The 0% problem of Japan’s economy

Today I intend to look east to the land of the rising sun or Nihon where the ongoing economic struggles have been a forerunner to what is now happening to western economies. Also of course Japan is intimately tied up with the ongoing issue and indeed problem that is North Korea. And its navy or rather maritime self-defence force is being reinforced as this from Reuters only last month points out.

Japan’s second big helicopter carrier, the Kaga, entered service on Wednesday, giving the nation’s military greater ability to deploy beyond its shores………..Japan’s two biggest warships since World War Two are potent symbols of Prime Minister Shinzo Abe’s push to give the military a bigger international role. They are designated as helicopter destroyers to keep within the bounds of a war-renouncing constitution that forbids possession of offensive weapons.

We cannot be to critical of the name misrepresentation as of course the Royal Navy badged its previous aircraft carriers as through deck cruisers! There are of course issues though with Japan possessing such ships as the name alone indicates as the last one was involved in the attack on Pearl Habour before being sunk at Midway.


This is a crucial issue as this from Bloomberg today indicates.

Japan Needs More People

The crux of the problem will be familiar to regular readers of my work.

Japanese companies already report they can’t find people to hire, and the future isn’t likely to get better — government researchers expect the country’s population to fall by nearly a third by 2065, at which point nearly 40 percent will be senior citizens. There’ll be 1.3 workers for every person over the age of 65, compared to 2.3 in 2015.

So the population is both ageing and shrinking which of course are interrelated issues. The solution proposed by Bloomberg is rather familiar.

It’s plain, however, that he needs to try harder still, especially when it comes to immigration……..Researchers say that to maintain the current population, Japan would have to let in more than half a million immigrants a year. (It took in 72,000 in 2015.)……..He now needs to persuade Japan that substantially higher immigration is a vital necessity.

There are various issues here as for example the Bloomberg theme that the policies of  Prime Minister Abe are working seems not to be applying to population. But as they admit below such a change is the equivalent of asking fans of Arsenal football club to support Tottenham Hotspur.

In a society as insular and homogeneous as Japan, any such increase would be a very tall order.

The question always begged in this is if the new immigrants boost the Japanese economy surely there must be a negative effect on the countries they leave?

The 0% Problem in Japan

I thought today I would look at the economy in different ways and partly as a reflection of the culture and partly due to the effect above a lot of economic and financial market indicators are near to 0%. This is something which upsets both establishments and central bankers.

Real Wages

Let me start with an issue I have been writing about for some years from Japan Macro Advisers.

The real wage growth, after offsetting the inflation in the consumer price, was 0% YoY in February.

The official real wage data has gone 0%,0%,0.1%, -0.1% and now 0% so in essence 0% and is appears on a road to nowhere. This is very different to what you may have read in places like Bloomberg and the Financial Times which have regularly trumpeted real wage growth in their headlines. There is a reason why this is even more significant than you might think because let me skip to a genuine example of economic success in Japan.

Given the prevalent labor shortage situation in Japan, there should be an economic force encouraging wages to rise. At 2.8%, the current unemployment rate is the lowest since 1993. (Japan Macro Advisers )

Actually in another rebuttal to Ivory Tower economics we see that unemployment is above what was “full employment”.

One could argue it is a matter of time, but it has already been 2.5 years since the unemployment rate reached 3.5%, the level economists considered as full-employment equivalent. (Japan Macro Advisers )


The latest official data hammers out an increasingly familiar beat.

The consumer price index for Japan in February 2017 was 99.8 (2015=100), up 0.3% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

If you compare 99.8 now with 100 in 2015 you see that inflation has been in essence 0%. This is quite a reverse for the policy of Abenomics where the “Three Arrows” were supposed to lead to inflation rising at 2% per annum. An enormous amount of financial market Quantitative Easing has achieved what exactly? Here is an idea of the scale comparing Japan to the US and Euro area.

As we stand this has been a colossal failure in achieving its objective as for example inflation is effectively 0% and the Japanese Yen has been reinforcing this by strengthening recently into the 108s versus the US Dollar. it has however achieved something according to The Japan Times.

Tokyo’s skyline is set to welcome 45 new skyscrapers by the time the city hosts the Olympics in 2020, as a surge of buildings planned in the early years of Abenomics near completion.

Although in something of an irony this seems to cut inflation prospects.

“This could heat up competition for tenants in other areas of the city”

A cultural issue

From The Japan Times.

Naruhito Nogami, a 37-year-old systems engineer in Tokyo, drives to discount stores on weekends to buy cheap groceries in bulk, even though he earns enough to make ends meet and the prospects for Japan’s economic recovery are brighter.

“I do have money, but I’m frugal anyway. Everyone is like that. That’s just the way it is,” he says.

Jaoanese businesses have responded in a way that will be sending shudders through the office of Bank of Japan Governor Kuroda.

Top retailer Aeon Co. is cutting prices for over 250 grocery items this month to lure cost-savvy shoppers, and Seiyu, operated by Wal-Mart Stores, cut prices on more than 200 products in February.

More of the same?

It would seem that some doubling down is about to take place.

The Abe government on Tuesday nominated banker Hitoshi Suzuki and economist Goshi Kataoka to the Bank of Japan Policy Board to replace two members who have frequently dissented against the direction set by Gov. Haruhiko Kuroda. ( Bloomberg)

Also Japan seems ever more committed to a type of centrally planned economic culture.

