Tag Archives: Bank of Japan

Japan Is Fast Approaching the Quantitative Limits of Quantitative Easing

Bloomberg, Apr 7, 2016

The Bank of Japan is running out of government bonds to buy.

The central bank’s would-be counterparties have become increasingly unwilling to sell the debt that monetary policymakers have pledged to buy, and the most recently issued 30-year Japanese bond didn’t record a single trade during a session last week as existing owners opted to hoard their holdings.

The central bank in the land of the rising prices sun has set a target of 80 trillion yen ($733 billion) in government bond purchases per year in its continued attempts to slay deflation, an amount that’s more than double the pace of new bond issuance planned by the Ministry of Finance and about 16 percent of gross domestic product.

Source: Bloomberg

But safe assets like government debt aren’t just attractive to central banks looking to force investors into riskier asset classes and push down the cost of borrowing or to pensioners looking for a reliable source of income—they’re also in high demand by financial institutions for use as collateral.

That’s because where there is a dearth of safe assets, there is also an incentive and tendency for them to be manufactured; that is, improperly labeled as such. Past results certainly haven’t been pretty.

As the Bank of Japan begins to rub up against the technical constraints of its asset purchase program, Jefferies Group LLC Chief Global Equity Strategist Sean Darby proposes a radical solution: consolidate some of the Bank of Japan’s existing holdings of debt into a perpetual bond—that is, one with no maturity and therefore no principal repayment—with a coupon of zero.

“There is a growing realization that there are effective limits to how much more Japanese government bonds can be acquired,” he writes. “The BoJ is approaching a shortage of Japanese government bonds for the central bank to buy, as commercial banks, pension and insurance funds have run down their holdings.”

Darby cited a working paper from the International Monetary Fund which concluded the collateral needs of financial institutions were such that the Bank of Japan might be forced to begin tapering its purchases of sovereign debt in 2017 or 2018, to bolster his case.

The thinking here is that as the Bank of Japan reaches the quantitative limits of quantitative easing, the issuance of such a perpetual bond that costs nothing to service would be a way to offer the government a blank cheque to proceed with fiscal stimulus such as boosting spending or cutting taxes.

The strategist believes the Bank of Japan will drop hints about its intention to pursue such a plan at its April meeting.

The Bank of Japan’s decision to shock investors and adopt a negative rate regime in January—one week after Governor Haruhiko Kuroda said such a move wasn’t needed at the time—was spurred by a desire to push yields at the longer end of the curve as low as possible in preparation for the consolidation of existing debt into a zero coupon bond, according to Darby.

“The authorities are attempting to push bond yields down below existing nominal GDP, so that the existing debt can be converted or ‘consolidated’ into a perpetual zero coupon bond presumably before any ‘tapering announcement,'” he writes.

Whether this extreme step will ever be taken—in particular on the timetable the strategist suggests (i.e. ahead of the elections scheduled for this summer)—is highly questionable.

But Darby’s suggestion does underscore that with Japan unable to declare ‘mission accomplished’ on its quest for reflation and a shortage of bonds looming, it’s time to consider Plan (perpetual) B.

Source

Bank of Japan Holds Fire on Stimulus, Negative Rate Unchanged

Bloomberg, Mar 15, 2016

JAPAN - MARCH 14: A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan. (Photo by Torin Boyd/Bloomberg via Getty Images)

* BOJ keeps its new benchmark rate at minus 0.1 percent
* Board voted 7-2 on negative rate, 8-1 on monetary base

 

The Bank of Japan refrained from bolstering its record monetary stimulus as policy makers gauge the impact of the negative interest-rate strategy they adopted in January.

Governor Haruhiko Kuroda and his board kept the target for increasing the monetary base unchanged, and left their benchmark rate at minus 0.1 percent, as forecast by 35 of 40 economists surveyed by Bloomberg. The central bank said it will add easing if necessary while the language in its statement Tuesday indicates a downgrade in its assessment of the economy.

With the BOJ far from its 2 percent inflation goal and growth stalling, most analysts have seen additional stimulus as just a matter of time. The stakes are rising for Kuroda, with household and corporate sentiment waning and investors questioning whether monetary policy is reaching its limits.

“You can see from the statement the agony for the BOJ in the gap between their hopes and the realities in the economy and prices,” said Kyohei Morita, an economist at Barclays Plc. “Japanese inflation is at a level where even the BOJ has to admit its weakness. It is leaning toward additional stimulus and I expect it to be in July.”

Economists surveyed by Bloomberg have judged that a further cut to the negative-rate policy is the most likely tool. Kuroda said at a post-decision briefing that he doesn’t need to wait to see the full impact of the negative rate before acting again, if change is needed.

