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.


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)


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.



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?


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).


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.


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?


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.


As the Federal Reserve promotes more interest-rate rises other currencies feel the pain

We are going through one of those phases of time where almost every economic road goes through the United States. It is always of significance as the world’s largest economy but at the moment developments mean that it is a real leader of the pack on many fronts. As we look around the world there are so many examples of it and here is one from this morning.

The onshore Rupee falls 0.63% to 82.40 all-time low despite RBI’s intervention

That is the Reserve Bank of India which has been intervening in an attempt to gold the Rupee at around 80 to the Dollar, and as you can see it is not going so well. The Business Standard is rather downbeat on its prospects.

“Basically, the  is making its presence felt and letting traders know once again that it will not allow one-sided moves,” said one of the state-run bankers who confirmed the intervention.

“The intervention will have an impact to (the extent) that it will not allow the rupee to fall more, but will not help rupee recover by much.”

When we looked at India not so long ago it was 70 which was seen as the significant level so we learn something from that alone.

Japan is also feeling the heat as in spite of the previous intervention we have headed back to 145 Yen again and this morning they have tried some open mouth operations.

Japan’s PM Kishida: Recent Sharp, One-Sided Yen Moves Undesirable – Japan’s Intervention Last Month Reflected View We Cannot Turn A Blind Eye To Speculative FX Moves ( @LiveSquawk )

Also we learnt that last time around the Bank of Japan intervened in scale.

Japan Foreign Reserves Sep: $1.24T (prev $1.29T)………Japan Foreign Reserves Fall In September From Previous Month By Biggest Amount On Record – MoFJ ( @LiveSquawk )

With today being US Labour market data day ( NFP) I am sure both central banks will be alert as it is released.

The Federal Reserve

It too has been conducting some open mouth operations. so let me hand you over to Governor Waller at the University of Kentucky.

Meanwhile, the labor market remains strong and very tight……..As a result, I don’t expect tomorrow’s jobs report to alter my view that we should be focused 100 percent on reducing inflation.

That is brave ahead of the figures and to the obvious question, at his level he probably does not know the numbers but may have been given a hint. Also he wants us to think he is worried about inflation.

We currently do not face a tradeoff between our employment objective and our inflation objective, so monetary policy can and must be used aggressively to bring down inflation.

Okay so we are getting an implied view on interest-rates which then became explicit.

And, though there are additional data to come, in my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand.

This was backed up bu the current media mouthpiece for the Federal Reserve which is Nick Timiraos of the Wall Street Journal.

Fed governor Christopher Waller pushes back against the idea of a premature Fed policy pivot due to market instability “Let me be clear that this is not something I’m considering or believe to be a very likely development.”

So we were told interest-rates were going higher and they are also claiming to coin a phase they are not for turning. Indeed we are also guided to this part of the speech.

These projections showed participants expected an additional 100 to 125 basis points of tightening by the end of the year, which means either a couple of 50 basis point hikes at our remaining two meetings, or 75 basis points in November and 50 basis points in December. Of course, the exact path for policy will depend on the data we receive between now and the end of the year.

From his other words and the tenet of his speech we were clearly being guided towards 1.25% more. This was spotted by financial markets.

The benchmark US 10-year bond yield jumped 7 basis points to 3.82% while two-year US treasury rates climbed to 4.25% from 4.15%. Other global rates rose but to a lesser degree. Germany’s 10-year Bund yield rose 6 basis points to 3.08%. ( acy.com)

It was not that people were seeing something outright new as they had seen the projections previously it was the additional conformation which put the squeeze not only on bond yields but other currencies.

New Zealand’s Kiwi (NZD/USD) plunged 2.1% against the Greenback to 0.5655 (0.5742 yesterday) after the RBNZ raised its Official Cash Rate by 50 bps (to 3.50%). Which was totally discounted.

The Australian Dollar slid 1.55% to 0.6412 (0.6490). On Wednesday, the RBA raised rates by a dovish 25 bps which when combined with a strong Greenback, weighed on the Aussie Battler. ( acy.com)

There was a message there for the Bank of England which as I have pointed out before is simply that to protect your currency you need to match the Federal Reserve. The Kiwi’s played a similar hand to the Bank of England moving with a “bazooka” of 0.5% and finding they not only have interest-rates 0.5% higher they have a weaker currency too.

There was a curious section when he repeated the mantra that they would be looking at the data and then determining policy.

