It is party and sake time at The Tokyo Whale as the Nikkei 225 hits highs

This week has brought a succession of news which will be welcomed by supporters of what has become called Abenomics and the Bank of Japan in particular. In fact the Bank of Japan will be pleased in two ways, one as an ordinary central bank and the other in its hedge fund style role as the Tokyo Whale. From The Japan Times.

The benchmark Nikkei average rose further and marked another 21-year closing high on the Tokyo Stock Exchange on Thursday, boosted by Wall Street’s overnight advance. The Nikkei 225 average gained 73.45 points, or 0.35 percent, to end at 20,954.72 — the best finish since Nov. 29, 1996.

Today this has gone one step further or for Madness fans one step beyond,

Let us start with the most recent period from when Abenomics was first likely to be applied to now. In that time the Nikkei 225 equity index has risen from around 8000 to 21000. As this was one of the policy objectives as according to the mantra it leads to positive wealth effects for the economy it will be regarded as a success. It may also help oil the wheels in the ongoing Japanese election. But you see there is another reason for the Bank of Japan to be happy about this because since a trial effort back in 2010 it has been buying Japanese shares via Exchange Traded Funds. A more regular programme started in 2012 and this was boosted in size and scale over time and here is the current position from the September monetary policy statement.

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 6 trillion yen and about 90 billion yen, respectively.

So the Bank of Japan will have some considerable paper profits right now especially in the light of a clear behavioural pattern which I looked at on the 6th of June.

The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

The Nikkei Asian Review analysed this development like this.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

There have been various rumours over the years about central banks providing something of a “put option” for equity markets leading to talk of a “plunge protection team”, well here is one literally in action. The Japanese taxpayer may reasonably wonder why it is supporting equity investors in yet another example of a policy which the 0.01% will welcome in particular. But for now let is move on with the Governor of the Bank of Japan enjoying a celebratory glass of sake as he looks at the wealth effects of the equity market high and the paper profits in the Bank’s coffers.

The “Put Option” in practice

A paper had been written by Toby Nangle and Tony Yates on this. You may well recall Tony Yates as the person I had a debate with on BBC Radio 4’s Moneybox programme and that events since have not been kind to his views. Anyway they tell us this.

 the cumulative purchases by the Bank of Japanese equities are becoming substantial. We estimate the market value to have been just below ¥20 trillion at the end of July 2017, or around 3.2% of the total Japanese stock market, making the central bank the second largest owner of Japanese stocks after the Government Pension Investment Fund.

Indeed they find themselves producing analysis along the lines of my “To Infinity! And Beyond!” theme.

Without further adjusting the pace of ETF purchases, we project that the central bank will own 10% of the market sometime between 2022-2026, depending on the interim market performance.

First they look for an announcement effect.

We control for this by examining the excess returns of Japanese stocks versus global stocks two business days post-announcement in common currency (last column in Table 1). The relationship between the scale of purchases and the price change is positive in each episode, although the confidence we have in the relationship is not strong given such few data points.

Personally I would also be looking at the days ahead of the announcement as many of these type of events are anticipated and if you like “front-run” these days. Next we see they look for an execution effect and they struggle to find one as the Japanese market underperformed in the period they looked at compared to other equity markets. However we do get a confirmation of the put option in operation.

 we find that the Bank of Japan has timed the execution of its ETF purchase programme to coincide with episodes of market weakness, potentially with the aim of dampening price volatility.

Oh and “dampening price volatility” is the new reduce and/or stop market falls as otherwise it would also sell on days of market strength.

Will it spread?

This is slightly dubious depending on how you regard the actions of the Swiss National Bank which of course buys equities abroad which I presume they regard as the difference.

Japan has been alone in purchasing equities as part of its monetary easing programme, and the question of whether the purchase of equity securities is the next step along this path is of wider interest.

But I agree with the conclusion.