Japanese government-backed fund eyes Toshiba’s chip unit (Financial Times )

With the Bank of Japan buying so many Japanese shares it has been named the Tokyo Whale there more questions than answers here.


There is much to consider here but let me propose something regularly ignored. Why does Japan simply not embrace its strengths of for example full employment and relatively good economic growth per capita figures and abandon the collective growth and inflation chasing? After all lower prices can provide better living-standards and as  wages seem unable to rise even with very low unemployment may be a road forwards.

The catch is the fact that Japan continues to not only have a high national debt to GDP (Gross Domestic Product) ratio of 231% according to Bank of Japan data but is borrowing ever more each year. It is in effect reflating but not getting inflation and on a collective level not getting much economic growth either. Let is hope that Japan follows the lead of many of its citizens and avoids what happened last time after a period of economic troubles.

For us however we are left to mull the words of the band The Vapors.

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

Let me finish with one clear difference we in the UK have much more of an inflation culture than Japan.

Will we see unlimited bond buying from the Bank of Japan?

After a difficult 2016 to say the least Governor Kuroda of the Bank of Japan has some reasons to be cheerful. So let us remind ourselves of the view of Ian Dury and the Blockheads about this.

Reasons to be cheerful, part 3
Reasons to be cheerful, part 3
Reasons to be cheerful, part 3
Reasons to be cheerful – 1, 2, 3

Part 1

If we look for reason one well that is easy as DailyFX have already pointed out.

USD/JPY hits 111.125 its highest since May 31, as reflationary Trump-trade rolls on. Perhaps only Thanksgiving can put a temporary brake on.

As the policy of Abenomics has a lower Yen as perhaps its major weapon and objective its recent fall will be welcome to the Japanese establishment. It was at 103 just before the election of Donald Trump so quite a fast decline although we should not overplay his impact as the Yen had been weakening since the near 100 of late September. Even the poor battered UK Pound £ has seen a bounce versus the Yen from the 125 of middish October to 137 overnight.  If we look at the battle of the currency depreciators of the Far East then I note that it now takes just over 16 Yen to buy in Chinese Renminbi or Yuan as opposed to just over 15 in late September. Cue smiles from Tokyo and frowns from Beijing.

Part 2

This is something which is associated with the weaker currency as we note something which all central bankers love these days. As they are keen to proclaim wealth effects then a higher equity market is close to their heart. There has been quite a push higher to 18,106 in the Nikkei 225 equity index from the below 15,000 of  June 24th. It is now in a bull market although of course that is merely another way of saying it has risen under the modern definition of a 20% rise.

Part 3

Economic growth as measured by GDP was relatively strong in the quarter just passed as Japan Macro Advisers point out.

According to the preliminary estimates by Cabinet Office, the Real GDP grew by 0.5% from the previous quarter (QoQ), or by 2.2% on annualized terms. The pace of the growth was significantly stronger than the prior market expectation.

It was to say the least export led.

The external demand added 0.5% point to the GDP growth on the account of rising exports and a fall in imports.

At this point Governor Kuroda might be considering joining the Japanese version of Strictly Come Dancing as those suggesting “innovation” in monetary policy seem to do these days. However whilst he might be smiling even the recent better silver lining had a cloud. If we stay with Japan Macro Advisers.

A key point from the preliminary estimate is that weak domestic activity continues to cast doubts on a sustainable recovery of the Japanese economy as there has been virtually no growth in private consumption nor private expenditure.

Okay so sadly same as it ever was in this regard and the day after the report Governor Kuroda did not seem that optimistic about more export growth.

Against this background, exports and production are expected to start increasing moderately.

You may wonder about the start but you see he does not think that Japan’s exports have been doing that well.

Exports as a whole have therefore been flat. Against this background, production also has been almost flat.

The past was bright

Back on the 30th of September I pointed out that using a new methodology the Bank of Japan has decided things were much better than they previously thought.

According to an experimental index prepared by the BoJ, Japan’s economy expanded 2.4 per cent in 2014, rather than falling 0.9 per cent as the official data showed.

They use the income version of GDP to get this as we not that the moral hazard meter rises perhaps even to the mythical 11 out of 10 described by Spinal Tap.

Unlimited bond buying

Back on the 21st of September the Bank of Japan introduced “QQE with Yield Curve Control” as described below.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent).

Actually very little happened here as things as I have pointed out carried on pretty much as before although the change of language did obtain a fair bit of comment and claims of a clear change. For those wondering why QE is called QQE or Quantitative and Qualitative (monetary) Easing in Japan the answer is easy as so many versions of QE led to it being discredited.

On Thursday the Wall Street Journal was on the case again.

The Bank of Japan on Thursday offered to buy an unlimited amount of Japanese government bonds at fixed rates for the first time since the introduction of a new policy framework—a sign of its concerns over recent rises in yields.

There is an issue here as I note that the ten-year Japanese Government Bond yield is at 0.03% above zero. It is up 0.08% over the past 30 days according to Bloomberg which gives a different perspective on the media reports of success. Also how do claims of unlimited buying face up to the extraordinary buying which was already happening?

This is yet another market where the Bank of Japan has become the Tokyo Whale. Here is something of an update of how it is progressing on the Tokyo Whale front elsewhere.