Of course, the exact path for policy will depend on the data we receive between now and the end of the year.

Then he denied it.

Before the next meeting on November 1–2, there is not going to be a lot of new data to cause a big adjustment to how I see inflation, employment, and the rest of the economy holding up.

Then he seemed to lose the plot even more because if he is as focused on inflation as he claims then surely the inflation numbers matter?

We will get September payroll employment data tomorrow, and CPI and PCE inflation reports later this month. I don’t think that this extent of data is likely to be sufficient to significantly alter my view of the economy, and I expect most policymakers will feel the same way.


There are various lessons from this and the first is that the Fed wants us to believe it will raise interest-rates by 1.25% between now and the end of the year. There are internal domestic issues from this such as higher mortgage rates. But it is the external issue where we see so many other central banks struggling to cope. They are doing a combination of raising interest-rates and/or intervening. Many face both higher interest-rates and higher inflation partly driven by a weaker currency. But the Fed has never been much bothered by such issues.


There is, however a clear undercut to this as we note what he told us this time last year as on the 19th of October he could not have been much more wrong.

On that score, I continue to believe that the escalation of inflation will be transitory and that inflation will move back toward our 2 percent target next year

Also it was kind of him to confirm one of my long-running themes which is that it is so often simply about house prices.

Because the housing market is sensitive to changes in interest rates and thus to monetary policy, I’ll conclude by discussing how housing is being affected by the Federal Open Market Committee’s (FOMC) efforts to achieve our dual mandate of maximum employment and stable prices.

That brings us round to thinking that any sustained fall in house prices will leadto what his colleagues have been denying.

Fed’s Daly: I don’t see rate cuts in 2023. ( @unusual_whales )

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.


That lasted less than a few hours.



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.


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.


The property crisis in China is increasingly affecting its banks

We have been following the problems in the Chinese property market since last year. As I have pointed out many times there has been a Chinese spin but many of the issues are common with problems us western capitalist imperialists have experience. The Chinese spin starts with the fact that this is a big deal economically with more than a quarter of economic output or GDP depending on this sector. Problems always get worse when we see this.

BEIJING, Sept 5 (Reuters) – Woes in China’s residential property market are expected to deepen this year as homebuyers remain cautious, with economists now expecting home prices to fall in 2022 and betting on a faster drop in property sales than previously forecast.

It is not that they falls are expected to be large ( although they may be under pressure to keep the number low) but the change in psychology here.

New home prices are expected to fall 1.4% in 2022, according to a Reuters survey of more than 10 analysts and economists polled between Aug. 29 and Sept. 2. In the May quarterly survey, analysts had expected prices to remain unchanged for the year.

The previous scenario relied on everybody singing along with Hot Chocolate.

Everyone’s a winner, baby, that’s no lie (yes, no lie)You never fail to satisfy (satisfy)

People buy property off-plan helping the developers borrow more and in a bull market it is juiced by prices rising so everyone’s a winner. Or for once the can being kicked into a better future. But now prices are falling and some developments have not progressed as expected.

The Banks

A property crisis always involves the banks as we let the Financial Times take up the story.

China’s biggest four banks have been hit by a more than 50 per cent increase in overdue loans from the property sector over the past year, as the real estate market’s liquidity crunch spills into the financial sector.
China’s top lenders — the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China — last week reported combined overdue property loans of Rmb136.6bn ($20bn) at the end of June, up from Rmb90bn at the same time last year.

I would imagine that there has also been pressure not to declare too large a number here as well. The mortgage book is not looking the banking asset that it previously did.

“We see multiyear structural [return on equity] decline as banks retreat from the property sector amid stalled projects, mortgage boycotts and heightened regulations,” Macquarie analyst Dexter Hsu wrote in a note to clients.

Also we see the Chinese version of The Precious! The Precious!

China’s “Big Four’‘ lenders are systemically important institutions and the backbone of China’s financial sector. They are among the world’s biggest banks, holding about 36 per cent of the country’s deposits and issuing a third of its loans. Beijing depends on the groups to stabilise the country’s economy and trusts them to faithfully implement monetary policies.

Remember when we were all supposed to be chopping at the banking sectors to stop the too big to fail issue? That seems to have morphed into “Beijing depends on the groups”. In truth we have not done much better in the west but the particular issue of the property boom and bust is hitting China first.

Have the Chinese authorities dictated this bit to the FT?