The BOJ exempted money reserve funds from the negative rate as it irons out kinks in its new policy and seeks to placate some institutional investors who are unhappy with the measure. Even so, Kuroda said he hasn’t changed his thinking on the negative rate since its announcement in January.

The yen advanced to 113.05 per dollar as of 4:59 p.m. in Tokyo, about 6 percent stronger than it was at the start of the year — an appreciation that has undercut the competitive advantage that previous BOJ easing had won. The currency’s gains are a risk to growth in corporate profits, especially among Japan’s exporters, and to inflation because of lower import costs.

The central bank said it “will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions — quantity, quality, and the interest rate — if it is judged necessary for achieving the price stability target.”

Since the BOJ’s last meeting on Jan. 29, economic data have shown little momentum for a recovery from a contraction in gross domestic product registered in the final quarter of 2015. The BOJ’s key consumer-price measure didn’t budge in January, and sentiment among consumers and merchants has slumped.

The central bank conceded in its statement that exports and production have been sluggish, while maintaining its view that there has been improvement in employment and income conditions. It noted that inflation expectations have weakened recently.

Masaki Kuwahara, an economist at Nomura Holdings Inc., said the BOJ has effectively cut its economic assessment.

“The downgrade may mean that the likelihood of further monetary easing increases,” Kuwahara said. “Spring wage talks are looking dull, and the price trend may weaken in the coming months.”

The decision to adopt a negative rate — a 0.1 percent charge on a portion of money that commercial banks park at the BOJ — had an impact even before it took effect in mid-February. Yields on more than 70 percent of government debt dropped below zero and bank shares tumbled on profit concerns.

Takahide Kiuchi was the sole dissenter on the decision to keep expanding the monetary base at an annual pace of 80 trillion yen. After a 5-4 split in January over the adoption of the negative rate, the board voted 7-2 to continue with the measure, with Kiuchi and Takehiro Sato against the policy.

The hope is that by bringing down borrowing costs, the strategy will spur companies to borrow and consumers to spend. “It is an absolute benefit that is going to transmit into increased purchasing power,” Jesper Koll, the Japan head of WisdomTree Investments Inc. in Tokyo, told Bloomberg TV.

Japan’s central bankers haven’t been alone in seeing financial markets move against them; along with the yen’s gain, stocks tumbled in February, following the Jan. 29 move.

The European Central Bank on March 10 unveiled a more aggressive dose of monetary stimulus than many analysts had anticipated, yet it still disappointed many investors. The U.S. Federal Reserve will conclude its policy meeting Wednesday.

Source

John Rubino: Japan Goes Negative; US To Return Fire In 2016

By John Rubino, Jan 30, 2016

Well that didn’t take long. Two weeks of falling share prices and the European and Japanese central banks caved. First the ECB promised new stimulus — which the markets liked — and then the BoJ upped the ante with negative interest rates — which the markets loved. Here’s a quick summary from Bloomberg:

Central Banks Intensify Campaign for Negative Rates

In surprising markets by penalizing a portion of banks’ reserves, the Bank of Japan on Friday joined a growing club taking the once-anathema step of pushing some borrowing costs beneath zero.“Negative rates are now very much the new normal,” said Gabriel Stein, an economist at Oxford Economics Ltd. in London. “We’ve seen they are possible and we’re going to see more.” Negative rates once “sounded illogical,” said Stein. “We now know what we thought was true isn’t.”

This is a resounding admission of failure. Over the past seven years the world’s central banks have cut interest rates to levels not seen since the Great Depression and flooded their banking systems with newly-created currency, while national governments have borrowed unprecedented sums (in the US case doubling the federal debt). Yet here we are in the early stages of a global deflationary collapse. Commodity prices have followed interest rates to historic lows, while growth is anemic and may soon be nonexistent.

The official response: More extreme versions of what has hasn’t worked. Here’s a JP Morgan chart published by Financial Times that shows just how sudden the trend towards negative interest rates has been:

NIRP Jan 16

Future historians will have a ball psychoanalyzing the people making these decisions, and their conclusion will almost certainly be some variant of the popular definition of insanity as repeating the same behavior while expecting a different result.

So what does this new stage of the Money Bubble mean? Many, many bad things.

This latest leg down in bond yields presents savers (the forgotten victims of the QE/NIRP experiment) with an even tougher set of choices. Previously they were advised to move out on the risk spectrum by loading up on junk bonds and high-dividend equities. Now, after the past few months’ carnage in those sectors, even the most oblivious retiree is likely to balk. But having said “no thanks” to the demonstrably dangerous options, what’s left? The answer is…very little. There is literally no way remaining for a regular person to generate historically normal levels of low-risk cash income.