It’s the No. 1 shareholder in piano maker Yamaha Corp., Bloomberg estimates show, after its ownership stake via ETFs climbed to about 5.9 percent…..The BOJ is set to become the top holder of about five other Nikkei 225 companies by year-end, after boosting its annual ETF buying target to 6 trillion yen last month. By 2017, the central bank will rank No. 1 in about a quarter of the index’s members.

How do “wealth effects” made by the central bank benefit the consumer?


There is much to consider here. If we consider the use of the phrase “unlimited buying” how did that work out for the foreign exchange purchases of the Swiss National Bank? That too was portrayed as a triumph until the engine blew a gasket. Also whilst the government of Japan offers a ready supply of newly printed Japanese Government Bonds via its fiscal deficit the supply is not unlimited so we have to ask what happens if they run out of bonds to buy? Not so long ago that would have seemed not far off crazy.

There is another irony for 2016 which goes as follows. When the Bank of Japan acted in 2016 things went wrong for it but when it talked but did nothing it saw the Yen fall and Nikkei rise. One in the eye for the central planners!

Another problem for the central planners in that in some ways Japan is not doing too badly. What I mean by that is that any economic growth may be an achievement compared to an ageing population which is also doing this according to The Japan Times.

Japan’s population excluding resident foreign nationals fell last year at the fastest pace yet, down 271,834 from a year earlier to 125,891,742 as of Jan. 1,……Japan’s population peaked in 2009 at 127,076,183 and has since been declining.

So the performance per head is better than the headlines. This of course brings us to something of a crunch because the official medicine for ever fewer people seems to be policies to accommodate an ever larger national debt. Also the current establishment mantra is for lower interest-rates and easier fiscal policy, well that’s Japan……..

However another issue currently on the sidelines is the price of crude oil as Japan via its lack of natural resources is perhaps the biggest gainer from lower oil prices.

Central banks face up to Super Wednesday

One of the features of the times is the way that financial markets spend so much of their time front-running central banks. This creates quite an atmosphere today as they wait for the Bank of Japan early tomorrow UK time and then later in the day the US Federal Reserve. We have seen already an example of skittish trading as the Euro pushed above 1.12 versus the US Dollar for no apparent reason. Also it will be a nervous day in bond markets where the “tantrum” I wrote about on the 12th if this month is ongoing and of course has pushed markets in the opposite direction to all the central banking bond buying. The ten-year bond yield in Germany has nervous poked its head into positive territory albeit only at 0.02% as I type this and yet the ECB QE (Quantitative Easing) bond buying continues and across all the eligible Euro area nations (not Greece) it had reached some 1.034 trillion Euros as of the end of last week.

Bank of Japan

This faces quite a list of problems which adds to its conundrum as in many ways it is the central bank which has gone furthest. If you do a check list you go negative interest-rates, QE albeit called QQE, corporate bond purchases, commercial paper ( where it is as far as I recall alone)  as well as equities and commercial property via exchange traded funds.

Those wondering about the equity purchases might like to look back to my article on the Tokyo Whale as the Bank of Japan must own two-thirds of that market by now. Here is an update on this subject from Bloomberg last week.

The central bank is on course to become the No. 1 shareholder of 55 companies in Japan’s Nikkei 225 Stock Average by the end of 2017, according to estimates compiled by Bloomberg last month.

The Yen

This will be on the mind of the members of the Bank of Japan because it is not behaving as they would have hoped and expected. In the early days of Abenomics the Yen fell and against the US Dollar reached a nadir of just below 124 in early May 2015. The rally in the Yen began at the start of 2016 and has seen it move by 20 points from just below 122 to just below 102. Even worse for the Bank of Japan a fair bit of the strengthening followed this announcement in January,

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary.

We saw that the application of negative interest-rates with the hint of more worked for 24 hours in Yen terms. It went on a wild ride where it weakened for about a day but then surged and has with the occasional halt and back track continued in the same direction until now.

So another Ivory Tower has come crashing down as more QE ( called QQE in Japan as QE has become discredited) and negative interest-rates have led to a stronger and not weaker Yen in 2016.


This is a clear area where things are made awkward for Abenomics as the stronger Yen means that there will be downwards pressure on inflation as commodities and oil get cheaper. That makes it harder for the Bank of Japan to hit its target of consumer inflation rising at 2% per annum. Here is the latest data on the subject.

The consumer price index for Japan in July 2016 was 99.6 (2015=100), down 0.2% from the previous month, and down 0.4% over the year….  The consumer price index for Ku-area of Tokyo in August 2016 (preliminary) was 99.6 (2015=100), up 0.1% from the previous month, and down 0.5% over the year.

As you can see prices are falling again which collapses another row of Ivory Towers as expanding the monetary base on this scale should lead to inflation in their models.

Now we get to something awkward which is that the lower rather than higher inflation is achieving an Abenomics objective. It has given Japan some real wage growth but by a completely different route to the one envisaged. Under Abenomics higher inflation was supposed to be accompanied by some sort of wages fairy which would sprinkle magic dust on the numbers.

So by an unexpected route Japan is getting an economic boost. Accordingly I can only completely disagree by this from Gavyn Davies in the Financial Times.

As a result, the inflation credibility of the BoJ has sunk to a new low, and the policy board badly needs to restore confidence in the 2 per cent inflation target.

