Tag Archives: Japan

John Rubino: Is This The Debt Jubilee?

By John Rubino, Mar 17, 2016

Not so long ago the financial world viewed certain numbers as limits beyond which lay trouble. Interest rates near zero, for instance, were thought to risk destabilizing the banking system. And government fiscal deficits above 3% were considered so dangerous that exceeding this level was prohibited by the Maastricht treaty that all euorzone members were required to sign.

Those numbers — 0% and 3% — are still considered bad. But now for the opposite reason: They’re insufficiently aggressive.

A big part of the world, as everyone now knows, operates with negative interest rates. And prominent economists are urging even greater negativity as a way to make government debt profitable and get people borrowing and spending again.

More recently, fiscal deficits — barely below 3% of GDP in the developed world — have come to be seen as dangerously inadequate and in need of dramatic expansion. From today’s Bloomberg:

Say good-bye to the bond vigilantes and hello to the budget brigade

A passel of investors, academics and even central bankers are calling on governments to spend more and tax less to provide a budgetary boost to the struggling global economy. That’s a 180 degree turn from the bond vigilantes of yore who pressed for smaller deficits and less debt about a quarter century ago.To hear the budget backers tell it, bigger shortfalls are a no-brainer. With interest rates at — or even below — zero in much of the industrial world, central bankers are pushing up against the limits of what they can do to buttress growth. Yet those same low interest rates make it exceedingly cheap for governments to borrow money to finance bigger budget shortfalls.

Deficit spending March 16

“A large part of what monetary policy can do, it has done,” former Treasury Secretary Lawrence Summers told Bloomberg television last month. “In Japan, in Europe, and perhaps on a forthcoming basis, in the U.S., we need further impulses to growth,” including from fiscal policy.

The dirty little secret is that budgets are starting to be loosened in some countries after years of austerity. Yet in many cases, that is more by happenstance than by intent. And the size of the resulting stimulus is small and far short of the more sweeping steps advocated by card-carrying members of the budget brigade.

“There’s pretty widespread consensus in the financial community that fiscal policies should come to the rescue,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.

Even central bankers are shedding their traditional reticence to stray into the political arena to sound off on the need for a more balanced growth strategy.

Lever ‘Disabled’
“It remains a pity that the fiscal lever seems to have been disabled,” Federal Reserve Vice Chairman Stanley Fischer said in a March 7 speech in Washington.

Canadian Prime Minister Justin Trudeau is leading the charge among government leaders in calling for a more active fiscal policy. “Don’t fall into the trap that thinking that balancing the books” is an end in itself, he said in a March 2 interview with Bloomberg. “It’s a means to an end.”

Budget constraints are in fact being eased by some countries. Government spending will boost U.S. growth about 0.2 percentage point this year, according to the Congressional Budget Office, thanks in part to a deal between President Barack Obama and Republican lawmakers to loosen caps on discretionary outlays. Even such a modest contribution would be the biggest since 2009.

In Germany, it’s stepped-up spending on refugees that’s turning fiscal policy more supportive of growth.

“Germany was neutral in 2015 and is now highly expansionary this year,” Ludger Schuknecht, director general of economic policy and international economy at the country’s Ministry of Finance, told a meeting of economists in Washington on March 8.

China Spending
And China unveiled plans for a record fiscal deficit this year as part of its effort to bolster its sagging economy. The Finance Ministry’s budget indicated on March 6 that the shortfall would increase to 3 percent of GDP from 2.3 percent.

Yet such steps fall short of the efforts advocated by the likes of Summers, who has repeatedly warned that the world economy faces a persistent deficiency of demand that policy makers need to address.

Angel Ubide, a managing director in Washington at Goldman Sachs & Co., complained that government officials are stuck with a long-standing “mindset” that fiscal policy shouldn’t be used to manage the ups and downs of the economy — except, according to Fischer, “in extremis, as in 2009.”

“We should not put fiscal policy in a corner and say we cannot use it,” Ubide said. “With interest rates as low as they are, there are surely public investment opportunities that generate positive returns.”

Mohammed El-Erian, chief economic adviser at Allianz SE, said he’s worried that it would take a downturn in the global economy to prompt concerted action on the fiscal front.

“That is my fear,” said El-Erian, who is also a Bloomberg View columnist. “How much of a crisis do we need as a wake-up call” for policy makers?, he asked rhetorically.