The size and relatively stable health of the Big Four banks has given Chinese authorities confidence as they try to orchestrate a soft landing for failing companies in the property sector, which accounts for about 30 per cent of national gross domestic product.

As we find so frequently the numbers are never quite what we have been told as we note this.

However, Hsu said that while banks’ loans to developers accounted for 4 per cent to 9 per cent of their total loans, it will probably become “the major source” of new non-performing loans in the next two years, driving up credit costs for the banks.
“We believe the real exposure to developers could be much bigger than reported because they extended credits to the developers via proprietary investments and off-balance-sheet credits like wealth management products, trust products, private funds and private bonds,” he added.

Maybe the FT has sneaked in a sense of humour with the bit highlighted by me below.

The underlying risks for mortgages, once considered among the banks’ safest assets, are rising too, partially because of the increasing pace of defaults by homebuyers, including a country-wide payments boycott on unfinished homes.

As to the worst hit we have these two.

According to the exchange filings, Agricultural Bank of China and China Construction Bank were the worst affected, suffering increases in bad loans to the sector of 152 per cent and 97 per cent from a year ago, respectively.

At CCB, overdue mortgages that were boycott-related reached Rmb1.14bn at the end of July, said Li Jun, vice-president of the bank. AgBank said it was facing Rmb1.23bn in overdue loans affected by the boycott, nearly double its previous estimate three months ago.

Nearly doubling in three months?


Reuters major on export growth slowing but they did grow as did the surplus.

Exports rose 7.1% in August from a year earlier, slowing from an 18.0% gain in July and marking the first slowdown since April, official data showed on Wednesday, well below analysts’ expectations for a 12.8% increase.

Inbound shipments rose just 0.3% in August from 2.3% in the month prior, well below a forecast 1.1% increase.

So we have what economics 101 would describe as export-led growth. The problem is that it is not really like that because the import issue shows an underlying problem. Consumption has struggled and the housing sector will add to its problems and the Covid lock downs are no doubt there too. Also there is the issue of not only an unbalanced Chinese economy but an increasingly unbalanced world one.

With energy intensive industries in the West cutting production we may see more of this which of course is the opposite of the political rhetoric we have seen.


The first issue is the impact on the Chinese economy where we see the property sector and banking sector being increasingly pulled downwards. That poses a question for consumption in a country which is also showing a feature of the Lost Decade in Japan.

Citizens aged 60 or over account for more than a fifth of residents in 13 of China’s 31 provincial-level jurisdictions, highlighting growing strain on the country’s struggling pension fund, but possible opportunities for the silver economy. ( South China Morning Post)

Also if we note Japan we see that it has seen quite a currency devaluation compared to China. We have a Yen which has passed 144 today but a Yuan which did not pass 7. One Yuan buys 20.7 Yen now which is up 21% on a year ago. Wasn’t China supposed to be the currency devaluer?

This has two influences of which the first is quite a revaluation between the two main Pacific currencies. The next is that China may be keeping the Yuan strong to prevent yet another problem for the property sector via its dollar borrowing.


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

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.


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.


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.



The rise of the US Dollar is putting more pressure on the world economic system

One of the things that raises a wry smile is themes that go around and then pretty immediately crash and burn. That has been happening in currency markets. There have been various claims that events will end the dominance of the US Dollar with other currencies taking its place. Some considered last week’s move by Israel as evidence of this.

Israel’s central bank has made the biggest changes to its allocation of reserves in over a decade, adding the Chinese yuan alongside three other currencies to a stockpile that last year exceeded $200 billion for the first time ever. ( Bloomberg)

This was reported as a downgrade for the US Dollar when in fact the biggest move was elsewhere.

To accommodate the changes, the euro’s share will fall to 20% — the lowest in at least a decade — from just over 30%, while the dollar will account for 61%, down from 66.5%. The pound’s weighting, by contrast, will almost double to 5%, returning to a level last seen in 2011. ( Bloomberg)

From a UK point of view it is interesting to see the UK Pound gain some official support but as you can see the main loser here was the Euro. The winners are below.

the currencies of Canada and Australia will have 3.5% each. Under the new approach, the yuan’s proportion is set at 2% for 2022, according to the Israeli central bank’s annual report published at the end of last month. ( Bloomberg)

So we see Israel reflecting the commodity strength of Canada and Australia and giving a nod to China. They also added 5% for the Japanese Yen.

