment

There is so much here that is typically Japanese. They have stuck to their guns on monetary policy and whilst official interest-rates have left then increasingly lonely in the icy cold world of NIRP with a rate of -0.1%, bond yields have gone their way. With its large equity holdings the Bank of Japan in its alter ego of The Tokyo Whale will be pleased to see the Nikkei-225 just below 28,000. I am not sure they know what their Yen policy is now? But they will not have liked the fast falls so that has improved too.

The problem comes with the real economy and let me return to the subject of real wages and this analysis from The Japan Times from February.

On top of deflation, many economists claim that Japan’s sluggish wage growth is linked to a soaring number of part-time and contract workers over the last few decades.

Companies use such workers to save costs. Full-time employees are heavily protected by law, so employers hired more and more part-timers and contract employees as they are easier to lay off when times are tough.

In the early 1990s, part-time and contract workers comprised about 20% of the total employed workforce, a figure that shot up to 36.7% in 2021.

There is a huge wage gap between employees with full-time contracts and those without, so the increase of part-time and contract workers drags down the growth of Japan’s average salaries overall.

However you spin it there is an issue here which undercuts a Japanese success story which is the low unemployment rate.

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Japan stands firm against the tide of rising interest-rates

The central banking news has come thick and fast this week.We knew from the schedules that several meetings were due but as we looked forwards we did not necessarily always know the importance.One thing we have definitely learned this week is that my theme that central bankers are pack animals continues but that they have split into two distinct packs and today we are looking at the one which involves both Japan and the Euro area.

Bank of Japan

Policy here has been under threat as a hedge fund has been taking on the Japanese Government Bond market by selling JGBs and looking to get the ten-year yield above the 0.25% limit imposed by the Bank of Japan. Blue Bay have posed a direct challenge to Yield Curve Control and had some success as the yield target was breached earlier this week and the Bank of Japan was forced to buy 2.2 trillion Yen of JGBs to reinstate it.

Yesterday the temperature was heated up by reports like this.

10Y JGB yeilding 0.45%, “coups d’état” on Kroda inside the BOJ right now. ( @ForexSmile )

Firstly it is Kuroda and secondly that always looked like a bum print from Trading View. Those running with such thoughts will have run into this today and the emphasis is mine.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero
percent.
b) Conduct of fixed-rate purchase operations for consecutive days
In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

So The Tokyo Whale really intends to live up to its name. As the Keiser Chiefs put it.

Knock me down I’ll get right back up again
Come back stronger than a powered-up Pacman

Following the statement Governor Kuroda has sounded like a man who is digging in the trenches rather than planning to leave them.

BOJ’S KURODA: NOT THINKING ABOUT RAISING 10-YEAR YIELD CEILING ( @IGSQUAWK)

Then even more so.

BoJ Gov Kuroda: Raising Implicit Cap For 10-Year JGB Yield Target Would Weaken Economy ( @LiveSquawk )

And then finally via forexlive

BOJ’s Kuroda says will not hesitate to ease monetary policy further if necessary.

Actually he is hyping things up there because the Bank of Japan is heavily involved in buying bonds ( QQE) and Japan Inc was never keen on interest-rates going below -0.1%,because if they were it would have done.

Early Wire?

One of the dangers of central planning is that some end up being more equal than others. I point this out because other bond markets rallied yesterday afternoon. Whilst it may have been reasonable to guess what the Bank of Japan would do it was a strong move in the reverse direction to the volley of interest-rate increases that we had seen this week.

Inflation 

The Japanese situation is different to others in many ways but the big difference right now is this.

On the price front, with the effects of a reduction in mobile phone charges dissipating, the year-on-year rate of change
in the consumer price index (CPI, all items less fresh food) has been at around 2 percent, mainly due to rises in energy and food prices.

The statement rather confusingly excludes and then includes fresh food! But so far Japan has what both its central bank and government wants which is inflation at 2%. Care is needed with this on several fronts. Firstly there are the power problems we have previously looked it which may push it even higher as we enter the air conditioning ( it gets very hot and humid) season. Also Governor Kuroda has already felt pressurised enough to apologise for higher inflation. Lastly it is my opinion that rather than being a solution to the lost decade problem it will make it worse via the impact on one of its main features which is the struggles of real wages.

The ECB

The messages coming out of the ECB are to say the least confused. That is a little awkward for President Lagarde who of course has just received an honorary doctorate, but promised at the start of her reign to end the squabbles and leaks leading to “sauces” in the media. But the ECB does have a direction of travel and that is in line with today’s command and control theme.

European Central Bank President Christine Lagarde told euro-area finance ministers that the ECB’s new anti-crisis tool will kick in if the borrowing costs for weaker nations rise too far or too fast, according to people briefed on their discussions.  ( Bloomberg)

She then went further down that road.