The sense of panic is palpable, and not surprising given the troubles that beset pretty much every part of the global economy. Latin America’s biggest countries are in various kinds of crisis. Japan’s Abenomics policy is widely seen as a failure. Europe has both negative interest rates and deflation, which seems like a deadly combination. US manufacturing is contracting and corporate profits are shrinking. China’s slowdown has sparked the kind of labor unrest that terrifies its leaders.

Hence the calls from the architects of the policies that got us here for something dramatic to save their reputations and investment portfolios. But the one thing that seems to be missing from these glib prescriptions is an acknowledgement that we’ve been there, done that, without the miraculous results now being promised. Post-2008, the world ran huge fiscal deficits. The US nearly doubled its federal debt, China borrowed even more and Japan (already running big deficits) kept on without missing a beat. At this point it’s helpful to revisit the McKinsey & Company study showing that the world took on $57 trillion of new debt between 2007 and 2014:

Global debt 2014

So the question that’s been dogging proponents of negative interest rates — if zero didn’t work why should we expect -1% to do better — needs to be asked of deficit fans: If $57 trillion of new debt didn’t produce a robustly-growing global economy, why gamble on another $57 trillion?

Meanwhile, the two concepts — NIRP and deficits — dovetail in a fairly terrifying way: All the new debt we take on to rekindle growth will have to be refinanced in the future. So the more we borrow now the more we’ll have to roll over then — and the bigger the impact on government budgets of an eventual rate normalization. Unless the ultimate plan is to never raise rates to old-school positive levels, in which case the world of the future is so different from that of the past that we may as well toss existing theories of market dynamics and individual freedom out the window.

A final thought: One way to sell ramped-up government deficits in the face of lingering doubts will be to give the money directly to citizens. This has appeal across the political spectrum — on the left because giving away free money is always popular and on the populist right because it bypasses the much-hated big banks. Coupled with a requirement that recipients pay down existing debts, such a “QE for the people” might bring along even traditional debt-averse economists. In other words, this might finally be the year of the debt jubilee.

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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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

Bank of Japan introduces negative interest rates

CNN Money, Jan 29, 2016

Buildings are reflected on a Bank of Japan board in Tokyo December 30, 2008. Japan's government and central bank are considering a $110 billion scheme to buy bad loans and other financial assets from banks to ease a credit crunch gripping the country's businesses, daily Sankei Shimbun said on Tuesday.  REUTERS/Issei Kato (JAPAN)

Japan’s central bank is stepping up its efforts to kick-start the country’s struggling economy by taking a key interest rate into negative territory.

The Bank of Japan said Friday that it will cut the rate on current accounts that commercial banks hold with it to minus 0.1%, adding that it will push the rate even lower if needed. The move basically means lenders will be charged to keep money with the central bank.

In theory, negative rates encourage banks to lend more and consumers to spend rather than save. They can also weaken a country’s currency, helping exporters.

It’s a step that the European Central Bank, among others, has already taken, resulting in bizarre situations where banks can end up paying customers who borrow from them. The idea has also been floated in the United States.

The Bank of Japan announcement Friday is the latest surprise move by its governor, Haruhiko Kuroda, in his drive to spur momentum in the world’s third-largest economy. He had previously denied plans to take the interest rate below zero.

“Governor Kuroda has gained notoriety by changing course when it is least expected, and today’s move will only serve to cement this reputation,” said Marcel Thieliant of Capital Economics.

Investors responded positively to the announcement. Stocks in Tokyo rose 2.8% and the country’s currency, the yen, fell against the dollar.

Financial markets’ turbulent start to 2016 has been particularly punishing for Japan. Prior to the central bank’s move, stocks had tanked around 10% in January, and the yen had strengthened.

The plunge in crude oil prices, meanwhile, has made it even harder for the Bank of Japan to hit its inflation target of 2%.

The central bank said the Japanese economy was in the midst of a moderate recovery, but it expressed concerns about plummeting oil prices and the uncertain outlook for emerging economies, especially China.

It’s unclear how much difference subzero rates will make to the Japanese economy. The ECB has used them among an array of stimulus efforts, but the euro zone has continued to struggle with deflation.

“With interest rates already at record lows, we do not expect these measures to have a significant impact on the real economy, or inflation,” said Izumi Devalier, Japan economist at HSBC.

The Bank of Japan’s decision to introduce a negative interest rate was also far from unanimous. Five policy board members voted in favor, but four opposed the move.

