Tag Archives: Japan

Markets Smell a Rat as Central Banks Dither, by Wolf Richter

There are a lot of good reasons not to allocate much money to bonds as an asset class right now. For one, as Wolf Richter points out, central banks are probably not going to be as strong a bid for them as they have been. From Richter at wolfstreet.com:

Markets are suspecting that central banks are in the process of exiting this fabulous multi-year party quietly, and that on the way out they won’t refill the booze and dope, leaving the besotted revelers to their own devices. That thought isn’t sitting very well with these revelers.

In markets where central banks have pushed government bond prices into the stratosphere and yields, even 10-year yields, below zero, there has been a sea change.

The 10-year yield of the Japanese Government Bond (JGB) jumped 2.5 basis points to 0.115% on Thursday, the highest since January 2016, after an auction for ¥2.4 trillion of 10-year JGBs flopped, as investors were losing interest in this paper at this yield, and as the Bank of Japan, rather than gobbling up every JGB in sight to help the auction along, sat on its hands and let it happen.

And on Friday morning, the 10-year yield jumped another 3 basis points to 0.145%!

In September last year, the BOJ started the now apparently troubled experiment of trying to control not just short-term interest rates but also the entire yield curve. It targeted a 10-year yield of about 0% (it was negative at the time). Analysts believed that this would mean a range between -0.1% and +0.1%, and that if the yield rose to +0.1%, the BOJ would throw its weight around and buy.

But the fact that the BOJ allowed the yield to go above that imaginary line signaled to the markets that it no longer has the intention of capping the yield at +0.1%, that in fact the BOJ has stepped back.

To continue reading; Markets Smell a Rat as Central Banks Dither

 

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Don’t Bet on Deflation Lasting Forever… by Bill Bonner

By now the emperor is naked and should have been arrested for indecent exposure: the world’s central banks’ have utterly failed to spark anything resembling a normal business-cycle upswing. From Bill Bonner at bonnerandpartners.com:

OUZILLY, France – Imagine the poor economist without a sense of humor.

How he must suffer!

This week was to be dominated by central banks. Two big ones – the Bank of Japan (BoJ) and the Fed – were to make important policy announcements.

The speculators placed their bets, front-running the news, and sat on the edge of their chairs.

More Mumbo-Jumbo

This morning, the BoJ came out with more mumbo-jumbo.

“Yield curve control,” it promised.

The central bank says it will target a 0% yield on 10-year Japanese government bonds.

It added that it would continue buying the nation’s stocks (by way of exchange-traded funds) and charging a negative interest rate of 0.1% on the accounts banks keep with it.

Japan’s stock market crashed in 1989. Since then, the no-luck Japanese have had sluggish growth, recession, and on-again/off-again deflation.

For more than a quarter-century, the gears of Japan, Inc. have turned slowly. And not for lack of trying.

The government spent hundreds of trillions of yen on “infrastructure” projects in an attempt to “jump start” the economy with fiscal stimulus.

At one point, they were pouring more concrete – on roads, bridges, dams, and other public works – than the entire U.S.

Critics charged that so much cement was used – channeling rivers in the countryside and building ugly bridges to nowhere – that it amounted to the largest vandalization program in history.

The Japanese feds tried monetary policy, too.

ZIRP (zero-interest-rate policy) began in Tokyo. They invented QE (quantitative easing) too; it was supposed to get more “liquidity” into the system and boost stock and bond returns.

And yet, nothing seemed to work.

From Tokyo to Harare

But rather than admit its manipulations have done no good – rather than raise a white flag… back off… and let the market sort itself out – Japanese authorities march on with more claptrap announcements, more pigheaded interventions, and more of the nation’s real wealth squandered on dumbbell projects.

Like soldiers of the Imperial Japanese Army abandoned on a remote atoll in 1945, they continue to fight a lost war.

The Japanese government already has the highest debt load in the world, at 230% of GDP.

Now that the older Japanese, in retirement, are selling their Japanese government bonds rather than buying them, the central bank funds the entire government deficit.

And the BoJ buys so many stocks and bonds, hustlers are said to be creating new investments just so the naïve geniuses can buy them.

Today’s announcement tells us that the central bank will buy more government debt, adding to its pile – already about one-third of all outstanding Japanese government debt.

This is what Zimbabwe and Argentina did. It is a classic way to ruin an economy, by “monetizing” debt.

It amounts to paying government expenses with newly invented money.

Eventually, the extra money leads to consumer price inflation.

To continue reading: Don’t Bet on Deflation Lasting Forever…

Pimco’s Baz Says Japan In a Bind as Total Debt Tops 600% of GDP, by Narayanan Somasundaram

How does a country pay off a debt load that’s 600% of its GDP? It probably doesn’t, not all of it, anyway. From Narayanan Somasundaram at bloomberg.com:

Japan is suffering from the excesses of the past,’ Baz says
Country is G-7 member that’s closest to ‘fiscal dominance’

There’s “very little” that Japan can do about its mounting debt pile, which presents a potential risk to growth, according to Pacific Investment Management Co.’s Jamil Baz.