She said the instrument may be triggered if bond spreads widen beyond certain thresholds or if market movements exceed a certain speed. Lagarde did not specify whether those limits would be made public.

Maybe someone should have told the Governor of the Bank of Italy not to tell anyone about the limits.

“A differential in the yields of 10-year Italian and German bonds of less than 150 basis points would be justified by the fundamentals,” Visco told a conference. “Levels above 200 points are certainly not.” ( Reuters )

It is right on the upper limit as I type this (2%) but the confused messaging led to a lot of trouble in the German bond market yesterday. The view got around that there could be selling of German bonds to buy Italian bonds so that the ECB could claim its moves were neutral. There are issues with this from the German point of view for obvious reasons highlighted by their bond future falling by 4 points at the worst point of the panic. So some will have been stopped out of what is supposed to be the safe haven of European bond markets. So genuine losses were created by the confused messaging. Actually it is more than the messaging as the plan is merely a wish list at this point.

So we see actual losses created by the involvement of the ECB and frankly policymakers who know nothing about bond markets. Supporters of such policies dismiss this as being about speculators and even “financial terrorists” ignoring the fact that people’s pension funds are involved here.

LAGARDE TELLS EUROGROUP CRISIS TOOL TO ADDRESS IRRATIONAL MOVES ( @C_Barraud )

Who is she to define bond market moves as “irrational”? She of course has plenty of experience of crises which sounds good until we recall her role in creating them.

Meanwhile this particular salmon seems to be trying to swim in the other direction.

KNOT: IF #INFLATION WORSENS, SEVERAL 50 BPS HIKES POSSIBLE ( @C_Barraud )

Just as a reminder here is the total increase in interest-rates in the last decade 0%.

Comment

We end what has been a tumultuous week with central banks having split into two packs. Indeed you could argue with its interest-rate open mouth operations that the ECB is trying to keep a foot in both camps as well as sometimes one in its mouth.

The present leader of the pack is the Bank of Japan which demonstrated irs devotion to the cause by buying some more equities today.

BANK OF JAPAN BUYS 70.1 BLN YEN IN ETF – CENTRAL BANK DISCLOSURE ( @PriapusIQ )

For them it is always Queen on the loudspeakers.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me

 

Japan continues to encourage the Yen to devalue

One of the economic stories we have been following in 2022 has been the fall in value of the Japanese Yen. This week it has picked up the pace again.

TOKYO, June 7 (Reuters) – The dollar rallied for a second day, reaching a fresh two-decade high against the yen, as worries that inflation would prove sticky lifted Treasury yields while also hurting Asian equities, both to the U.S currency’s benefit…….The greenback soared 0.77% to 132.915 yen, and earlier reached 133.00, a level not seen since April 2002.

Actually sticky inflation would be an issue for Japan too but I will come to that later because first there is this.

Japanese officials back on alert after Yen sets fresh 20-Year lows ( Francine Lacqua)

That matters because this stage in a Yen move would usually be accompanied by a government official promising “bold action”. Indeed you could argue we would usually have been gearing that a while ago.

Indeed there was an opportunity earlier according to Forexlive.

Bank of Japan Governor Kuroda:

  • Japan’s economy is improving as a trend
  • Exports, output continue to increase as a trend although there is some weakness due supply constraints
  • Japan’s economy expected to recover ahead
  • Japan’s core CPI is likely to keep hovering around 2% for the time being before slowing its pace of increase as the boost from energy dissipates

The headlines from his comments are hitting Reuters. They are most notable for not including anything on the yen, so far at least.

Governor Kuroda makes the same point three times in a row and there is a nuance in the second version which rather undermines things. In the past with a decline in the Yen like this then exporter Japan would indeed be looking forwards to some export-led growth. But as you can see even the Governor of the Bank of Japan is hedging his bets. Part of the reason for that is an irony, because back in the carry-trade era when the Yen was strong Japan moved production abroad to places like Thailand in response. Thus in terms of economic theory any response now is more price inelastic.

Interest-Rates

We can stay in the Pacific for a perspective on this as we look south to a land down under.

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 85 basis points. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 75 basis points.

The Reserve Bank of Australia (RBA) raised interest-rates by 0.5%, which if you think about it is an implied criticism of its failure to raise them before. But from the point of view of Japan it reminds everyone that it is keeping its interest-rates and bond yields where they are.

At the latest Monetary Policy Meeting (MPM) in April, the Bank decided to maintain the guideline for market operations, in which the short-term policy interest rate is set at minus 0.1 percent and the target level of 10-year JGB yields is around zero percent…………Based on this guideline, the Bank currently purchases a necessary amount of JGBs so that 10-year JGB yields will stay within the range of plus and minus 0.25 percent from zero percent.