Meanwhile, a NIRP world presents the US with a problem that perhaps only the Swiss can appreciate: As the other major countries aggressively devalue their currencies (the euro and yen are already down big versus the dollar), another round of lower interest rates and faster money printing will, other things being equal, raise the dollar’s exchange rate even further.

For a sense of what that might mean, recall that US corporate profits are already falling because of a too-strong dollar (see Brace for a ‘rare’ recession in corporate profits). Bump the dollar up another 10% versus the euro, yen and yuan, and US corporate profits might fall off a cliff. The inevitable result: Before the end of the year, the US will see no alternative but to open a new front in the currency war with negative interest rates of its own.

The big banks, meanwhile, are no longer feeling the central bank love. Where falling interest rates used to be good for lenders because they energized borrowers and widened loan spreads, ultra-low rates are making markets more volatile (and thus harder to profitably manipulate for bank trading desks) without bringing attractive new borrowers through the door. The result: falling profits at BofA, JP Morgan, Goldman, et al and tanking big-bank share prices.

As for gold, there are now $5 trillion of bonds and bank accounts that cost about the same amount to own as bullion stored in a super-safe vault — and which cost more than gold and silver coins stored at home. Compared with the 5%-6% cash flow advantage that bonds have traditionally enjoyed versus gold, NIRP can’t help but lead savers and conservative investors to reconsider their options. In other words, what would you rather trust: A bond issued by a government (Japan, the US, Europe — take your pick) that is wildly-overleveraged and acting ever-more-erratically, or a form of money that has never in three thousand years suffered from inflation or counterparty risk? At some point in the process, a critical mass of people will get this.

And no discussion of the unfolding financial mess would make complete sense if it left out the geopolitical backdrop. The Middle East is on fire and refugees are flooding the developed world, resurrecting old social pathologies (see Swedes storm occupied Stockholm train station, beat migrant children). Much of Latin America is sinking into chaos (see Caracas named as world’s most violent city and 21 of the 50 most violent cities are in Brazil). Seeing this, who in their right mind would spend thousands of dollars to visit Egypt or Rio or even Paris right now? The answer is far fewer than a decade ago.

So the old reliable economic drivers of expanding global trade and enthusiastic tourism are gone for a while, if not for decades. Central banks are, as a result, swimming against a current that is far faster — in water that is far deeper — than anything seen since at least the 1930s. And all they can do is pump a bit more air into their sadly-inadequate water wings.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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Era of Easy Money Lives on in World Economy Even After Fed Shift

Bloomberg, Dec 17, 2015

yellens-magic-bus

* JPMorgan’s average rate for developed nations is still sub-1%
* Central bank balance sheets to top $1.3 Tln, according to BofA

The era of easy money in the world’s major economies isn’t close to being over.

Even after Federal Reserve Chair Janet Yellen and colleagues raised the target range for the federal funds rate to 0.25 percent to 0.5 percent, that’s still way below its 2 percent average since 2000 and the 3.2 percent of 2000 to 2007.

It also means JPMorgan Chase & Co.’s average rate for eight developed nations and the euro-area weighted by size is on course to end 2016 at just 0.36 percent. That’s a full 3 percentage points below the average of 2005 to 2007.

If the Fed lifts its benchmark to 1.5 percent a year from now, as JPMorgan predicts, the bank’s economists still see the rate for the key industrial economies undershooting 1 percent next December as the European Central Bank and Bank of Japan stay on hold.

Low for Long

The upshot for the world economy is, as Bank of England Governor Mark Carney described this week, an environment of “low for long” rates even with the Fed hiking. While there are questions over the potency of monetary policy, weak inflation and lackluster growth around the world will require it to remain loose.

“The Fed’s path is slow and nobody of any size is following through behind it,” said David Hensley, director of global economics at JPMorgan in New York. “The ECB and the Bank of Japan are absolutely not going to be raising rates for the foreseeable future.”

There may even be about as many rate cuts as hikes in the next twelve months. Of the 31 central banks it monitors, JPMorgan predicts nine will ease further including China, Sweden, New Zealand and Malaysia. A reduction in the number of emerging markets pegging their exchange rates to the dollar mean many won’t have to trail the Fed as they once did.

Still, ten central banks aside from the Fed are seen tightening by JPMorgan, including the Bank of England in the second quarter and the Bank of Canada in the fourth. Hensley says some emerging markets may also find themselves having to hike more than he now anticipates.

Balance Sheets

Regardless of rates, there are also still bumper balance sheets, swollen by years of quantitative easing. Bank of America Corp. calculates those of the four major central banks will expand to $13.5 trillion by the end of 2017 from $11 trillion today.