The economy

This is not going so well as Bank of Japan policymaker Funo told us last week.

Looking ahead, sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow.

He was more specific later on the numbers.

the medians of the Policy Board members’ forecasts for the economic growth rate are 1.0 percent for fiscal 2016, 1.3 percent for fiscal 2017, and 0.9 percent for fiscal 2018, and the economy is expected to continue growing at a pace above its potential through the projection period.

Is he really saying that growth at such a low-level is above potential?Yes he is.

Japan’s potential growth rate, as estimated by the Bank, has declined to the range of 0.0-0.5 percent,


On a collective level we got news today on the population and ageing problem that Japan has. According to its Statistics Bureau the population fell by another 300,000 in the 6 months to the beginning of this month making it 126.6 million now. There are now 10.5 million people over 80 which only the “dismal science” would conclude is a bad thing.

Deposit Rates

Have raised the issue of people saving more when interest-rates get very low let me give you the Bank of Japan data on deposit rates. The ordinary depositor gets 0.002% and if you do a time deposit for a year you get 0.016% and for ten years between 0.2% and 0.3% per annum.

The Federal Reserve

It has been a dreadful year for Forward Guidance from the US central bank. The “three to five” interest-rate increases promised at the start of 2016 by John Williams of the San Francisco Fed have morphed into zero so far. As we approach the election changes will be less likely but not impossible. So it is now or after the election you would think. Except now relies on someone as cautious as Janet Yellen taking a risk. So I think we can expect yet more Open Mouth Operations and promises of future rises just like we have seen all year.


My job as an options trader in UK interest-rate markets used to involve predicting what central banks will do and whilst I had quite a few successes it is also true that sometimes it teaches you some humility. Let me remind you of another view of Japan which I have been pointing out on here in 2016. On an individual or per capita basis its performance is in fact okay and might point at us in the UK. So in my view it does not need all the monetary splashing around. Where the catch comes is the level of the national debt compared to output which in gross terms is very high (250% or so of GDP according to the IMF) and rising due to the fiscal deficit which does not fit well with a shrinking and aging population. Is it all about the debt then? Pretty much I think the idea that it will boost the economy is all Imagination.

It’s just an illusion, illusion, illusion

Illusion, illusion, illusion, illusion



Can the Bank of Japan fix the economic problem which is Japan?

Tonight or tomorrow depending on your location the Bank of Japan will announce the deliberations of its latest policy meeting. There is much for it to consider but before I come to matters such as interest and exchange-rates lets update ourselves on what is the main issue facing the land of the rising sun or Nihon.

Population Problems

Regular readers will be aware that Japan has particularly unfavourable demographics involving both an ageing and shrinking population. Earlier this month The Japan Times reported the latest data.

Japan’s population excluding resident foreign nationals fell last year at the fastest pace yet, down 271,834 from a year earlier to 125,891,742 as of Jan. 1, the government said Wednesday. The measurements have been made since 1968.

Okay so the problem has in fact accelerated and I am reminded of the song lyrics “what goes up must come down”.

It was the seventh straight year of decline, with the population sliding below 126,000,000 for the first time in 17 years, the Ministry of Internal Affairs and Communications said.

Here is some more perspective on the matter.

Japan’s population peaked in 2009 at 127,076,183 and has since been declining.

As well as a shrinking population Japan has an ageing one as described below.

People aged 65 or older accounted for 26.59 percent of the population. The elderly have grown in number every year since 1994, when the government began to collect the data.

The proportion of people aged 14 or younger was 12.82 percent and continued to shrink.

A little care is needed here as Japanese society tends to look after its elderly with more care and attention than us in the west. However the problem of ever more elderly depending on ever fewer workers leads to the concept of an ever more unstable inverse pyramid. Oh and it is revealing that the population is described as excluding foreign-born nationals.


Part of the third Abenomics arrow is supposed to be a reversal of the trend above and there is a minister for this Mr.Kato who presumably is not related to the housekeeper of Inspector Clouseau. As well as Minister of State for Measures for Declining Birthrate he is also according to Reuters last October responsible for this.

Abe unveiled the goal of building a “Society in Which All 100 million People can be Active” after his re-election as ruling party chief late last month………The 100 million level is where the government wants to hold Japan’s shrinking population over the next five decades, versus 126 million now.

It points out that this is reminiscent of wartime propaganda in Japan and of course militaristic themes are increasingly occurring there. For our purposes the issue is the acceptance of a population decline.

Mr.Kato has maybe had a little success if we return to The Japan Times.

There were slightly more births, at 1,010,046, compared with 1,003,554 a year earlier,

However the birthrate is officially targeted at 1.8 which is a long way from the present ~1.4 and even further from the 2.1 required to stabilise the population at 100 million according to some experts. There is an institute for this in Japan which is revealing in itself and its 2012 report told us this.

The annual number of births in Japan (Japanese) has declined from 2.09 million in 1973 to 1.07 million in 2010.

It made various forecasts depending on fertility rates that Japan’s population would decline to 100 million in either 2044,2048 or 2054.

National Debt

This of course is heading in precisely the opposite direction. This is unlikely to be helped by the plans to spend ever more as reported by Bloomberg.

