Posts Tagged ‘Japan Earthquake 9.0’
May 1, 2011
While it will not surprise anyone that Japan, which for the past 3 decades has been a monetary policy basket case caught in what bankers like calling a deflationary spiral (yet which others like Sean Corrigan merely define as prices re-indexing to a fair value absent endless cheap credit crutches), has constantly had to resort to a record loose monetary policy coupled with endless episodes of quantitative easing, some may not know that over the past month Japan has seen its current account balance swell by $250 billion, or nearly half the entire Fed QE2 monetization mandate. And as the BOJ continues to disclose the full extent of the Japanese economic devastation following March 11, we are confident that very soon the most recent episode of Japanese “printing” will surpass the $600 billion that the Fed is injecting into the US economy (in addition to the roughly $250 billion in Treasury bonds monetized by the BOJ each year): an amount roughly 5 times greater than America’s when expressed as a ratio of GDP. It is thus no surprise then that Bernanke does not seem too concerned with the purported end of QE – after all money printing is merely moving from developed world point A to developed world point B. And thanks to monetary linkages of “globalization” all this brand new money will once again find its way into speculative assets, and thus, Fed mandate #3 favorite – Russell 2000. Below we provide a closer look at what exactly the current and future, Japanese QEasing will look like.
To do that, we present some observations from an Ad Hoc Comment by GaveKal: “The Understandable Japanese Liquidity Surge.” As we presented yesterday, while for the time being the Japanese monetary base (unlike our own exploding Adjusted Monetary Base) will not show much if any change for a few months, the Japanese current account balance has “swollen by Yen equivalent of $250 billion in the past few days (i.e., about half of the amount of QE).” This is shown on the chart below:
And since this move does not occur in isolation, it has impacted the broader total assets category of the BOJ, which is now close to an all time high following the recent surge:
So while it is now obvious that Japan has quietly, and without much fanfare moved into another monetization regime, the two questions remaining are: i) what is the mechanism by which Japan is pumping a quarter trillion into the market, and ii) and, much more important, where is this money going? GaveKal answers question #1:
Breaking down the BoJ’s increase in assets, it seems that the entire increase of the past week is pretty much attributable to one source – loans by funds supplying operations against pooled collateral (green line below). This is clearly a change in normal practices:
Click Chart for larger view
- In 2002-2004, the BoJ injected cash in the system by purchasing treasury bills (dark blue above).
- In 2008, the little the BoJ did was through the purchase of foreign assets and even then, the BoJ’s intervention was sterilized through the sale of JGBs (yellow line going down).
So what is this ‘loans by funds against pooled collateral’? Given the underlying amount, the only explanation we come up with (though we look forward to alternative theories from clients) is that the BoJ has dramatically increased its bank repo operation; in essence, making sure that the banks are not scarce of cash in the middle of the current national emergency. Importantly, so far, there seems to be no sterilization by the BoJ of this cash injection. A fact which begs a number of important questions, including:
- Why isn’t the Yen retreating on this news? Is it just a question of delays and the markets still finding their footing after the massive exogenous shock of two weeks ago?
- Where will that excess money go? Will it all go into rebuilding the devastated areas? Will it go into local stocks? Or will we see what we saw in 2003 onwards from Japanese investors, namely a rush for carry?
On this last point, it is interesting to note that since the G7 intervention was announced on the 18th, the typical ‘carry’ currencies, namely AUD, NZD, ZAR, BRL, etc., have done rather well:
Click Chart for larger view
As for question #2, as Louis Gave speculates, the excess money, instead of hitting the Nikkei, and with the dramatic relative underperformance of the Japanese stock market compared to the US this would not be surprising at all, could simply be fuelling the latest surge in commodity prices, which at this point provide far greater rates of return than stocks (by now everyone has seen the parabolic rise in silver prices in 2011 soon to be followed by gold and all other commodities). To wit:
Another possibility of course is that this excess liquidity is already helping fuel the next leg of the equity bull market while a more worrying development would be if this excess cash found its way in the hot ‘momentum’ trades of the day, namely oil, gold or silver.