That was Governor Kuroda yesterday and as you can see he is pinning Japanese interest-rates. You may note that ( as often in Japan) things are different as bond yields are leading official interest-rates rather than the other way around.

So looked at from the Pacific perspective Japanese interest-rates are on a road to nowhere whereas the RBA not only raised them it promised more of the same.

The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.

We can move on from there but not before having a wry smile at the RBA ending up with an interest-rate of 0.85%.

The next step we can also say involves the Pacific if we note California and Alaska is that the US ten-year yield went back above 3% last night again reminding everyone of the interest-rate differential with Japan.

Economic Prospects

Japan has struggled in the Covid era according to Governor Kuroda.

The first is that Japan’s economy is still on its way to recovery from the downturn caused by COVID-19. Unlike in the United States and the euro area, Japan’s real GDP has not yet recovered to the pre-pandemic level.

Rather than getting better things have just got worse.

The real GDP growth rate for the January-March quarter of 2022 was negative, at minus 1.0 percent on an annualized quarter-on-quarter basis.

The Japanese economy remains some 2.7% smaller than pre pandemic and regular readers will recall it had previously been struggling due to the rise in the Consumption Tax. There was also something which leaps off the page to anyone who has followed the causes of the lost decade(s) in Japan.

By demand component, in Japan, the
recovery in domestic private demand, such as private consumption and business fixed investment, has been somewhat weaker than in the United States and the euro area.

As the Keiser Chiefs put it

Oh my God I can’t believe it
I’ve never been this far away from home

There was more bad news in this area this morning

Real wages down 1.2% on year in April, biggest fall since December 2021.

That from Nikkei Asia reminds us that real wages have consistently fallen in the period of the lost decade reinforcing the ongoing issue with domestic demand.

Energy Problems

This is a hardy perennial for Japan.The lack of energy resources led to the move for nuclear power then Fukushima led to that being wound back. More recently it has seen its plans to rely on LNG challenged by demand elsewhere, firstly by other Pacific nations and then Europe. Now as Shoda Oda of Bloomberg points out it is getting serious.

“The power supply this summer and the upcoming winter will be very tough,” chief cabinet secretary Hirokazu Matsuno said Tuesday. “We would like households and businesses to do what they can, like turn off lights in unused rooms and hallways, and turning down the temperature of the refrigerator.”

This bit will be concerning.

Japan’s power reserve ratio, which measures spare capacity, is expected to barely reach the minimum 3% needed for a stable supply in the Tokyo, Tohoku and Chubu areas next month, according to the government.
The ratio is expected to go negative for Tokyo in January and February, which would trigger blackouts.

Governor Kuroda looked at this from a different perspective using Gross National Income or GNI to look at the impact of higher commodity ( including energy) prices.

While Japan’s real GDP growth rate for fiscal
2021 was 2.1 percent, reflecting an increase in spending due to the resumption of economic
activity, the growth rate in terms of real GNI was only 0.6 percent due to deterioration in the
terms of trade stemming from rising commodity prices.

Since then things have continued to deteriorate from Japan’s perspective symbolised by an oil price which was above US $120 per barrel last week on both main benchmarks.

Comment

The saddest part of recent moves is that Japan is repeating all the phases and particular details of the lost decade period. We have deficient domestic demand and falling real wages as the primers here. Also this time around exports seem unlikely to help much, partly due to the way that the Japanese economy exported production and partly due to the fact that imports are ballooning.

One signal of this has been doing the rounds and whilst like the author of the tweet I have my doubts about the size of the fall there is something going on.

At the current exchange rate, Japan’s per capita income has grown at a rate of -4%/yr over the last decade — implying it is currently poorer than France and not much richer than Italy and Spain It is less than half as rich as the United States That does not pass the smell test ( @nosunkcosts )

The US position is flattered by the use of the US Dollar as a benchmark but that only explains some of the move.

We have a situation where the same problem is being responded too with the same solution. If that worked we would not be here. Yet on we go….

China must be wondering how it has been labelled as a currency devaluer too.

 

Where next for interest-rates and bond yields?

Today I thought we should take stock on one of the changes of 2022 which is that we are beginning to see rises in interest-rates. If we look at the world’s main central bank the US Federal Reserve it made its first move on March 16th when it did this.

 In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.

There is a perspective here in that in terms of time we are not even 3 months ( and one further rise of 0.5%) and we are already wondering about their resolve?! One example of the way that this is looked at in the media is this from the Financial Times

Central banks are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades, according to a Financial Times analysis that lays bare the reversal of their previous historically loose stance.
Policymakers around the world have announced more than 60 increases in current key interest rates in the past three months, according to an FT analysis of central banking data — the largest number since at least the start of 2000.