Holla Dolla

Meanwhile if we move from rhetoric to financial markets we see a different story. From the Financial Times yesterday.

The US dollar rallied to its highest level since March 2020 on Monday and is on track for its best month since January 2015, buoyed by expectations that the Federal Reserve will have to lift interest rates aggressively to tame inflation.
The dollar index, which tracks the US currency against six others including the euro and sterling, rose by as much as 0.8 per cent to a high of 101.86. The index has risen roughly 12 per cent in the past year.

There have been more headlines on this front since then.

The euro has tumbled to a five-year low against the US dollar…………The European common currency fell further on Wednesday morning after hitting its weakest point since April 2017 late in the previous New York session, according to Refinitiv data.

The whole concept is so painful for the FT they do not give a price so let me point out it has fallen below 1.06 this morning. If we stay with the Euro it has created something of a brain fart from Robin Brooks.

EUR/$ at 1.06 looks weak (white), but it isn’t. The Dollar is super strong, which drags up Euro in trade-weighted terms (orange). Once you adjust for that, what looks like a weak 1.06 is more like a strong 1.40. Not the right level given the Euro zone is going into recession…

Er a strong Dollar drags down the Euro but anyway we see that it may have what we dread in the UK which is inflationary versus the US Dollar and commodities but deflationary versus other trading partners.

Speaking of the UK Pound it has been hit recent falling below US $1.30 on Friday and then following equity markets lower this week to below US $1.26.

If we look to the orient we see more signs of pressure building. On Monday last week I looked at the way the Japanese Yen was devaluing. To that we can add concerns about the Yuan or Renminbi of China. From YuanTalks on Monday.

#PBOC cut reserve ratio for banks’ foreign exchange deposits to support the #yuan after the currency hit the weakest level in 17 months 

What is causing this?


One factor in this game is a change in perceptions about the US Federal Reserve.

The futures market is projecting the Fed will raise its main interest rate to 2.77 per cent by the end of 2022 — up from expectations of around 0.8 per cent at the start of the year — including three half-point raises in the coming months. ( FT)

I say perceptions because so far we have had only one interest-rate increase but financial markets are expecting more. This will especially support the US Dollar against the Yen and Euro who are limited on this front and indeed the Yuan where we may even see an interest-rate cut.


The first component of this is the simplest or actual fear about the war in Ukraine and its consequences which leads a move to a perceived safe haven.This time around there are fewer of those in sight as the Japanese Yen has fallen as there seems little sign of its large foreign investments being repatriated. Also the Euro which in recent times has had elements of safe haven moves is on the front line.

Another factor this week has been financial fear with equity markets falling leading to a stronger US Dollar. There is an irony as the main equity markets are in the US but it happens anyway.

Commodity Prices

As commodity prices rise importers need more US Dollars to buy the same amount. Thus more Euros, Yuans, Yen and Pounds need to be exchanged leading to price moves.

What is not causing it

Economics 101 would have this pushing the US Dollar lower.

For 2021, the U.S. trade deficit was $859.1 billion, according to the U.S. Bureau of Economic Analysis (BEA). The U.S. imported $3.4 trillion in goods and services, up $576.5 billion from 2020. Exports were at $2.5 trillion, marking a $394 billion increase from 2020.2

The 2021 trade deficit was significantly higher than that of 2020, in which the trade deficit was $676.7 billion. The COVID-19 pandemic and supply chain issues had a dramatic effect on imports in 2021. The current deficit sets a new record over the previous high mark of $763.5 billion in 2006.  ( The Balance )

Care is needed as in real terms the numbers will be different but even 2022 so far adds to the theme of a trade position which should be pushing the US Dollar lower according to economics 101.

Year-to-date, the goods and services deficit increased $45.7 billion, or 34.5 percent, from the same period in 2021. Exports increased $68.0 billion or 17.6 percent. Imports increased $113.7 billion or 22.0 percent. ( US BEA)


There are various impacts of this and if we look at the US the simplest is that for a given amount of US Dollars they can buy more foreign goods and services. That is more woe for economics 101 as it will further worsen the trade deficit although according to the Federal Reserve the export position is worse.

the response of U.S. real exports to a 10 percent dollar appreciation that is derived from a large econometric model of U.S. trade maintained by the Federal Reserve Board staff.4 Real exports fall about 3 percent after a year and more than 7 percent after three years.

