Tag Archives: Japan

The True Danger of the North Korea Crisis: It Could Cost America Its Allies, by Robert Kelly

Would the US wage a war that might kill millions of South Koreans or Japanese without consulting South Korea or Japan? It would be a colossal mistake, but the US government has made a lot of colossal foreign policy mistakes lately. From Robert Perry at strategic-culture.org:

If Washington takes action without consulting its allies, the alliances themselves could fray

Tough North Korea rhetoric from the U.S. administration continues. Major South Korean media increasingly talk as if U.S. air strikes are likely, and theexpert community seems increasingly resigned to them as well. Despite constant criticism of his incendiary language, President Donald Trump continues to suggest that major action against North Korea is imminent—most recently by suggesting that we are now in a period of ‘calm before the storm.’

I have argued in these pages that such strikes would be an enormous risk. We do not know what the North’s redlines for retaliation against such a strike are. We do not know if the strikes would so unnerve the North’s elites that war was next, that they would respond with enormous force, possibly including nuclear weapons. An expert study of this scenario suggests appalling casualty numbers. We also do not know what China’s thresholds are for intervention. China is treaty-bound to help North Korea if it is attacked. It may not, but if a U.S. air strike against North Korea spirals into a major conflict, then the likelihood of Chinese intervention rises.

It is also worth noting that even if the Chinese and North Koreans do not respond to air strikes, North Korea will almost certainly deploy human shields as soon as the bombs start to fall. And the North has so many targets that the United States would like to hit, that any ‘air strike’ would look a lot more like a major air campaign and not a quick ‘surgical strike,’ as in Syria earlier this year. An air campaign against sites with human shields means a high civilian death toll. The North Koreans will not make this easy for us at all.

White House officials, most importantly Secretary of Defense James Mattis, continue to suggest that diplomacy is the preferred outcome. And there are options to continue to buy us time against the North Korean nuclear and missile programs: missile defense, sanctions, continuing to cajole China to push North Korea harder and so on. Nevertheless, the pressure to something dramatic regarding North Korea is rising. If war is inevitable — it is not, but for the sake of the argument—it is better to fight now, before they have more weapons, and before those weapons can more evidently strike the continental United States. Even Kim Young-sam, South Korea’s president at the time of the 1994 nuclear crisis, has retrospectively regretted his decision not to strike then.

To continue reading: The True Danger of the North Korea Crisis: It Could Cost America Its Allies

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War Is Not an Option for Korea, by Christine Ahn

Even best case scenarios for war on the Korean Peninsula are horrific. From Christine Ahn at antiwar.com:

“Let me be very clear: The policy of strategic patience has ended,” U.S. Secretary of State Rex Tillerson told reporters at a news conference in Seoul, South Korea. “All options are on the table,” Tillerson continued, including “an appropriate response” to any North Korean threat.

The United States and North Korea are like two “accelerating trains coming toward each other,” Chinese Foreign Minister Wang Yi warned last week. North Korea test-fired four ballistic missiles off the coast of Japan as thousands of South Korean, Japanese, and US troops, backed by warships and warplanes, are currently engaging in massive military exercises, including the deployment of the Navy SEALS that killed Osama Bin Laden.

With no communication other than military posturing, Pyongyang is left to interpret Washington’s maneuvers as preparation for a preemptive strike. Given the political vacuum in South Korea following President Park Geun-hye’s impeachment, all tracks are heading towards one destination: war.

At a Council of Foreign Relations discussion on March 13, Mary Beth Long, a former assistant secretary of defense, advocated for “aggressive movement” given the failure of the Obama administration’s strategic patience, which depended heavily on sanctions to further isolate and foment the collapse of the Kim Jong Un regime.

Yet as hawks call upon President Trump to deal with North Korea’s nuclear and missile programs through the use of force, they’re undermining the very reason the US military has allegedly been stationed on the Korean peninsula for seven decades: to protect the South Korean people.

Although the fantasy of surgical strikes to topple brutal dictators has long intoxicated American military officials, they’ve been restrained by the sobering reality of such reckless action. In the 1990s, when President Bill Clinton considered a first strike on North Korea’s Yongbyon nuclear reactor, the Pentagon concluded that even limited action would claim a million lives in the first 24 hours – and this was well before Pyongyang possessed nuclear weapons.

To continue reading: War Is Not an Option for Korea

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

 

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