The Nikkei newspaper reported on Tuesday that the plan would include 6 trillion yen ($57 billion) of new spending, although only about 2 trillion yen of that would be in a supplementary budget to be passed this year. The government was discussing supplementary spending of about 3 trillion yen ($28.5 billion) for the current fiscal year, two officials familiar with the talks said last week. Including loans and loan guarantees, the headline figure for the fiscal stimulus has been speculated at 20 trillion yen.

Only a day later the numbers were even larger according to the BBC.

Japan’s Prime Minister Shinzo Abe has said his government will introduce a 28tn yen ($265bn; £200bn) package to boost the flagging economy.

The problem is that Japan already had a fiscal deficit of 6% in 2015 which some might consider was a fiscal stimulus enough. Japan has had persistent large fiscal deficits and if they fixed the problem it would not be where it is! There had been some reduction in them caused by the raising of the Consumption Tax in 2014 but of course that sent the economy reeling backwards. This created quite a problem as according to the IMF the target was supposed to be this.

The authorities’ medium-term consolidation plan of achieving primary surplus by FY2020 should avoid relying on optimistic growth assumptions,

This has been a feature of the Japanese economic experience where money is borrowed to create future growth except that the growth does not turn up. An example of this is provided by the IMF GDP growth forecasts for 2016 which a year ago projected growth of 1.2% in 2016 and now projects 0.3%. In essence Japan continually goes on a hopeful journey on this front but the hoped for future never arrives.

On this road the national debt of Japan continues to rise and it is now around 230% of GDP according to the Ministry of Finance or 250% of GDP according to the IMF. In terms of numbers the Ministry of Finance had the total central government debt (including borrowings)  at 10,911,467 at the end of May which gets a lot worse when you realise that each unit used represents 100 million Yen.

The Yen

This was supposed to be one of the fundamental drivers of Abenomics and for a while it was. The fall in its value was badged as ending deflation by helping to create inflation as well as making the economy more price-competitive. Actually the issue of creating inflation was always a dubious benefit for me as it would reduce real wages. So we saw the advent of “Ivory Tower” style thinking in that it was assumed that wages would rise faster than inflation. They even brought over Paul Krugman from his New York Ivory Tower to give advice. The real world was not so accommodating and wages drifted along so real wage falls were created or exactly the reverse of the plans.

More recently the Yen reversed course and strengthened and the nadir of 125 Yen to the US Dollar of late spring 2015 has been replaced by more like 105 now. There is an irony in that the consequent lower inflation  has in fact helped real wages!

The oil price

Forgotten in this saga is that the lower oil price should be giving the Japanese economy an enormous boost. Where did that go? Back on November 16th last year I pointed out the scale of the gain from lower crude oil prices.

It is the third largest oil consumer and net importer in the world behind the United States and China. Furthermore, it ranks as the world’s largest importer of liquefied natural gas (LNG) and second-largest importer of coal.

With Brent Crude Oil at US $43  per barrel as I type this Japan should be full steam ahead.


There is much to consider here but I cannot see how any monetary policy move by the Bank of Japan overnight would help the Japanese economy. It has cut interest-rates into negative territory albeit only just (-0.1%) and is indulging in QE or rather QQE on a grand scale. It has also intervened in currency markets as well as trying to encourage Japanese businesses to borrow more. As I discussed in my article on the Japanese Whale it is also buying equity and commercial property ETFs.

There is however some fiscal space caused by the fact that Japan can borrow and be paid to do so. The ten-year yield is -0.27% and Japan was able to issue some 40 year debt at only 0.345% earlier this week. However there are two catches here. Firstly we are at such yields because of all the Bank of Japan buying and secondly if fiscal expansionism worked Japan would not be where it is.

Meanwhile on a per capita basis it is not doing so badly and perhaps it would be best to simply leave things alone and stick to  actually trying to implement the third arrow of reform.




Why if stimulus is the medicine for Japan’s economy does it always need more?

One of the earliest subjects of this blog was Japan and its economic travails. Later I moved onto the subject of Abenomics where the government of Shinzo Abe planned to end deflation via a fiscal stimulus but mainly through monetary stimulus on a grand scale. I was always dubious about whether that would work especially on the subject of the third arrow which was supposed to be economic reform as Shinzo Abe is a representative of old Japan and his previous government had been guilty of what is called “pork barrel” politics. Such a view made me stand out as elsewhere they was a lot of cheerleading and claims of likely and in some cases near certain success,If we go back to October 2013 then Paul Krugman told us this.

And it has been an unambiguous good thing for the Japanese economy………..The answer is, Abenomics, which has successfully, at least for now, convinced investors that the Bank of Japan has changed its spots and will keep the pedal to the metal for a long time even after moderate inflation sets in.

My critique of such arguments was based on two main themes. The first was that Japanese society had adjusted over the “lost decade(s)” period to low inflation and indeed low wage growth and it was going to be much more difficult than argued to change that. Also that I was unconvinced that more stimulus would be a magic wand as Japan had seen various efforts on this front each of which had fizzled out in disappointment. In fact even the current claimed saviour helicopter money had been tried and then abandoned in failure. Or to put it another way we were on around QE 13 even then.

Thus I predicted that we would see this from Andrea True Connection being played on the loudspeakers at the Bank of Japan.

More, more, more
How do you like it?
How do you like it?
How do you like it?