That was from a speech from Vice-Chair Stanley Fischer who thought the import reaction would be lower.

The low exchange rate pass-through helps account for the more modest estimated response of U.S. real imports to a 10 percent exchange rate appreciation shown by the thin red line in figure 2, which indicates that real imports rise only about 3-3/4 percent after three years.7

This is contractionary for the US economy.

The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years.

The extra US imports will boost other economies but then they are presently struggling to afford US goods and commodities priced in US Dollars.


Meet Japan the new currency devaluer

Last night as the UK bank holiday weekend was coming to an end I took a look at financial markets and noted a new low for the Japanese Yen as the big figure versus the US Dollar became 127. Back on the 28th of March I quoted this from Nikkei Asia.

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

They went on with this.

“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.

Why does this matter? There are the issues for Japan I will come to later but the Yen is an internationally significant currency as again I pointed out back then.

The Japanese Yen (world’s third most-traded & third-largest reserve currency) is on track for one of its worst months ever. ( @DavidInglesTV )

Today the Japan Times is reporting events like this.

The yen posted its longest losing streak in at least half a century on bets further divergence between U.S. and Japanese interest rates is inevitable.

The yen fell to the ¥128 range against the U.S. dollar in Tokyo Tuesday, marking a fresh 20-year-low after breaking the ¥127 line in New York overnight.

There was more.

Monday’s decline marked its longest losing streak since records compiled by Bloomberg begin in 1971, when the U.S. left the gold standard.

Also there was a bit of echoing of the view in Nikkei Asia on the 28th of last month as we learn something about how things are being presented in Japan itself.

The emerging consensus among traders in Tokyo is that it will reach ¥130 against the dollar in coming months.

What is causing this?

Interest-Rate Expectations

The issue here was revved up last night by a policymaker at the US Federal Reserve.

April 18 (Reuters) – U.S. inflation is “far too high,” St. Louis Federal Reserve Bank President James Bullard said on Monday as he repeated his case for increasing interest rates to 3.5% by the end of the year to slow what are now 40-year-high inflation readings………..Bullard’s preferred rate path would require half-point interest rates hikes at all six of the Fed’s remaining meetings this year.

Just in case he had not ramped this enough here is the Wall Street Journal.

St. Louis Fed President Jim Bullard: Raising the federal-funds rate by 75 bps at a meeting shouldn’t be ruled out, but it’s not my base case “at this point”

Whereas in Japan there are no such thoughts.

Kuroda, however, repeated his view the BOJ must maintain its massive stimulus programme to support a fragile economic recovery. ( Reuters)

Of course talk is merely that and the US Federal Reserve has only raised interest-rates to the 0.25% to 0.5% range. But currency moves often look at short-term bonds and at the 2 year maturity there is a 2.5% carry or if you prefer interest-rate differential in favour of the US Dollar.

Energy Problems

This is a major issue for Japan as the trade ministry METI put it a few years ago.

Originally, Japan is poor in resources such as oil and natural gas. The energy self-sufficiency ratio of Japan in 2015 was 7.4% which was a low level even compared to other OECD countries.

The Fukushima disaster had made a bad situation worse leaving Japan even more exposed to the sort of thing we are seeing now. With the rises in the price of gas this from the International Energy Agency poses a problem.

Because Japan is one of the top global natural gas consumers and has minimal production, the country relies on imports to meet nearly all of its natural gas demand. Japan was the largest global liquefied natural gas (LNG) importer in 2019…….In 2019, Japan’s natural gas consumption reached an estimated 3.6 trillion cubic feet of natural gas per year (Tcf/y), about 4% higher than a decade ago

It also pointed out the reliance on oil imports.

Japan’s oil consumption was an estimated 3.7 million b/d in 2019, making it the fifth-largest petroleum consumer in the world behind the United States, China, India, and Russia.

With prices at current levels this poses an increasing problem. The price of Brent Crude Oil is above US$112 today and even in the US gas prices are soaring.

Holy moly, US natural gas is on a mission to hit $8/mmbtu for the first time since 2008 ( @SStapzinski )


The energy issue is a major factor in changes here too. Over time we have got used to Japan racking up trade surpluses even if that was dented for a while by the Fukushima crisis. This meant that Japan built up large foreign asset holdings. But now things are starting to look rather different.

Amid soaring commodity prices, the country logged a trade deficit for the seventh straight month in February. And increasing red ink means Japanese companies need to sell more yen to acquire dollars to pay for imports, thereby putting downward pressure on the yen.  ( Japan Times)

The issue is one of increasing concern within Japan.