 Even if central banks in the US/Eurozone/UK achieve a lasting lift-off from the zero bound, and are able to shed asset purchases from their balance sheet, low central bank rates are discounted by markets to be a fact of life for the next decade or two, and the chance of needing to have recourse to unconventional measures appears very large.

Comment

Thank you to Tony and Toby for their paper but they use very neutral language and avoid any opinion on whether this is a good idea which tends to suggest a form of approval. Yet there are a myriad of problems.

The ordinary Japanese taxpayer is very unlikely to be aware of this and what is being done both in their name and with their backing. This is especially important if we consider the exit door as in how does this end?

There is a moral hazard problem in both backing and financing a market which disproportionately benefits the already well off. This gets added to by the latest scandal in Japan as the company below has been ( indirectly) backed by the Bank of Japan.

DJ KOBE STEEL SAYS FOUND MORE INSTANCES OF SHIPPED PRODUCTS WITH QUALITY PROBLEMS ( h/t @DeltaOne )

There are real problems here and is one of the arguments against central banks buying risky assets of this form and the clue of course is in the use of the word risky.

Next we have the issue of what good does it do? Yes some get an increase in their paper wealth and some will take profits. In a sense good luck to them, but as we note that this will be disproportionately in favour of the wealthy this is in my opinion a perversion of the role of a central bank.

On the other side of the coin is the current media cheerleading for equity markets of which this from Bloomberg this morning is an especially disturbing example.

To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009. Aided by an 8 percent drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount — $20 trillion — that is comparable to the total value of all equities nine years ago……… And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

You see congratulating people on doing well out of equity investments is very different to saying you should buy now at what are higher prices. Unless of course Bloomberg thinks they are more attractive at higher prices in which case perhaps it should be buying Bitcoin. Let me leave you with this which feels like something out of a dystopian science fiction piece.

Big companies are becoming huge, from Apple Inc. to Alibaba Group Holding Ltd.

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The land of the rising sun sees rising GDP too

Today starts with good news from the land of the rising sun or Nihon. I do not mean the sporting sphere although there was success as a bronze medal in the men’s 4 by 100m relay was followed by silver and bronze in the men’s 50 km walk at the world athletics championships. There was also a near miss as Hideki Matsuyama faded at the US PGA  and did not become the first Japanese man to win a golf major. But the major good news came from the Cabinet Office as this from The Mainichi tells us.

Japan’s economy grew an annualized real 4.0 percent in the April-June period for a sixth straight quarter of expansion, marking the longest growth run since 2006, as private consumption and corporate spending showed signs of vigor, government data showed Monday.

If we convert to the terms we use there was 1% economic growth from the previous quarter which was quite a surge. Actually that is way beyond what the Bank of Japan thinks is the potential growth rate for Japan but let us park that for now and move on to the detail.  Reuters points out that consumption was strong.

Private consumption, which accounts for about two-thirds of GDP, rose 0.9 percent from the previous quarter, more than the median estimate of 0.5 percent growth.

That marked the fastest expansion in more than three years as shoppers splashed out on durable goods, an encouraging sign that consumer spending is no longer the weak spot in Japan’s economic outlook.

In fact so was investment.

Capital expenditure jumped by 2.4 percent in April-June from the previous quarter, versus the median estimate for a 1.2 percent increase. That was the fastest growth in business investment since January-March 2014.

The combination is interesting as this is something that Japan has wanted for a long time as its “lost decade(s)” of economic malaise have seen domestic demand and consumption in particular struggle. Some countries would be especially troubled by the trade figures below but of course Japan has seen many years of surpluses as this from the Nikkei Asian Review indicates.

 Japan’s current account surplus expanded in the January-June period to the highest level since 2007 as earnings from foreign investments moved further into the black, despite rising energy prices pushing up the overall value of the country’s imports, government data showed Tuesday.

 

Thus it is likely to see this as another welcome sign of strong domestic demand.

External demand subtracted 0.3 percentage point from GDP growth in April-June in part due to an increase in imports.

Those who look at the world economy will be pleased to see a “surplus” economy importing more.