The Fed doesn’t plan to reduce its stock of assets before the hiking cycle is cemented, while BofA predicts the ECB and Bank of Japan will accelerate their bond-buying.

With the Fed’s balance sheet now around 25 percent of gross domestic product, it estimates the ECB’s will reach 33.8 percent by May 2017 and the BOJ’s will rise to almost 108 percent of GDP by the end of that year.

“A sizable amount of liquidity will be added to global markets over the next two years, if not longer, even as some central banks slowly hike rates,” Michael Hanson, an economist at BofA, said in a report this month. “This combination should help to maintain a very accommodative policy stance globally, which in turn should give a lift to global growth, help put a floor under inflation, and support demand for risky assets — all the while keeping a lid on longer-term bond yields.”

Unconvinced is Steve Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London, who argues the world is at an “inflection point.” Rate cuts and bond-buying elsewhere don’t wield the same heft as those from the Fed because the dollar remains the prime international currency and its set to stay strong, he said.

“The bottom line is that weaning the world off the Fed’s monetary largesse is going to be hard, even if does not seem this way initially,” said Barrow. “We’d be prepared for higher volatility and a higher dollar, but lower prices for risk assets.”

If the U.S. does slip back into recession at some point, rock-bottom rates will also again be the order of the day, former U.S. Treasury Secretary Lawrence Summers told Bloomberg this week in giving odds of 50-50 that such a slump will occur within two years.

“We are not saying goodbye forever to the zero-lower bound,” said Summers.

Source

John Rubino: Here’s What We’ll Try – And What Will Fail – Next

By John Rubino, Oct 11, 2015

The UK’s Guardian newspaper, of Edward Snowden leaks fame, just published a good overview of the world’s recent financial missteps titled The world economic order is collapsing and this time there seems no way out.

Some excerpts:

The heart of the economic disorder is a world financial system that has gone rogue. Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level.

The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees.

The false boom that follows seems to justify the lending. Property prices rise. Companies and households grow overconfident about their prospects and borrow freely. Economies surge well above their trend growth rates and all seems well until something – a collapse in property or commodity prices – unravels the whole process. The money floods out as quickly as it flooded in, leaving bust banks and governments desperately picking up the pieces.

The result, says the Guardian, is a crisis in three acts. Act one was the 2008 bursting of the housing/derivatives bubble that nearly wiped out the global banking system. Act two was the 2011 euro crisis in which the idea that Greek, Italian and Spanish bonds were equivalent to German paper was abruptly discredited, again nearly wiping out the big banks.

Act three, now in progress, is the bursting of the emerging markets bubble, led by China (great stat: “China manufactured more cement from 2010-13 than the US had produced over the entire 20th century.”)

China’s banks are, in effect, bust: few of the vast loans they have made can ever be repaid, so they cannot now lend at the rate needed to sustain China’s once super-high but illusory growth rates. China’s real growth is now below that of the Mao years: the economic crisis will spawn a crisis of legitimacy for the deeply corrupt communist party. Commodity prices have crashed.

Money is flooding out of the EMEs, leaving overborrowed companies, indebted households and stricken banks, but EMEs do not have institutions such as the Federal Reserve or European Central Bank to knock up rescue packages. Yet these nations now account for more than half of global GDP. Small wonder the IMF is worried.

So far so good. But then the Guardian ruins its perceptive analysis by proposing more of the same:

The world needs inventive responses. It needs a bigger, reinvigorated IMF whose constitution should reflect the global balance of economic power and that can rescue the EMEs… It needs western governments to launch massive economic stimuli, centred on infrastructure spending. It needs new smart monetary policies that allow negative interest rates.

This isn’t surprising but it is instructive because it represents the thought process at work in the upper echelons of virtually all the major economies: What we’ve tried has failed, but the fault is with the execution rather than the concept. We didn’t go big enough. We didn’t borrow enough money, we didn’t build enough roads and bridges, we didn’t push interest rates down far enough. So let’s hit the emerging market crisis with everything: bigger multinational institutions making vastly larger development loans, rich-world governments ramping up spending and paying for it with borrowed money, and central banks pushing interest rates down to negative mid-single digits.

For those who view this as the financial equivalent of a junkie doubling the dose of heroin to ensure a permanent high, the question isn’t whether some mutant strain of easy money will save us, but what dosage will turn out to be fatal. And of course which asset classes will benefit from the intervening high.

At the risk of sounding like a broken record, the negative interest rate/high debt/rapid money growth world envisioned by the Guardian looks like a precious metals paradise.

 

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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