However, due to the structural change in Japan’s trade balance, concerns are growing that the country may even post an annual current account deficit. Because of the increasing red ink in the trade arena, Japan posted a current account deficit in December and January. Although February saw a ¥1.64 trillion current account surplus, the figure was down by 42.5% year on year.

After all it has been a while.

The last time the nation recorded an annual current account deficit was 1980, following the 1979 oil crisis, according to a Finance Ministry official.

So there are shifting sands here.


As so often Japan seems to be dodging the inflation bullet with the leading indicator for Tokyo at 1.3%. But there is this pointed out by the Bank of Japan.

dissipation of the effects of a reduction in mobile phone charges

So soon we will have numbers without that and there have been factors keeping the price of rice low.

Rice farmers are particularly vulnerable. Unlike wheat and corn, which have seen prices skyrocket as the war jeopardizes one of the world’s major breadbaskets, rice prices have been subdued due to ample production and existing stockpiles. That means rice growers are having to deal with inflated costs while also not getting more money for their grains. ( Japan Times)

That cannot continue.


It is time to remind ourselves of our 2 major themes in this area. The first was the years of Yen strength as like is “Currency Twin” the Swiss Franc  it got further boosted by the Carry Trade. Well as Bob Dylan sang.

For the loser now
Will be later to win
For the times they are a-changin’

But also there was the period where Prime Minister Shinzo Abe pursued a policy called Abenomics which was designed to weaken the Yen except after an initial move it didn’t. He must be furious right now. Along the way we found out some unexpected developments for economics 101 as this did not do the trick.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen……The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

A big problem for this was that so many were ( and in some cases still are) at the same game.

Also imagine how this is going down in Beijing as China has been accused of being a currency devaluer for years whereas it seems that it is Japan who is at that game. One Renminbi buys more than 20 Japanese Yen now which is up nearly 20% over the past year.



The Japanese Yen falls as the Bank of Japan promises to buy an “unlimited” number of bonds

As the week fires up the economic news has come from Nihon or Japan as The Tokyo Whale has started the week in hungry mode.

Announcement on the Conduct of
Fixed-Rate Purchase Operations for Consecutive Days
The Bank of Japan will conduct fixed-rate purchase operations for consecutive days
as follows….

So it is back in the game but we need to look further down the official notice and the emphasis is mine.

With regard to the outright purchases of JGBs (competitive auction method) during the period indicated above, the Bank may change the schedule and amounts of the
purchases as needed, taking account of market conditions.

It is offering to buy an unlimited amount of Japanese Government Bonds tomorrow, Wednesday and Thursday. That comes after doing this earlier.

TOKYO, March 28 (Reuters) – The Bank of Japan desperately defended its yield target on Monday by making two offers in a single day to buy an unlimited amount of government bonds, as it struggled to swim against the global tide toward higher interest rates.

There is an interesting choice of language from Reuters there. Anyone we tick one box as I was sure the Bank of Japan had not changed its spots when the media was assuring us it was getting out of the QE game.

Yield Curve Control

What is happening here is a response to international events and in particular the rise on bond yields we have been noting. Whilst the rise in US yields is the headline maker I thin that the rise in the benchmark German yield is more significant. Germany is fiscally prudent which is quite a contrast to Japan and has a central bank still doing QE bond buying but its benchmark yield is 0.62%. By contrast the Bank of Japan is trying to do this.

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.

That is at least 1% too low I would say. The only thing in Japan’s favour is the low level of inflation and as I will discuss later that is changing. Anyway if bond markets were tracking inflation they would be nowhere near where they are.

Even the Bank of Japan realises it cannot keep bond yields at 0% all the time so it has a range which used to be 0.1% and is now 0.25% which is where we are right now. At this point there are three main consequences for the bond market.

  1. The Japanese government is able to borrow very cheaply and we are on the margins of the text book case of its debt being monetised.
  2. Anyone who holds Japanese Government Bonds is being giving a handout by the Bank of Japan as the price is higher than otherwise.
  3. Volumes will be low ( the first offer today did not trade at all) until something moves things.

The Yen Falls

Let me take you to the view of Nikkei Asia from last week.

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

It went on to note this.

“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.