With a government debt load that’s 2 1/2 times the size of annual gross domestic product and a total national borrowing burden that’s six times as large, “Japan is suffering from the excesses of the past” and the country “is in a bind right now,’’ the fund manager’s head of client analytics said in an interview in Sydney last week.

Japan’s economy is still struggling to gain traction even after policy makers hit it with repeated doses of budgetary stimulus and unprecedented monetary easing to drag the country out of its deflationary funk. The Bank of Japan’s adoption of negative interest rates has pushed down debt financing costs for now, but repeated delays to a planned sales tax increase, a new 28 trillion yen ($272 billion) fiscal boost from Prime Minister Shinzo Abe and the pressures of an aging population mean the borrowing pile is likely to keep on growing.

“In general, when you have these extremely high debt-to-GDP ratios, you have the choice between two things: you either default — explicitly or via high inflation — or you increase your savings to repay,” said Baz, who previously worked at Man GLG Partners and rejoined Pimco in February. “In both cases, there is obviously a substantial left tail risk to future growth.”

Japan is the Group of Seven nation that’s “closest to a situation of fiscal dominance,” Baz said, referring to a situation in which the country’s budgetary needs overwhelm more traditional objectives of monetary policy.

Baz, who has also taught at the University of Oxford, published a paper last month on seven potential outlier risks to the global economy. In it, he discussed the issue of Japan’s solvency and whether its problems might ultimately destabilize the nation and the global monetary system. He painted a tail-risk scenario in which there could be a backlash against negative yields on Japanese government bonds resulting in capital flight and a “melt-up” in the yen. That in turn could lead to either “fiscal dominance/hyperinflation” or a default by the government, he wrote.

While the probability of these outlier scenarios coming to pass in the next year is less than one-in-five in each case, the risks do increase over a longer horizon of 5-to-10 years, Baz said.

To continue reading: Pimco’s Baz Says Japan In a Bind as Total Debt Tops 600% of GDP

QE, End of the Private Sector? Japanese Government Now Largest Shareholder of 474 Big Companies, by Wolf Richter

The creeping socialism that dare’s not speak its name. From Wolf Richter at wolfstreet.com:

The two biggest buyers of Japan Inc. are flying blind and don’t care.

The Bank of Japan and the Government Pension Investment Fund (GPIF) have been buying stocks to inflate the market, create some kind of “wealth effect,” and bamboozle regular Japanese into pouring once again into stocks, after many of them lost a big chunk of their savings when the prior bubble imploded without ever recovering.

In 2014, the GPIF – buckling under the pressure from the Abe administration – decided to plow about 25% (“±9%”) of its assets into Japanese stocks. With assets at the time of still about $1.4 trillion, 25% would amount to about $350 billion. So the fund has been buying a lot! And it has been a disaster! [Read… Japan Mega-Pension Fund Dives into Stocks, Foreign Assets, Loses Shirt. People Not Amused]

But even after Japanese stocks took a licking over the past year, the fund’s allocation to domestic equities is still 21%, so near its range and no longer a powerful buyer. But to make up for any holes left behind by the pension fund, the BOJ announced on July 28 that it would nearly double its annual purchases of equity ETFs to ¥6 trillion ($59 billion).

The holdings of Japanese stocks by these two entities have nearly tripled over the past five fiscal years to about ¥39 trillion ($381 billion), according to The Nikkei. During that time, the Nikkei stock index soared 70%, “demonstrating their powerful support.”

But, but, but… the index remains 57% below its bubble peak of 1989.

So what has this done to overall government ownership of Japanese stocks? We don’t really know, because it’s kept purposefully opaque, according to The Nikkei:

These major public-sector buyers do not appear on shareholder lists because of their indirect ownership via trust banks and other intermediaries.

And yet, The Nikkei figured that “the two together are the largest shareholders for 474 of about 1,970 stocks” on the Tokyo Stock Exchange’s first section (the section for large companies), “based on public information.”

And this is just the beginning.

So for example, between the GPIF and the BOJ, they own 17% of TDK, 16.5% of Advantest, 14.2% of Nitto Denko, 14.2% of Yokogawa Electric, more than 10% of entertainment company Konami Holdings and security services provider Secom.

“We hope they will hold the shares over the long term,” fretted an official of Yokogawa Electric. Because if they ever tried to sell those shares, all heck would break loose.

Overall, the BOJ and the GPIF now hold over 7% of stocks in the first section of the TSE. By contrast the largest private-sector stockholder, Nippon Life Insurance, holds only about 2% of the stocks in the first section.