Thus if the March action by the BOJ has taken about one month to translate into a nearly $20 spike in silver, just what will happen as the BOJ is forced to pump hundreds of billions more into its market? And pump it will: after holding back for over a month on the consequences of Japan’s earthquake, tsunami and nuclear disaster, the head of the central bank has finally stepped up to the plate and warned that the Japanese economic outlook is “very severe.”
First a quick overview of what was disclosed about the Japanese economy in the past week: factory output fell at a record monthly pace in March, household spending declined at a record annual rate and another private survey showed manufacturing activity languishing at a two-year low. This is about as catastrhopic for a deflationary economy as it gets. And with apologies to Larry Kudlow, there is no boost in GDP coming any time soon. In fact, March monthly GDP was cut to the lowest since Lehman.
So with its back to the wall, what is Japan to do? More of the same of course. From Reuters:
Bank of Japan Governor Masaaki Shirakawa said on Saturday that the country’s economic outlook was very severe and that the central bank would take appropriate action to support the economy.
But he offered few clues on whether and when the BOJ would expand its asset-buying scheme, only saying that its next policy step would depend on economic conditions at the time.
“The BOJ sees the outlook for Japan’s economy as very severe,” Shirakawa told a financial committee meeting in the lower house of parliament.
“We’d like to take appropriate policy steps as needed while monitoring the economy and prices, taking into account that uncertainty over the outlook is high,” he said.
Asked by a lawmaker whether the BOJ would consider buying more government bonds to support the economy, Shirakawa said only: “We’d like to consider in earnest what would be the desirable step to take.”
The BOJ kept monetary policy unchanged on Thursday even as it lowered its growth forecast for the current fiscal year, which began in April, and warned of uncertainties over the extent of damage that last month’s devastating earthquake would inflict on the economy.
Shirakawa reiterated that having just expanded its asset purchasing scheme days after the March 11 quake, the BOJ preferred to spend more time examining the impact the step would have on the economy.
But he also left open the possibility of easing monetary policy further if damage from the quake proved bigger than expected, stressing that the central bank was focusing on downside risks to growth for the time being.
In a sign some in the BOJ were more cautious about the economic outlook than Shirakawa, Deputy Governor Kiyohiko Nishimura proposed on Thursday expanding the central bank’s asset buying scheme by 5 trillion yen ($62 billion).
While the proposal was outvoted by the board, some market players said it may be a sign the BOJ may loosen policy as early as next month.
And loosen it will, because unfortunately as the past 30 years have shown, the country at this point has no other choice but to take the same toxic medicine which merely removes the symptoms briefly, while making the underlying problems far worse. Also, with the Fed threatening to end QE2 in precisely two months, someone out there has to be dumping hundreds of billions in infinitely dilutable 1 and 0s into primary dealer prop desks. Furthermore, as shown above, the BOJ needs not to buy securities outright: tinkering with the shadow economy in the form of the repo market will provide just as desirable an outcome… If, of course, said outcome is to see gold and silver continue on their relentless rise to new all time record highs. And/or higher. Because the only thing limiting the price of gold is price stupidity and the amount of paper money in existence. Both are infinite.
The latest projections from the Japanese Finance Ministry regarding the fiscal year which started on April 1 make for sobering reading. They say that Japan’s “public” (funded) debt will probably rise by 5.8 percent this year – to 997.7 TRILLION Yen ($US 12.2 TRILLION at current exchange rates). Should these projections be even slightly on the optimistic side – and government financial projections always are – then Japan could easily be looking at a public debt of 1,000 TRILLION Yen by March 31, 2012.
There is another way of expressing 1,000 TRILLION. It is the same as ONE QUADRILLION.
The sheer magnitude of these numbers has long been a talking point for the watchers of international finance. Now, they are becoming very nervous indeed. The OECD has recently “urged” the Japanese government to “do something” about their deficits, especially in the wake of the earthquake disaster. Noting that Japanese sovereign debt is about to hit 204 percent of GDP, they suggested that Japan’s current sales tax be “at least” doubled from its present 5 percent to 10 percent. The Japanese Foreign Ministry politely declined to comment on this suggestion, contenting themselves with assuring the OECD that – “We will continue to work to maintain and secure trust in Japanese government bonds.”