Things have really rather sped up because today the Yen has fallen by two big figures and is  124.40 as I type this. So by the end of the year may be next week! There is an additional significance to the move as we consider the international position of the Yen.

The Japanese Yen (world’s third most-traded & third-largest reserve currency) is on track for one of its worst months ever. ( @DavidInglesTV )

There is an irony as we have gone from the Bank of Japan creating zero volumes in the bond market whilst putting volumes in the FX market through the roof! The central planners will be looking to deflect away from that one especially as when it was explicit policy they failed! Somewhere the former Prime Minister Shinzo Abe must be looking at this and wondering why all that monetary easing of Abenomics did not happen for him? Or to be more specific after weakening the Yen rebounded as those who remember the night it shot up to 103 will recall.

There are problems here as a weak Yen is not what it used to be as Nikkei Asia points out.

For starters, more Japanese cars and other products are made in the markets where they are sold. This undercuts the export boost from a weak yen

Added to this Japan is a very large energy importer made worse by the Fukushima issue which meant that many nuclear power plants were mothballed.

Today, crude hovers above $100 a barrel after Russia’s invasion of Ukraine. A weak yen drives up the cost of imported energy even more. These factors add to the negative side of the current yen depreciation.

With Brent Crude Oil at US $113 the oil price situation has deteriiorated too.


Japan is about to see some at least by its standards. From Friday

The Services Producer Price Index (All items) rose 1.1 percent from the previous year. The Services Producer Price Index (All items ) rose 0.9 percent from the previous year.

Not much you may think but services inflation has been much lower than goods inflation and earlier this month we saw this in that arena.

The Producer Price Index rose 0.8 percent from the previous month

That made the annual rate 9.3% and import costs were rising even faster.

The Import Price Index (contract currency basis) rose 1.7 percent from the previous month.

The annual rate was 25.7% and it has been that or higher for a bit now.

Even Japan cannot avoid the consequences of this. A factor holding inflation down will soon wash out of the numbers.

 The services sector even has reported the strongest deflation since 1970 (-2,8%), mainly due to the sharp
drop in mobile phone charges, down more than 50% since March 2021. ( BNP Paribas )

The impact has been to reduce things by a bit more than 1%.


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 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.

USD/JPY reaching 125, what’s the Kuroda line? 125/126??? ( @Trinhnomics )

For now we have an inflation and a trade situation made worse by all of this. Previously Japan at least had a strong Yen to buy its energy imports with. Then we move onto the next stage of the story because a past theme of it being a Safe Haven is now singing along with Queen and David Bowie.

It’s the terror of knowing what the world is about
Watching some good friends screaming
“Let me out!”
Pray tomorrow gets me higher
Pressure on people, people on streets

Oh and across the world some at the Frankfurt Tower of the ECB will be getting a little nervous.





The economic consequence of Russia invading Ukraine is more stagflation

Today is a grim day as we wake up to the news that Russia has invaded Ukraine. It is hardly a surprise but still has shaken up some financial markets which have seen big moves. It also will have longer-term consequences. I would say that all roads lead to Russia except of course for the fact that presently we are also concerned with the tanks using them to exit it and enter Ukraine.

The Rouble and stock market collapse

We can look at the stock market situation with a wry smile via the lens of Reuters on the 1st of December.

MOSCOW (Reuters) – Russia’s stock market will recover in 2022 from the November sell-off……..The MOEX rouble-denominated index was expected to reach 4,100 by mid-2022, up about 5.7% from Monday’s close of 3,879.54, according to the Nov. 15-30 Reuters poll.

Well that is not quite the state of play today.

#RussiaUkraine Tensions | #Russia‘s #RTS Index Tumbles 50% & #MOEX Slides 45% ( CNBC)

It has been quite a day already with the MOEX initially falling below 1700 ( in such wild moves there are always disputes about exact levels) and has now rebounded as I type this to 2300 which is still around a quarter lower on the day and comes on the back of earlier losses this week already. So we have a starting point of what central bankers hate which is falls in asset prices and negative wealth effects.

The Rouble has followed a similar pattern as the present level of 84 versus the US Dollar would be an all-time low except for the fact that it fell below 87 on the invasion news. Again we have a pattern of a fall but wild swings within it. This led me to believe that the Bank of Russia was intervening and I had a look.