So hopes are high that the BOJ’s buying binge of ¥6 trillion in equity ETFs, and whatever the GPIF might still buy – though it’s largely finished as a buyer – will inflate the market. Nomura Securities chief strategist Hisao Matsuura thinks that the ¥6 trillion a year from the BOJ alone will inflate the Nikkei index by 2,000 points per year, or about 12%… year after year… come hell or high water, one would assume, because according to this logic, nothing else but central-bank and government-pension-fund buying matters.

If companies have declining sales, losses, and nightmarish management, it wouldn’t matter. These companies would still be able to raise funds and go on as if nothing happened because there will be a relentless and dumb bid, and their stocks would soar since the BOJ and GPIF are passive shareholders, blindly buying equities mostly in form of ETFs. Owners of ETFs cannot dump individual stocks; they cannot punish companies by selling their shares – the most fundamental action of the market.

To continue reading: QE, End of the Private Sector? Japanese Government Now Largest Shareholder of 474 Big Companies

Japan Mega-Pension Fund Dives into Stocks, Foreign Assets, Loses Shirt. People Not Amused, by Wolf Richter

The Japanese Government Pension Investment Fund is an extreme case, losing  almost 4 percent of its assets in quarter ended June 30, but many pensions funds around the world are either losing money or not generating the returns that will be necessary to pay beneficiaries. From Wolf Richter at wolfstreet.com:

“It will not harm the pension beneficiaries”: official

This is how the report by Japan’s Government Pension Investment Fund (GPIF) for the March-June quarter – the first quarter in Japan’s fiscal year – started out in order to soothe the frazzled nerves of the people who’d paid into this system all their working lives: the fund is managed “in the long-term, and its investment results should be assessed in the same manner.”

OK we get that. But what a fiasco.

The GPIF isn’t alone. Pension funds in the US and elsewhere are in deep trouble. Many of them have been taking on enormous risks to solve their underfunding problems. It has been called the “global pension crisis.” Some corporate and union pension funds in the US have already become insolvent. Others are heading that way. Local and state pension funds are neck-deep in trouble. Yet, the Fed-engineered asset bubbles have lifted all boats….

But few big public pension funds can hold a candle to the GPIF’s October 2014 decision to dive into Japanese stocks and foreign stocks and bonds near the peak of the Japanese stock market rally.

Actually, it didn’t voluntarily dive into it.

It was pushed into it by the Abenomics-obsessed government and its reckless way of trying to manipulate up the stock market. The goal was to plow 20% to 25% of the fund’s assets into Japanese stocks. At the time, the fund still had about $1.4 trillion in assets, so 25% would amount to about $350 billion. It meant some serious buying over a year or two, which would inflate the stock market.

Add some hype and hedge-fund front-running, peppered with the Bank of Japan’s money-printing mania, which includes purchases of equity ETFs – and you’ve got a value-creation miracle on your hands.

It did work for a while. It worked during the hype stage. And it worked when the GPIF began selling its government bonds to the Bank of Japan and started buying stocks. The GPIF became the biggest buyer of equities in Japan. Stocks soared. Other pension funds followed the model. In June 2015, the Nikkei hit its recent peak of 20,868 (still 47% below its all-time peak in 1989).

But since then, the GPIF has met the goals for its “policy asset mix.” And so the GPIF stopped its purchases. Hedge funds lost interest and bailed out. And the Nikkei has since plunged 22%!

And there’s a special treat. Foreign equities and foreign bonds combined account for over 34% of total assets: a huge bet on the exchange rate, or rather on the wholesale destruction of the yen. But the yen has risen sharply recently.

So how has the Abenomics value-creation miracle performed?

•  In Q1 of fiscal 2016, ending June 30, the GPIF lost ¥5.23 trillion ($51.4 billion), or 3.9% of its total assets.
•  Year-over-year, total assets have shrunk 8.1% to ¥129.7 trillion.
•  In Q4 of fiscal 2015, ended March 31, the fund had already lost 3.5%, or ¥4.7 trillion ($46.2 billion).
•  This was the first back-to-back quarterly loss since 2008! But we’re not in a Financial Crisis!
•  Both quarters combined generated a loss of about 7% or ¥10 trillion ($98 billion)!
•  For the fiscal year 2015, the fund lost ¥5.24 trillion, the fund’s first annual loss since 2008.

To continue reading: Japan Mega-Pension Fund Dives into Stocks, Foreign Assets, Loses Shirt. People Not Amused

Why Helicopter Money Won’t Push Stocks Higher, by Charles Hugh Smith

The wonder is why anybody would think that government debt monetization would push stocks higher, because all the effects on the real economy of such monetization are negative. From Charles Hugh Smith at oftwominds.com:

In effect, helicopter money turns the entire economy into a Ghost City.