We have seen two main phases of this. The first was to expand the Quantitative Easing effort by expanding both the amount and type of the purchases. This meant that the Bank of Japan bought equities via Exchange Traded Funds and commercial property via Real Estate Investment Trusts or what are called J-REITS. Back on the 25 th of April I covered this issue as what is now known as The Tokyo Whale is eating its way through the ETF market. It does not make it easy to track down the purchases in its accounts but it look as though another 800 billion Yen have been purchased since then. Next was the move into negative interest-rates back in January as an official interest-rate of -0.1% was declared.

In case you are wondering what the next section means for you well central bankers are dedicated followers of fashion and what happens in Japan is seen later elsewhere. Time for The Soca Boys.

Follow the leader, leader, leader
Follow the leader
Follow the leader, leader, leader
Follow the leader
Follow Me!

Japan gears up for more Abenomics

Over the weekend the position of Shinzo Abe and his government was strengthened by his election victory so the ground was tilled for even more. Speculation on this front was boosted by a visitor to the Japanese government and central bank. From the Nikkei Asian Review.

Former Federal Reserve Chairman Ben Bernanke on Tuesday urged Japan’s Prime Minister Shinzo Abe to keep pushing to decisively defeat deflation, according to an adviser to Mr. Abe.

A lot of eyes will have alighted on this bit in particular.

The adviser left it vague whether Messrs. Abe and Bernanke discussed a radical step involving a central bank directly financing government spending—a measure known as “helicopter money” that Mr. Bernanke has advocated.

So we are back on the more,more,more road except we did get an excerpt worthy of the science fiction fantasy program The Outer Limits.

At a face-to-face meeting, Mr. Bernanke said Mr. Abe’s growth measures have worked well so far,

Eh! Why is he there then? Anyway we were also told this.

that Abenomics “will work even better if we add fiscal spending” to it, according to Mr. Hamada. Mr. Abe is widely expected to compile a large-scale fiscal package in the autumn that his aides and officials say will likely top Y10 trillion.

Reuters have weighed in with this.

Japanese Economy Minister Nobuteru Ishihara said on Tuesday the government may issue construction bonds to fund a planned stimulus package to revive a flagging economy.

Ah so “worked well so far” is now a “flagging economy” is it?

Japanese Government Bonds (JGBs)

I would like readers to remember that one of the ways that Abenomics was supposed to work was via holders of JGBs losing money. Even back then JGB yields were such that any achievement of the 2% inflation target would leave then losing money in real terms. Now the Nikkei Asian Review tells us this.

Investors are buying medium-term JGBs in expectation of further easing from the BOJ at its policy board meeting at the end of July in response to weaker inflation data and a stronger yen.

The consequence of them front-running the Bank of Japan in terms of market prices are seen below.

In particular, medium-term instruments like two-year and five-year bonds are attracting significant numbers of investors. The two-year JGB yield fell to a record low of minus 0.365% on July 8, while the five-year yield sank to minus 0.375% on Friday, also an all-time low.

What has taken place is that bondholders have made large nominal gains which have not been eroded by inflation at all as the official measure of consumer inflation in Japan is around 0%. Now whilst I do not expect Paul Krugman to have forecast the fall in the oil price in this area we see exactly the reverse of his road to claimed success.

Financial Markets

They think that a change is in the offing. For example the Japanese equity market has surged this week pushing above 16,000 on the Nikkei 225. But the main change has been seen in the value of the Yen which has weakened considerably and as I type this is at 103.75 versus the US Dollar. So something is expected and Rabobank seem to have been the first to push their nose above the parapet in this subject.

The celebration is because in the same way the BoJ repeatedly said it would not increase stimulus, then did so, and repeatedly said it would not cut interest rates to negative, then did so, the market now suspects we are on the cusp of ‘helicopter money’ in the near future: if so, that’s obviously negative for JPY and hence positive for equities.


The central point her is that what we are getting is more of the same and the need for it reminds us that what we have had so far has not worked, in spite of the claims to the contrary. We have another signal of this in the way that QE became QQE (Quantiative and Qualitative Easing ) in Japan in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield!

If we return to my medical analogy in the title above then the treatment can only be a palliative and not a cure. We are reminded of the concept of an economic junkie culture.

Ireland GDP

There has been an extraordinary development this morning from the Central Statistics Office. It has announced that GDP (Gross Domestic Product) rose by 21% in the first quarter of 2015 and yes you do read that enormous revision correctly! I have looked at the detail and so far I have spotted that exports have been revised higher by 50%.

Just for clarity this is not a joke, at least not by me. I have written often on the problems created for economic measurement in Ireland by having so many non domiciled companies.

The Tokyo Whale is suffering from indigestion today

Today is certainly a day when I am reminded of the opening of the cartoon series Stingray “Stand by for action!”. The irony is that it is what the apocryphal civil servant Sir Humphrey Appleby would call “masterly inaction” which has caused it. The last 24 hours have seen several of our current masters of the universe issue policy statements. The US Federal Reserve and Janet Yellen  was singing along to “land of confusion” by Genesis yesterday evening but the real action has come in response to the Bank of Japan.

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 decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

Let me just mark the point that in a culture of “face” then any dissent is significant and that one of the individuals dissented ( Mr. T. Kiuchi.) on three other points as well.