Japan has long struggled with deflation, and prices have been stagnating despite the central bank’s aggressive stimulus measures in recent years that include a massive bond-buying program. It said Friday that it was leaving its asset-purchase plan unchanged.

The bank’s moves have come at a time when the government of Prime Minister Shinzo Abe has tried to jolt the economy into life by increasing spending and pushing through reforms. That program took a hit Thursday when Abe’s economy minister announced his resignation over a political-funding scandal.

The Bank of Japan’s announcement also follows closely watched statements from other major central banks amid the recent market turmoil.

Last week, ECB President Mario Draghi gave stocks a lift by promising that the bank could pump out more money as early as March if necessary.

The U.S Federal Reserve, which raised interest rates last month, said Wednesday it was “monitoring global economic and financial developments.”

Source

John Rubino: Another Atrocious Week Goes Out With A Bang

By John Rubino, Jan 15, 2016

On days when lots of financial numbers are released, the normal pattern is for some to point one way and some another, giving everyone a little of what they want and overall presenting a reassuringly muddled picture of the economy.

Not today. A wave of economic stats flowed out of Washington, almost all of them terrible, while corporate news was, in some high-profile cases, shocking. Let’s go to the highlight reel:

Retail sales fell again in December, bringing the 2015 increase to just 2.1% versus an average of 5.1% from 2010 through 2014. This kind of deceleration is out of character for year six of a gathering recovery, but completely consistent with a descent into recession.

The New York Fed’s Empire State Manufacturing Survey index plunged to -19.37 in January from -6.21 in December. This is a recession — deep recession — level contraction. Not a single bright spot in the entire report.

U.S. industrial production fell for the third straight month in December, and the previous month was revised down sharply. Factories are already in a recession that appears to be deepening.

On the company-specific front:

UK resource giant BHP Billiton wrote down the value of its US shale assets by $7.2 billion — two-thirds of its total investment — in response to plunging oil prices. Now everyone is wondering who’s next, and the list of likely candidates spans the entire commodities complex.

Chip maker Intel reported okay earnings but really disappointing margins and outlook. Its stock is down 9% as this is written mid-morning.

Walmart is closing nearly 300 stores and laying off most of the related 16,000 workers. It also cut its forward guidance aggressively.

There’s more, much of it related to plunging oil prices and their impact on developing world economies. For countries that grew temporarily rich on China’s infrastructure build-out, the end of that ill-fated program has produced something more like a depression than a garden-variety slowdown.

Now the panic is spreading. China stocks entered a bear market last night, oil is down huge, and as this is written (1 PM EST on Friday) the Dow is off 450 points. A tidal wave of terrified capital is pouring into Treasury bonds, and a smaller but still significant amount is moving to precious metals. Everything else is down varying shades of big.

Readers of a certain age will notice that this feels a lot like late 2007, when pervasive optimism hit a brick wall made up of subprime mortgages and credit default swaps. Everyone then headed for exits that were far too small to accommodate all the semi-worthless paper.

But this time around there are some big differences:

1) In the 2000s the world’s central banks weren’t prepared for the scale of the carnage and had to improvise. Today they’re already intervening in virtually every major market and so presumably have plans drawn up for the mother of all manipulations should 2008 come calling again. So we should expect some bold, experimental (let’s just say crazy) monetary policies from major governments in the year ahead.

2) The big banks are now seriously out of favor, so when their derivatives books blow up they might not be able to blackmail a sitting president with threats of martial law should Goldman and JP Morgan fail. Today, letting the big banks implode is an experiment that a lot of people would actually like to run, on the assumption that because the same number of factories, farms and hospitals would exist the day after such an event, real wealth would hardly change at all and mega-banks would be proven irrelevant.

3) The world is vastly more indebted today than in 2007, the carnage in commodities is global rather than sector-specific as with mortgages, and formerly rock-solid political systems like the eurozone and China are now unstable — to put it mildly. A new financial crisis would energize fringe (i.e., anti-status quo) parties everywhere, vastly complicating the official response. In the US, another bust could easily result in a 2016 presidential campaign between Bernie Sanders and Donald Trump, neither of whom would favor bailing out the big banks.

And then of course there’s the Middle East, which is now in end-to-end civil war.

Add it all up and the picture is grim, with lots more bad news in the pipeline. So it’s not surprising that traders are nervous about going into the weekend with long positions in retail, tech, banks, commodities, or anything, really.