The possibility that Japan might launch helicopter money stimulus sent global stock markets soaring in a paroxysm of pleasurable anticipation. But exactly what is helicopter money and what connection does it have to stock valuations, if any?

Broadly speaking, helicopter money is government deficit spending that is directed to households rather than the financial sector. Deficit means the government doesn’t have extra cash to pay for the stimulus program–it borrows it by selling government bonds.

With interest rates near-zero or even negative, it doesn’t cost governments much to borrow huge sums from future taxpayers. All bonds are borrowed from future taxpayers, because somebody will have to pay back the principal, even if there are no interest payments due.

Typically, bonds that mature (i.e. the principal must be returned to the owner of the bond) are replaced with newly issued bonds. In other words, government debt never declines, as new debt is issued to replace bonds that come due AND to fund additional spending.

The nearest household analogy is a mortgage which you “pay off” by borrowing an even larger sum every few years. The debt just keeps getting larger as time goes on.

The assumption here is that there will be more of everything in the future: more taxpayers paying more taxes, more consumers consuming more, more workers being even more productive, more corporations earning even more profits, and so on: more, more, more, more.

More of everything means it will be easier to pay the debt we borrowed from future taxpayers. The economy will be larger, tax receipts will be higher and productivity will drive profits and consumption higher.

This assumption worked for a few hundred years, but now it doesn’t. In Japan (and many other nations are soon to tread the same path), population is declining and GDP, profits, productivity and tax receipts are all stagnating.

This raises the terrifying prospect that there won’t be more of everything in the future. If there is less of everything, sacrifices must be made to roll over the mountain of debt accumulated in the past, and it soon becomes impossible to do so.

Here’s the magic part of helicopter money: to avoid all the problems of ever-rising debt in a stagnating economy, the central bank creates money out of thin air and buys the government bonds with the newly created money.

This is called monetizing the debt as new money is created out of thin to buy the debt. No tax revenues are needed, and so no sacrifices must be made to accumulate more debt. All the helicopter money is in effect free money because nobody has to pay anything for it.

To continue reading: Why Helicopter Money Won’t Push Stocks Higher

Bernanke’s Black Helicopters Of Money, by David Stockman

There is almost no idiocy to which Japanese politicians and central bankers have not resorted during Japan’s twenty-six years of economic stagnation. Now, apparently, under the tutelage of Benjamin Bernanke, they are about to engage in the ultimate idiocy: helicopter money. From David Stockman at davidstockmanscontracorner.com:

Ben Bernanke is one of the most dangerous men walking the planet. In this age of central bank domination of economic life he is surely the pied piper of monetary ruin.

At least since 2002 he has been talking about “helicopter money” as if a notion which is pure economic quackery actually had some legitimate basis. But strip away the pseudo scientific jargon, and it amounts to monetization of the public debt—–the very oldest form of something for nothing economics.

Back then, of course, Ben’s jabbering about helicopter money was taken to be some sort of theoretical metaphor about the ultimate powers of central bankers, and especially their ability to forestall the boogey-man of “deflation”.

Indeed, Bernanke was held to be a leading economic scholar of the Great Depression and a disciple of Milton Friedman’s claim that Fed stringency during 1930-1932 had caused it. This is complete poppycock, as I demonstrated in The Great Deformation, but it did give an air of plausibility and even conservative pedigree to a truly stupid and dangerous idea.

Right about then, in fact, Bernanke grandly promised during a speech at Friedman’s 90th birthday party that today’s enlightened central bankers—led by himself—-would never let it happen again.

Presumably Bernanke was speaking of the 25% deflation of the general price level after 1929. The latter is always good for a big scare among modern audiences because no one seems to remember that the deflation of the 1930’s was nothing more than the partial liquidation of the 100%-300% inflation of the general price level during the Great War.

In any event, Bernanke was tilting at windmills when he implied that the collapse of the US wartime and Roaring Twenties boom had anything to do with the conditions of 2002. Even the claim that Japan was suffering from severe deflation at the time was manifestly false.

In fact, during the final stages of Japan great export and credit boom, the domestic price level had risen substantially, increasing by nearly 70% between 1976 and 1993. It then simply flattened-out—–and appropriately so—-after the great credit, real estate and stock market bubble collapse of 1990-1992.

So even by the evidence of Japan, there was no basis anywhere in the world for Bernanke’s fear-mongering about deflation at the turn of the century.

Instead, Bernanke was already showing himself to be a dangerous academic crank with no compunction about dispensing among democratic politicians the most toxic ideological poison known to history. Namely, an invitation to plunge the public fisc deep into the red so that the central banks would have bonds to buy in their fight against the purported scourge of deflation.

To continue reading: Bernanke’s Black Helicopters Of Money