The number of increases is not even a tenth of all the cuts and as language matters I would argue that we are seeing a reduction in stimulus rather than a tightening. Also two of the word’s major central banks have stood apart from the moves as the Bank of Japan has actively any rise in Japanese bond yields via its use of yield curve control bond purchases The ECB has so far only talked about increases later this summer and remains with a deposit rate of -0.5.

So we have a further counterpoint often reflected in bond yields ( which in theory are the sum of expected interest-rate increases/changes although in practice it is more complicated than that). So we find ourselves mulling the words of Diana Ross as we consider where interest-rates are goinf?

Do you know where you’re going to?
Do you like the things that life is showin’ you?
Where are you going to?
Do you know?
Do you get what you’re hopin’ for
When you look behind you, there’s no open doors
What are you hopin’ for?
Do you know?

Africa and Latin America

There is a geographical issue which was partly highlighted by poor Malawi on Friday. The 25% currency devaluation on Friday reminded us of this.

The Monetary Policy Committee (MPC), at its second meeting of 2022 held on 29th April, decided to raise the Policy rate by 200 basis points to 14.0 percent.

Whilst Malawi has currency problems its interest-rates are not that high for the region. Earlier in the week the Bank of Ghana announced this.

On the basis of the above assessment, the Committee decided to raise the policy rate by 200 basis points to 19.0 percent.

Even the other end of the African spectrum has much higher interest-rates than us in Europe as we look at the Reserve Bank of South Africa.

Against this backdrop, the MPC decided to increase the repurchase rate by 50 basis points to 4.75% per year, with effect from the 20 of May 2022.

If we switch to Latin America there is quite a swerve deserving of an article all of its own!

Emerging markets in Latin America embarked on tightening cycles last year, as their economies were damaged by the pandemic.

After all interest-rate cuts were supposed to “save” us in economic terms from damage from the pandemic. The interesting line that we have contributed to trouble elsewhere gets ignore though. We do however get some numbers and the move in Brazil is in many ways shocking.

 Brazil has raised rates 10 times in just over one year to 12.75 per cent, up from only 2 per cent in March last year. Mexico, Peru, Colombia and Chile have also raised borrowing costs.

There are always individual country circumstances but such moves and levels provide quite a perspective when for example the Bank of England has just dithered over a 0.25% or 0,5% move and no doubt wishes it had moved by 0.5%, and a Bank Rate of 1%. There has been a lot of wailing and gnashing of teeth which must look rather confusing to those in Latin America or Africa,

Some are cutting interest-rates

The coordinated line has a bit of a struggle with the ECB although it is now promising to join the interest-rate party and more so with the Bank of Japan. But I would not be surprised to see more interest-rate cuts from China in addition to this

One major economy bucking the trend is China, where mounting economic damage from widespread virus restrictions and troubles in the property sector prompted officials to cut the one-year loan prime rate by 10 basis points from 3.8 per cent to 3.7 per cent. Private lenders have also lowered their mortgage rates.

Plus there was this last week.

The Bank of Russia Board of Directors decided to cut the key rate by 300 basis points to 11.00% per annum effective from 27 May 2022.

If course the war and then the fall followed by the strong rally of the Rouble has affected this.

What happens next?

The FT seems to be pushing a bullish ( for interest-rates) line.

McKeown said that of 20 major central banks around the world, 16 are likely to raise interest rates over the next six months. Tightening is expected to be fastest in the US and UK.

That refers to what markets are pricing in and others are expected to join the move.

Markets expect an increase in policy rates by at least 100 basis points by the end of this year or early next year in the eurozone, Canada, Australia and New Zealand.

Still I am pleased to see that they have got around to agreeing with my theme that central bankers are pack animals.

Keller said the widespread trend made it more likely policymakers would consider more substantial moves: “Announcing unexpectedly larger or earlier policy steps feels easier if everyone else is doing them.”

Comment

If we look at the western world then I think the words of Elvis Presley are appropriate.

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

The actual interest-rate increases in the US and UK have been minor for example. Also they had to be forced into doing it as inflation was already rising before this.

The sudden shift in policy comes as inflation has reached multi-decade highs in many countries, fuelled by soaring energy and food costs since Russia invaded Ukraine in February. ( FT)

As it happens the inflation picture continues to defy the “Transitory” claims of last year if today’s figures from the Euro area are a good guide to the official number tomorrow.

In May, the estimated annual variation rate of the HCPI stood at 8.5%, two tenths more than
the one registered in the previous month.
For its part, the estimated monthly variation of the HCPI is 0.7%. ( Spain)

According to ECB President Christine Lagarde it was supposed to be a “hump.”

Also I am expecting more fiscal policy. The UK has acted for example on energy costs and I expect others will do the same.

So in the short-term I expect the central banks in the West to act but I still expect them to start to struggle once they reach 2% and let’s face it we have a way to go before we get there. As an aside the central banks will be causing mark to market and increasingly realised losses on all their QE bond holdings.

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