Where does this leave Abenomics?

There are various ways of looking at this and the Japanese owned Financial Times leads the cheers.

‘Not a fluke’: Japan on course to record best GDP growth streak since 2000

“Not a fluke” is an odd thing to write because if you look at the GDP chart they provide we see several spikes like this one which imply it may well be er not only a fluke but another one. They are less keen to credit another form of Abenomics which is the way that the latest stimulus programme impacted with a 5.1% (21.9% annualised) rise in public investment causing a 0.2% rise in GDP on its own. Perhaps this is because of the dichotomy in this part of Abenomics where on the one hand fiscal expansionism is proclaimed and on the other so is a lower deficit! Also there are memories of past stimulus projects where pork barrel politics led to both bridges and roads to nowhere.

Actually the FT does then give us a bit of perspective.

 

Japan’s economy, as measured by real GDP, is now 7 per cent larger than when prime minister Shinzo Abe took office in late 2012, notes Emily Nicol at Daiwa Capital Markets.

That is a long way short of the original promises which is one of the reasons why the Japanese government page on the subject introduces Abenomics 2.0.  If we look at the longer-term chart below is there a clear change.

On such a basis one might think it was the US or UK that had seen Abenomics as opposed to Japan. Of course the figures are muddied by the recession created by the consumption tax rise in 2014 but the performance otherwise even with this quarter’s boost is far from relatively stellar.

Bank of Japan

It will of course be pleased to see the economic news although it also provides plenty of food for thought as details like this provide backing for my analysis that ~0% inflation is far from the demon it is presented as and can provide economic benefits. From Bloomberg.

The GDP deflator, a broad measure of price changes, fell 0.4 percent from a year earlier.

Board Member Funo confirmed this in a speech earlier this month.

The rate of increase for all items less fresh food and energy had remained on a decelerating trend, following the peak of 1.2 percent in winter 2015; recently, the rate of change has been at around 0 percent.

He of course followed this with the usual rhetoric.

The rate will likely reach around 2 percent in around fiscal 2019.

It is always just around the corner in not entirely dissimilar fashion to a fiscal surplus in the UK. As to the official view it is going rather well apparently.

Taking this into consideration, the Bank decided to adopt a commitment that allows inflation to overshoot the price stability target so as to strengthen the forward-looking mechanism in the formation of inflation expectations, enhance the credibility of achieving the price stability target among the public, and raise inflation expectations in a more forceful manner.

Make of that what you will. The reality is that the QQE programme did weaken the Yen but that effect wore off and inflation is now ~0% as is wage growth.

Comment

This growth figures are good news and let me add something that appears to have been missed in the reports I have read. Back to Board Member Funo.

In an economy with a declining population.

Thus the per capita or per person GDP numbers are likely to be even better than the headline. I would say that this would benefit the ordinary Japanese worker and consumer but we know that real wage growth has dipped into negative territory again. This provides a problem for Prime Minister Abe as when he came to power the criticisms were based around his past history of being part of the Japanese establishment. What we see nearly 5 years down the road is a lack of real wage growth combined with good times for Japanese corporate profitability. As to the reform programme there is not a lot to be seen and maybe this is why Board Member Funo was so downbeat.

In an economy with a declining population, as is the case in Japan, demand is expected to decrease for many goods and services; therefore, it will be important to adequately adjust supply capacity; that is, employees and production capacity to meet such a decreasing trend.

I do not know about you but trying to raise prices when you expect both demand and supply to fall seems extremely reckless to me.

As to the GDP numbers themselves we need a cautionary note as Japan has had particular problems with them and they are revised more and by larger amounts than elsewhere.

 

Could the Japanese Government cope with an end to QE in Japan?

It is time for us to look east again to the land of the rising sun or Nihon. It remains in the grip of an extraordinary economic experiment as its central bank continues to offer freshly printed Yen ( albeit electronic rather than paper ones) on a grand scale in return for bonds, commercial paper , corporate bonds, equities and property so just about everything!