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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John Rubino: Market Figures Out Fed No Longer Has Its Back

By John Rubino, Dec 18, 2015

US stocks soared while the Fed was meeting to raise interest rates this week — though it’s not clear why that should be so since monetary tightening isn’t generally a good thing for stock prices.

In any event, it didn’t last. Over the past 48 hours the Dow is down more than 3%, with many, many individual stocks down far more.

Why the quick reversal? For one thing, that’s pretty much how it always goes. The Fed tends to aim its statements directly at traders, who are so desperate for adult supervision that they can’t help responding positively. But when the Fed goes quiet, reality once again bites, and the general trend turns negative.

That it’s happening so quickly is a sign of how different things are this time around.

The Fed is now — for the first time in adult memory for half the world’s traders and money managers — tightening rather than loosening monetary conditions. A quick look at financial history is all it takes to lead anyone with leveraged money at risk to lighten up.

Equally important — and vastly more strange when you think about it — this tightening comes at a time when major parts of the global economy are either grinding to a halt or imploding. See Torrent Of Bad News Greets Fed As It Prepares to Raise Rates for some of the disturbing events reported while the Fed was meeting.

And since then (that is, in just two days), a whole new series of similarly-scary stories have surfaced, including:

China Beige Book Shows ‘Disturbing’ Economic Deterioration

(Bloomberg) – China’s economic conditions deteriorated across the board in the fourth quarter, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country’s slowdown.National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012.

The world’s second-largest economy lacks the kind of comprehensive data available on developed nations, making it harder for investors to get a clear read — particularly as China transitions from reliance on manufacturing and investment toward services and consumption. Official data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November, while consumer inflation perked up and a slide in imports moderated.

Earnings Deterioration
The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.

The survey shows “pervasive weakness,” Miller wrote in the report. “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.”

———————–

Japan’s November Exports Fell 3.3%

(Khaleej Times) – Japan’s exports in November fell at the fastest pace in almost three years as shipments to Asia declined in a worrying sign that weakness in overseas demand could curb economic growth.Japan’s gross domestic product is likely to avoid a contraction for the time being as domestic demand has performed better than expected, but declining exports highlight the risks that China’s slowdown and turmoil in emerging markets pose to the outlook.

Ministry of Finance data showed on Thursday that exports fell 3.3 percent in November from a year earlier, more than the median estimate for a 1.5 percent annual decline in a Reuters poll. That was the biggest decline since a 5.8 percent year-on-year fall in December 2012.

———————–

Hedge Funds Just Had Their Worst Quarter Since the Crisis

(Bloomberg) – Hedge fund closures surged in the three months to the end of September as money managers reeled from declines in commodity and equity markets, while high-yield credit spreads widened.The number of funds liquidated climbed to 257, up from 200 in the previous three months, according to a report from Hedge Fund Research Inc. on Friday, and taking total closures in the first nine months to 674, compared with 661 during the same period last year. Cargill Inc.’s Black River Asset Management shut four units, while Armajaro Asset Management LLP also closed one of its funds.

Liquidations rose “as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds,” Kenneth Heinz, president of HFR, said in a statement.

 

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Bond funds see record outflows after junk jitters

(CNBC) – Investor fears about liquidity in junk bonds have leaked into the investment grade sector of the market, with redemptions from corporate bond funds hitting record highs in the week running up to the Federal Reserve meeting.Global bond funds saw their largest outflows since June 2013 in the week to Wednesday 16th December, with some $13 billion being pulled from the sector, including, high-yield and investment-grade strategies.

BofAML said the “carnage in fixed income” was still focused on junk bond funds, which saw $5.3 billion of the outflows. Meanwhile, corporate investment-grade debt funds saw around $4.8 billion in net redemptions, according to separate data from Thomson Reuters Lipper which also showed that the net outflows from bond funds over the period were the largest weekly outflows since Lipper started tracking fund flow data in 1992.

There’s more, but you get the point. These are the kinds of things that happen in the early stages of recession, not the middle of an expansion. As such, they’re usually signals to a central bank to ease conditions.

But the Fed has locked itself into tightening for a while, and will need a serious crisis to make a change of course possible. That’s what the markets are figuring out, that they can’t count on free money falling from the sky in the next couple of months, no matter what happens.

So, for the first time in a long time, they’re responding to fundamentals rather than artificial easy money. And the fundamentals, by any historical or common sense standard, are terrible.

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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