Russia’s central bank said Thursday that it would start interventions in the foreign-exchange market after the ruble plunged to a record low in the hours after troops invaded Ukraine. ( MarketWatch)

It is not short of ammunition for this and as we noted back in January you could say it was getting ready for it,

Russia holds a formidable warchest of more than $600 billion in foreign-exchange reserves and gold that it can use in currency markets to prop up the ruble.

According to its website it has acted to support the stock market as well.

the Bank of Russia ordered brokers to suspend short sales on exchange and over-the-counter market.

So we have a lot of intervention, more inflation and heavy losses on assets as our opener for the economic impact on Russia.

However that mostly affects the ordinary Russian whereas those in power will be getting a boost from this.

Wti Crude 99.58 +8.12%

Brent Crude 104.96 +8.39

Natural Gas 4.91 +6.19%

Gold 1,963 +2.77% 

Palladium 2,670 +7.69% ( @InvestorsHaven )

There is a discount for the Urals benchmark oil price and there may be restrictions but for the moment there are views that the West may even be sourcing more rather than less energy from Russia.

I’m hope to be proven badly wrong on this: I believe Europe will buy more (no less) Russian natural gas in the next few days. Yes, that’s right: more. That’s capitalism in times of war. The reason is linked with how Gazprom import contract pricing is structured. ( @JavierBlas )

Russia in short looks like it is winning from its commodity resources and also from its policy of building up gold reserves. Ir rather the Russian state is as the ordinary Russian will be seeing inflation as a minimum.

The rest of the world


This will come from the commodity prices we have just noted. Already many countries were seeing an energy price crunch which now looks set to worsen. There is also the issue of this.

Wheat prices jumped to a 9-year high as global shipments are seen facing disruption from Russia’s invasion in Ukraine The two countries supply 21% of the world’s wheat, barley and maize Food prices are set to rise worldwide. ( @SalehaMoshin)

US wheat futures are up 50 cents at US $9.26 per bushel this morning giving us a nine-year high. If we add in a factor we have been following higher food prices are on their way.

Russia + Belarus supply 20% of fertilizer exports, key for world food production ( @SalehaMoshin )

So a mixture that would be described by Britney like this.

With a taste of your lips, I’m on a ride
You’re toxic, I’m slippin’ under (toxic)

Central Banks

These have a problem and let us start with the ECB for two reasons. One is that it has an informal meeting today by chance and next because in many ways it is in the biggest mess. Let me hand you over to @fwred.

Oil prices are 35% higher than assumed by the @ecb

staff in December. The first-order impact will push headline inflation higher (+40bp), also raising concerns over second-round effects. But from these levels, higher/sticky energy prices will ultimately be disinflationary.

As you can see the inflation move poses a challenge to the ECB ( and wider central banking view) that inflation is about to flaw. Although of course from their point of view the food and energy inflation is non-core.

But there is an associated issue as well.

The ECB’s piece included an estimate of the growth impact of last year’s surge in gas prices, which could reduce euro area GDP by around 0.2% by the end of 2022. The latest rise in gas prices (and oil) has the potential to have a much larger impact on growth. ( @fwred )

So we will be seeing yet more of our stagflation theme. Which way will they move? Well one policymaker seems to have already decided.

FRANKFURT, Feb 24 (Reuters) – The European Central Bank should continue its bond-buying stimulus programme at least until the end of the year and keep it open-ended to cushion the fallout from any conflict in Ukraine, ECB policymaker Yannis Stournaras told Reuters.

To Infinity! And Beyond!

Defence Expenditure

We have lived through a period called the Cold War dividend where its end meant we in the west spent less on defence. Sadlt that is changing as Francine Lacqua reflected on earlier.

Our world has changed overnight. Next 24 hours will be critical to understanding how.

We will have to spend more and only time will tell how much more. But there are things the UK can do in the relatively short-term.

1. Keep the tranche 1 Typhoons

2. Accelerate frigate production and order the FSS supply ships.

To which I would add speed up the modifications to the Type 45 frigates.

There is a reason I am looking at the RAF and Royal Navy which is that the British Army has been dreadfully led and run in recent times and can only help in a minor way until we sort it out.


There is much that is in flux right now but I am afraid we are back to our stagflation theme and more inflation. So we will be poorer. There will also need to be thought on the issue of how we have left ourselves so dependent on potential enemies for vital products.

Let me finish with a glimmer of hope. At a time like this we would expect to see the safe haven of the Japanese Yen soar but in fact it has only moved marginally to 114.80. So from the Pacific region at least there is no panic at this stage.