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline. …… 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 6 trillion yen and about 90 billion yen, respectively.

Perhaps it was the scale of all of this that led much of the media to start writing articles that the Bank of Japan would reduce its operations or as it is now called “taper” them. Only on Friday I quoted this from the Wall Street Journal.

Japan shows Europe how to dial back stimulus without spooking investors

The Bank of Japan responds

Sadly for the media the word taper required the word reverse in front of it. From the Nikkei Asian Review only a few short hours later.

At 10:10 a.m. Japan time, the BOJ unleashed what a market manager for a leading brokerage called a “devastating” combination, announcing both a fixed-rate operation, in which the central bank agrees to buy unlimited bonds at a fixed yield, and an increase in the size of regular bond-buying operations. It was the first time the bank had executed such policies simultaneously.

So more is apparently less as we note that this bit could only have come from Japan.

When yields on 10-year Japanese government bonds hit 0.1% on Thursday evening, the central bank was forced to ring up Japan’s leading securities firms for advice.

What would they have done in places like Greece Italy or Portugal in the Euro area crisis or in the early days of my career when longer UK Gilt yields passed 15%?!

By Friday morning, 10-year JGB yields had reached 0.105% — the last straw

We will have to see what happens next but should the Bank of Japan feel the need to keep intervening this could be the state of play.

If the central bank keeps buying up 10-year JGBs as quickly as it did Friday, annual purchases could exceed new issuance, according to Takenobu Nakashima of Nomura Securities, burning through fuel for measures to combat a future yield surge.

Actually if it bought them all that would of itself tend to stop any yield surge. Although of course that is just the flow so there would still be an existing stock albeit one which the Bank of Japan owes a fair bit of.

Massive bond purchases have swollen the BOJ’s balance sheet to roughly the size of Japan’s gross domestic product

Around 90% I think. There are various issues here one of which has been conveniently pointed out by the European Central Bank this morning.

Worsened liquidity in domestic government bond market

They mean in the Euro area but imagine how much worse the state of play will be in Japan. We do know that trading volumes have dropped a lot so should the day come that the Bank of Japan decides to withdraw a lot of Japanese fingers will be crossed that past traders and buyers will return. The truth is we simply do not know.

Oh and I see some looking at the equity capital of the Bank of Japan implying it could go broke. But that misses the fact that not only is it backed by the Japanese Treasury but it is pursuing Abenomics a government policy.

Number Crunching

Currently Japan owes this according to Japan Macro Advisers.

At the end of March 2017, the Japanese general government owed a total of 1270.5 trillion yen in liability, equivalent to 236.4% of GDP. The liability includes 863 trillion yen of JGBs, 115.2 trillion yen of T-bills and 157.5 trillion yen of loans.

The Bank of Japan owns over 400 Trillion Yen of these so in round numbers if it wrote these off it would reduce the debt burden to ~160% of GDP. I am by no means suggesting this but if such a situation led to a lower value for the Japanese Yen well that is government policy isn’t it? Of course the danger of debt monetisation of that form is that the currency falls heavily or plummets in a destabilising fashion like Ghana saw for those who recall when I looked at its woes.

The Yen

This has been drifting lower recently and Friday’s news added to that with it now taking more than 114 Yen to buy one US Dollar. This continues a trend which began in the middle of last month.  A sign of the Yen weakness is that the poor battered UK Pound £ is near its post EU Leave vote highs at 147 Yen.

But none of this is anything like enough to spark off the amount of inflation required by Abenomics.

The Inflation Target

More than 3 years down the road after the Bank of Japan kicked off its QQE ( Qualitative and Quantitative Easing) effort we find ourselves noting this. From Japan’s Statistics Bureau.

The consumer price index for Japan in May 2017 was 100.4 (2015=100), up 0.4% over the year before seasonal adjustment, and the same level as the previous month on a seasonally adjusted basis……  The consumer price index for Ku-area of Tokyo in June 2017 (preliminary) was 99.8 (2015=100), the same level as the previous year before seasonal adjustment, and the same level as the previous month on a seasonally adjusted basis.