Abenomics meets the currency wars

The response in the currency markets was both immediate and strong as the Japanese Yen surged yet again. This is the polar opposite of what is supposed to happen under both conventional economics and the version of it being applied in Japan called Abenomics where the 80 trillion Yen a year of QE ( called QQE in Japan because QE has such a track record of failure it got rebadged ) is supposed to lead to a falling currency. It did for a time but no longer.

The Yen which had been strengthening anyway roared higher and higher like a living thing as it pushed through 104 versus the US Dollar to 103.8 as I type this. So the Yen is now some 15% stronger than it was a year ago in spite of all the QQE and rhetoric as we note again that something big is happening here. Putting it another way it has gone back to a level last seen in August 2014 so undoing nearly two years of effort under Abenomics.

However this does not fully reflect things because we are comparing with another strong currency. Our own domestic currency the UK Pound £ can help with this. The Yen fall against the £ driven by Abenomics saw it fall from just below 130 to 195 just over a year ago whereas now it is at 147. So some 73% of the move has been retraced.

Recently I mentioned the economic problems of South Korea due to the far eastern currency wars with both Japan and China looking to devalue. Well there will be some smiling in Seoul today with it taking 11.25 Won to buy a Yen as opposed to the 9.3 of last November.

Equity markets and bond yields

The bad news for Abenomics continues with a 3% drop in the Nikkei 225 to 15434 today. This means that it has fallen by around 24% over the past year meaning that the trumpeted “wealth effect” which we heard about in the 52% rally in 2013 is now negative.

Happier news for Abenomics is the surge in Japanese Government Bonds because of cause the Bank of Japan has so many of them. Sake all around! Oh hang on! Who can it  ever sell them to for profit-taking? 373,846,107,781,000 Yen and rising fast is a mere bagatelle or something like that.

In terms of market detail Reuters gives us the price highs and yield lows including yet more negativity.

The 10-year JGB yield fell to minus 0.205 percent , after plumbing a record low of minus 0.210 before the BOJ’s announcement…….with the 20-year yield down 4.5 basis points at a record low 0.095 percent and the 30-year yield down 5.5 basis point at record low 0.150 percent.

The Tokyo Whale

Back on April 25 th I covered this issue which is the way that the Bank of Japan is building up holdings of equities as well as bonds.

Indeed the Bloomberg analysis went further.

At an estimated 8.6 trillion yen as of March, the BOJ’s holdings amount to about 1.6 percent of the total capitalization of all companies listed in Japan. That compares with about 5 percent held by the nation’s Government Pension Investment Fund.

So three months on we know that the whale will have been gorging itself as it tells us here.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3.3 trillion yen and about 90 billion yen, respectively.

So if the buyers of the Bank of Japan are on pace they will have purchased an extra 0.8 trillion Yen or so since March making the total an estimated 9.4 trillion Yen. I have looked at the accounts as of June 10th  but they are opaque as the holdings are spread over several categories with no break-down. But if the Tokyo Whale held 55% of Japanese equity ETFs in March then it holds around 60% now. What could go wrong?

One minor hiccup at the moment is that all of the latest purchases are loss making and indeed with the market down 23% on a year ago the outlook seems to be rather like this from Madness for Japanese taxpayers.

No committment, you’re an embarrassment,
Yes, an embarrassment, a living endorsement,
The intention that you have booked,
Was an intention that was overlooked.

Oh and never believe anything until it is officially denied

BOJ Exec Dir Amamiya: Do not think that BoJ’s presence in ETF market is too big ( @moved_average )

Interest-Rate Negativity

Back on the 29th of January the Bank of Japan played what it thought was its master stroke which was the announcement of a negative interest-rate of 0.1%. How is that going in terms of wealth-effects and Abenomics?

Back then the Nikkei 225 closed at 17,635 and the Yen fell to a low of 121.68 versus the US Dollar.

I suppose that it what you get when you listen to the “experts” and make it complicated to the nth degree.

Mr. T. Sato and Mr. T. Kiuchi dissented considering that an interest rate of 0.1 percent should be applied to current account balances excluding the amount outstanding of the required reserves held by financial institutions at the Bank, because negative interest rates would impair the functioning of financial markets and financial intermediation as well as the stability of the JGB market.

Stability now goes into my financial lexicon for these times perhaps next to “price stability” which of course means anything but price stability.


There is much to consider here as the leader of the pack in the central banking universe finds itself subject to my critique that it has implemented a type of junkie culture with the more,more, more approach of Abenomics. A consequence of this is that financial markets mostly spend their time front-running central banks which means that no further action leads to nothing to front-run and reversals. The current action which is purchases of Japanese Government Bonds on such a scale the market has frozen up is very passe now and old news in this respect.

So for the Tokyo Whale it is time to sing along to Iron Maiden.

Don’t want to be here
Somewhere I’d rather be
But when I get there
I might find it’s not for me

Don’t know what I want
Or where I want to be
I’m feeling more confused
The more the days go by.

Of course Iron Maiden taught some European heads some humility earlier this month.


I think another convention of these times that there is no money in music needs a bit of a rethink……..


The Bank of Japan becomes The Tokyo Whale

Today has already seen some eye-catching and thought-provoking news from the land of the rising sun or Nihon. Fortunately its new stealth fighter has not been seen taking off from its aircraft carriers excuse me helicopter destroyers merely from a runway. But we have seen news on a subject I analysed on the 19th of this month with this question.

How many central banks will turn into hedge funds?

As you will see there have been many other questions posed by what has now taken place in Japan so let’s crack on.