This represents not far off complete failure in spite of the rhetoric about defeating deflation as if Tokyo is any guide 0% is the new 2%. Although of course we have seen asset price inflation leaving us mulling how much of the rise in the Nikkei 225 equity index from around 8000 to the current 20000 is growth and how much inflation?

Often policies to raise inflation really mean wages growth so let us look at that. From The Japan Times.

Japan’s real wages in May gained 0.1 percent from a year earlier for the first rise in five months, the government said Friday.
Total cash earnings per worker, including base and overtime pay, increased 0.7 percent to an average ¥270,241 (around $2,300), the second consecutive monthly rise, the Health and Welfare Ministry also said in a preliminary report.

You can look at this in two ways. The first is that it is not much and the second is that it is about as good as it has got over the past decade or so. One area that is different to the West where we are worrying about workers in the gig economy is that wage growth in Japan is centred on part-time work. It appears to be the one area where conventional economics can breathe a sigh of relief.

Comment

The situation continues to see some gains but also some retreats as these two quotes from The Japan Times today indicates.

Japan ‘economy watchers’ sentiment rises in June for third straight month……..Core private-sector machinery orders defied expectations and fell in May, the second consecutive month of decline, due to weakness in the service sector, the government said Monday.

Of course the UK data on Friday reminded us of the problems that sentiment indicators can have as optimism emerged as a fall!

I would like to return to my central theme that Japan has done okay in many ways with 0% inflation especially as we note its demographic problem. So why all the bond buying? Well a debt burden does of course often require some inflation to ease the burden for debtors of which the largest debtor is the government. The biggest beneficiary has been the Japanese government which has been able to do a lot of its borrowing for pretty much nothing for a while. Could it afford a return to normality? At what bond yield would it find things difficult and would it have to apply austerity? A sort of road to nowhere……

 

 

In the future will equities be allowed to fall?

The credit crunch era has seen an enormous expansion of monetary policy activity which has manifested itself in two main ways. We have seen interest-rates cut not only to zero but below it into negative territory. Then we saw enormous expansion of central bank balance sheets as well as Quantitative Easing style policies were added to the play book. Indeed this is continuing apace in both the Euro area and Japan and the latter of course has moved into newer areas as well. Japan Macro Advisers have updated us on the current state of play.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets, of which Japanese government securities accounted for 427.2 trillion yen.

I think we have a new candidate for the largest number we have used on here! That sends out its own message but also there is the issue that some 14.7% of the total is not purchases of Japanese government bonds or JGBs. So what might be regarded as conventional QE is already out of date as we note that the Bank of Japan calls its operations Quantitative and Qualitative Easing or QQE.

What is it buying?

You might expect this as after all both the Bank of England has recently and the ECB currently, have ventured into this area.

As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively. ( CP is Commercial Paper ).

Whether it does much good is of course another matter as it ossifies economic structures but subsidising larger companies who are able to issue such debt whereas smaller ones cannot. But the main game here is shown below.

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 6 trillion yen and about 90 billion yen, respectively.

Here we see intervention in a different sphere as both property and equities are being bought here. The property purchases are relatively small, if you can say that about 90 billion! But the main game in town is the equity purchases.

For comparison here is the plan for what is conventional QE.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline.

The target level of JGB yields is around 0% for the ten-year.

The Tokyo Whale

Just over a year ago on the 25th of April I alerted readers to what was taking place.

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……….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.

That begged more than a few questions as for example shareholders are supposed to hold company directors to account and sometimes provide direction to the business. How can a central bank possibly do that? There is of course the issue of potential losses as well before we get to the creation of a false market.

Let us bring this up to date with thanks to the Nikkei Asian Review.

Japan’s central bank nearly doubles ETF holdings in one year.

With the rate of purchases we looked at above I suppose that is no great surprise but there are genuine questions as to where this is taking us?

The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013.

Will stock markets be allowed to fall?

I do not mean on a day to day basis as for example the Nikkei 225 equity index dipped below 20,000 earlier today. But I am starting to wonder about this in terms of sustained corrections. Why? Well take a look at this from the Nikkei Asian Review.

The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

At what point did central bankers become experts in where share prices should be at? If anybody else did this they would be facing accusations of creating a false market. The point gets reinforced later.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

This is quite different to central banks responding to a market collapse and panic in terms of timing,size,scale and indeed intention. There is also the danger of a Buzz Lightyear “To Infinity! And Beyond!” reality as we mull the consequences of this.

The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.

So that poor battered can has been kicked into the future one more time! If we cannot allow equity market falls now how will we be able to in say 5 years time? This leaves the Bank of Japan sounding rather like Elvis Presley.

Don’t you know I’m caught in a trap?
I can’t walk out

As time goes by the situation will go from bad to worse in terms of market manipulation.

Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.

Also all the jokes and humour about a “Plunge Protection Team” stopping equity market falls move from satire to reality.

Comment

There is much for us to consider here. So far the expansion of central bank activity has not been put into reverse. Even the US Federal Reserve which has nudged interest-rates higher has only talked about reducing its balance sheet as opposed to actually doing it. Others are still chomping away like Pac-Men and Women but the scale of their purchases is increasingly posing problems for government bond markets.

Should the next recession or slow down hit before we see any form of exit strategy then there will be much less scope to buy government bonds. Now that the Bank of Japan has broken the moral barrier around buying equities and indeed property such a scenario would see others follow. If we look at the UK then as the current Bank of England Governor is a “dedicated follower of fashion” he would be likely to join the party.

There are a lot of catches here as we look forwards to a potential future. Equities are supposed to provide a form of price discovery as individuals buy and sell and hopefully there is investing in what are good ideas and people. Central banking bureaucrats are unlikely to add any value here.There attempts so far have fallen on stony ground.

Despite the initial excitement among major financial institutions, the Bank of Japan’s push for exchange-traded funds tracking companies that actively raise employee pay or invest in new equipment has run aground. ( Nikkei Asian Review)

But their loudspeakers should have Yazz on repeat in terms of equity indices..

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now

 

What is happening in the war on cash?

One of the features of the credit crunch era is the way that the establishment so regularly pushes the idea that cash money is bad for us. If we stop for a moment there is quite an irony and contradiction here as of course the various establishments have created so much more money via the use of Quantitative Easing. The leader in this regard has been the Bank of Japan which announced this back in April 2013.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen………In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base….

Actually it decided in August 2014 that even such an extraordinary number was not enough as like Agent Smith in the Matrix series of films the cry went up for “More! More!”.

The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).

Of course plenty of other central banks have been playing the same game as we see the Bank of England with its £435 billion of conventional QE and the ECB with around 1.8 trillion Euros of it and the US Federal Reserve with a balance sheet of US $4.47 trillion. The other side of this has been the money created which has sloshed around the financial world ever since exacerbating the problems that we are now told are the fault of cash!

The fanatic pursuing this argument Kenneth Rogoff will be familiar to regular readers and here from NPR is his argument.

Well, I think that a lot of the money – these big bills – is used to facilitate tax evasion and crime. We all use cash in our everyday life, but we don’t use hundred-dollar bills. We’re not using 500-euro notes. And yet these account for mountains of cash out there. I think they’re being used in tax evasion and by criminals of all types.

This is very awkward for our Ken and sadly he is rarely challenged on the two main problems. Firstly as I have described above the world has been flooded with base money with policies he supported which has facilitated all sorts of problems some of which he is now blaming on cash. Next if we apply the principle of banning things which are used by criminals and terrorists then we need immediately to get rid of mobile phones and as they seem to be increasingly using cars,vans and lorries they need to go as well. They also use houses and so on……

The UK seems to be demanding ever more cash

I referred to this a few days ago but here is some more detail from the Bank of England on the subject.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

The speculation referred to links to an article in the Guardian discussing the cashless society. Then the Bank of England points out that we are far from alone with this trend.