The Tokyo Whale

Those of you who recall what happened when The London Whale scandal emerged you may already be troubled by that name. Here is a Bloomberg reminder.

The trader known as the London Whale lost at least $6.2 billion for JPMorgan Chase & Co. in 2012……..More importantly, it raised two worrisome questions: What if the banks are still addicted to risk? And what if regulators haven’t gotten better at spotting that?

For me there was a familiar issue.

In a sense, what Iksil and his colleagues did was the same old story — doubling down after a loss with bigger and bigger bets.

The doubling down issue is a clear theme for us to consider as we peruse the announcement from Bloomberg.

The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc.

JP Morgan again or another bank considered too big to fail?

They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank.

Regular readers will have been aware of the reality of this but as we go on the scale of it comes home to roost.

It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion

Here it is in another form.

I am not so sure about his order of importance but that relates mostly to the time zone he is broadcasting too. As we look into the detail we see this.

The BOJ ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies, effectively controlling about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder.

Something for shoppers at Uniqlo to consider as well as musicians and even me when I buy some more soy sauce! Another way of looking at the scale is shown below.

At an estimated 8.6 trillion yen as of March, the BOJ’s holdings amount to about 1.6 percent of the total capitalization of all companies listed in Japan. That compares with about 5 percent held by the nation’s Government Pension Investment Fund.

So it is a trillion Yen larger than the Bank of Japan numbers I posted last week and nearly a third of the size of what is considered an enormous player in Japanese markets the state pension fund. At the current rate of purchases it will not be long before it passes that benchmark as I pointed out on the 19th.

Second, it would purchase ETFs and J-REITs so that their amounts outstanding would increase at annual paces of about 3 trillion yen and about 90 billion yen, respectively.

The companies shown below by Francine will be increasingly influenced by this.

I will come to the waiting point later.


This is normally an issue for the military world and as I hinted at earlier there has been news on this front in an increasingly militarised Japan. From The Japan Times.

Japan on Friday became the fourth country to test-fly its own stealth jet….According to the Defense Ministry, the Advanced Technology Demonstrator, called X2, took off from Nagoya airport in Aichi Prefecture at 8:47 a.m. Friday morning.

I am not sure this bit of tub-thumping is entirely reassuring.

During World War II, Japan’s aerospace industry led the global competition with its Zero fighter.

The stealth theme does come into The Tokyo Whale story too.

While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors…….estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg’s findings.

More stealthy than the jet? Anyway in terms of individual holdings it would appear that the Bank of Japan is none to keen on us knowing. Mind you it might be one way of ensuring that Japanese firms raise wages! Buy all the shares and send a nominee to the public meetings to vote.


There are quite a few here so lets us run through them.

1. Shareholders are supposed to have a role in the strategy of a company so how will the Bank of Japan deal with this?

2. How does price discovery in the Nikkei 225 and Topix indices work when the Bank of Japan buys and presumably pushes prices higher? This creates a danger of the sort of false market central banks are supposed to be guardian against.

3. On that road how will the Bank of Japan regulate itself as an equity investor? Also what about other Japanese regulatory authorities.

4. Abenomics was supposed to be a break from “pork barrel” politics as we consider the now pretty much mythical thrid arrow. As the quote below shows it is buying what might be regarded as big industry’s shares or the sort of favouring reminiscent of Abe’s previous government.

The central bank’s use of large-cap ETFs means its positions are concentrated

5. The elephant in the room is of course the issue of how much all this buying has driven the stock market and in particular Japan’s big businesses higher? Whilst acolytes may argue it is only 1.6% of the market remember that there has been substantial net buying which is continuing. Where would the Nikkei 225 equity index be without this.

6. The rises in the Japanese equity indices are likely therefore to be affected by the principles of Goodhart’s Law and indeed the Lucas Critique.

7. Should losses be made will the Bank of Japan just print the money required and who will explain the consequences to the Japanese taxpayer?


It was only on Friday that news leaked about the Bank of Japan considering offering negative interest-rates on loans. This had an immediate impact on the Yen which at 111.3 versus the US Dollar is much weaker than before the news. Indeed speculation about Bank of Japan moves at its policy meeting are apposite to today’s article. From Bloomberg.

If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen — the pace predicted by Goldman Sachs Group Inc. — the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.

Care is needed with any forecast from the Vampire Squid which is usually for its benefit but I note that HSBC’s effort exceeds it considerably. At such a pace the Bank of Japan would soon become large even for a whale. The risk of unintended consequences gets larger as it grows along the lines of this consequence of the UK National Living Wage.

Salami slicing? Zizzi responds to living wage by cutting free staff food to margherita pizza or a plate of spaghetti ( @sarahoconnor_ )

There is also the issue of what I call the exit strategy from this or how you ever reverse it? I have argued many times that central banks have charged into QE style efforts with no plan for either retreat or even the consequences of victory.

Also will we in a few years time be saying the same about the property market in Japan as it seems likely to seem more central banking buying?

I will leave you with Alphaville who back in 1984 were rather prescient about the Bank of Japan.

When you’re big in Japan, tonight
Big in Japan, be tight
Big in Japan, oo the Eastern sea’s so blue
Big in Japan, alright
Pay, then I’ll sleep by your side
Things are easy when you’re big in Japan
When you’re big in Japan