Banknote growth has been continuous, despite cash’s popularity as a payment method declining. In 2015, cash accounted for less than half of consumer payments (volume) for the first time. This paradox of falling transactional use of, but rising demand for, notes is faced by many other countries.

So it would appear that our road to a cashless society is er paved with cash, how contradictory! As to the cause well the author choses her words neutrally because it is rather close to home.

One factor driving this is low-interest rates incentivising increased hoarding, so notes remain in wallets and the retail sector for longer.

Let me spell this out the low interest-rates applied by the Bank of England have slashed the cost of holding cash. Also some will be afraid that the ideas of Kenneth Rogoff will be acted on so that further interest-rate cuts can be made and negative interest-rates can be enforced.

We are referred to some Bank of England research which is rather damning for Kenneth Rogoff.

However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.

Ken can apparently…..

The housing market

One feature of the modern era is high and indeed unaffordable house prices which of course have been driven by policies which Kenneth Rogoff has been a cheerleader for. Well there is a massive irony in this being reported by the Financial Times today.

Cash is pouring into UK residential property as never before, with buyers less reliant on mortgage finance in 2016 than at any time since comparable records began.

The scale of this issue is described below.

Using official figures on the number of property transactions and average prices, plus Bank of England data on mortgage financing for house purchases, the IMLA ( Intermediary Mortgage Lenders Association) estimated that £418 of every £1,000 used to buy property in 2016 was in cash. In 2013, when the BoE first collected comprehensive mortgage data, the cash contribution was £377, although the proportion of cash used for house purchases has been growing for a much longer period, the IMLA said.

I have to confess that this is a larger proportion than I was expecting. Also the FT’s economics editor has a really odd view on the creation of money.

Much of the cash is created by rising property values.

If true no wonder central bankers are so keen on ever higher house prices. Also as I have pointed out so many times, what could go wrong here?

Mr Williams said the Bank of England should relax the rules to make it easier for people without access to a large cash deposit to get a mortgage.

The issue here is that property prices have been driven higher by all the monetary easing and the ordinary person has been priced out more and more often. That is the fault of the central banks and has also been associated with more money laundering where the money is called cash but is more often the electronic money the central banks are so keen on. Giving people ever more debt is part of the problem not the solution here and of course debt has led to rather a lot of financial crime.

Bitcoin

The war on cash makes alternative currencies look more attractive because they are outside the grasp of both governments and central banks. So it is hard to avoid such thoughts as we note that the price of Bitcoin has now passed US $1700. There are of course other factors such as money flowing out of India and China but it particularly intriguing to see Japan make it a legal means of payment. It is so often Japan isn’t it? Perhaps they increasingly fear even that interest-rates could go even more negative.

Comment

There is much to consider here but there is a huge irony and indeed hypocrisy in those who have flooded the world with electronic money blaming cash money for ills it contributed too. Many scandals such as “liar loans”, PPI miss selling, Li(e)bor and foreign exchange rigging had nothing to do with cash. Indeed in the news today is another example of a whole wave of financial crime that was nothing to do with cash.

Noel Edmonds, the television celebrity, has written to the boss of Lloyds Banking Group to demand compensation that his lawyers claim could run to more than £50m in connection with the fraud scandal at HBOS. In correspondence seen by the Financial Times, Mr Edmonds says HBOS and its disgraced former employee, Mark Dobson, destroyed Unique Group, his former business, a decade ago.  ( Financial Times).

I do not know the individual circumstances and there will no doubt be plenty of ” Mr Blobby” and “Deal or No Deal” jokes but I do know that there have been many problems in this area that seem to take forever to come to justice. They are nothing to do with cash.

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.

Demographics

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 )

Inflation

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.

Comment

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?

Comment

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.