At this, a line from Rosencrantz and Guildenstern are Dead comes to mind: “Eternity’s a terrible thought. I mean, where’s it all going to end?” While this has been mostly a rhetorical question over the ages, G7 central planners are set to provide a definitive answer very soon.
(and people worry about the “bubble” in precious metals)
Read the entire article HERE.
By Lily Nonomiya and Mayumi Otsuma
Mar 13, 2011 8:15 PM PT
The Bank of Japan poured a record 12 trillion yen ($146 billion) into the world’s third-biggest economy today as the strongest earthquake in the nation’s history triggered a plunge in stocks and surge in credit risk.
The yen fell after the central bank added funds to the financial system, reversing earlier gains against the dollar on speculation authorities would sell the currency to aid exporters. Governor Masaaki Shirakawa yesterday said he is ready to unleash “massive” liquidity to support markets.
“This is a big and also appropriate move,” said Stephen Schwartz, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It’s a short-term measure to ensure stability to prevent this shock from spilling over to the financial markets.”
Japan faces power blackouts, the risk of meltdowns at a nuclear power station, and a predicted death toll of more than 10,000 after the 8.9-magnitude temblor and subsequent tsunami devastated northeastern regions. More than 350,000 people are in emergency shelters. The central bank, meeting from noon in Tokyo, may respond to the disaster with tools other than policy rates, already cut to near zero to counter deflation.
Besides the 12 trillion yen of emergency funds, the Bank of Japan offered to buy 3 trillion yen of government bonds from lenders in repurchase agreements starting March 16. Today’s policy meeting was brought forward from 1 p.m.
The disaster may have killed 10,000 in Miyagi prefecture north of Tokyo, said Go Sugawara, a spokesman for the prefectural police department. The official toll reached 1,597, with 1,481 more missing and 1,683 injured, the National Police Agency said.
Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year.
The cost of protecting Japanese government bonds with credit-default swaps surged the most in two years and the the Nikkei 225 Stock Average fell as much as 5.8 percent before paring the loss to 4.5 percent as of 11:28 a.m. local time.
The yen touched 80.62, the strongest since Nov. 9, before falling to 82.24 per dollar as of 11:37 a.m. in Tokyo from 81.84 in New York last week. It has gained about 0.9 percent against the greenback since the March 11 earthquake.
Bank of Japan officials may keep the central bank’s asset- purchase plans unchanged as they gauge the effect of the disaster. Economists said officials will likely keep longer-term credit programs at a total of 35 trillion yen.
The economic hit from the March 11 quake will depend on how long it shuts down factories and the distribution of goods and services, with the potential meltdown at the nuclear power facility clouding the outlook. For now, the central bank is likely to ensure lenders have enough cash to settle transactions, and aim any additional steps at providing credit in the areas of northeastern Japan devastated by the temblor, analysts said.
Shirakawa and his board could opt to accelerate asset purchases, including government bonds and exchange-traded funds, within the existing credit programs, particularly if the yen climbs and stocks tumble, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank.
Prime Minister Naoto Kan is also preparing a fiscal response. Economic and Fiscal Policy Minister Kaoru Yosano said at a press conference the government still has 1.3 trillion yen in discretionary funds from the budget for the year through March 31 that can be allocated for quake relief.
“This earthquake affected a wide area, and it’s likely that the economic impact will exceed the 20 trillion yen in damage sustained during the Kobe earthquake” of 1995, Yosano said.
Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile a supplementary budget package. Opposition leader Sadakazu Tanigaki told reporters in Tokyo yesterday he proposed to Kan a temporary tax to help fund the relief effort.
The central bank set up a task force after the temblor, and pledged in a statement March 11 to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors.
The money went to 13 financial institutions operating outside regular business hours in disaster-struck areas, the bank said in a statement yesterday, adding that it was checking on the scale of damage to lenders.
The quake struck hardest in Tohoku, the northern region of the main island of Honshu that accounts for about 8 percent of Japan’s gross domestic product.
Sony Corp. and Toyota Motor Corp. halted production after the quake struck 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co. is battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will today begin rolling, periodic blackouts of Tokyo.
Declines in stocks may shake consumer confidence, which slid to a 10-month low in December as the government started to unwind economic stimulus measures. The economy had contracted in the fourth quarter as consumer spending and exports slumped, a decline economists had said would be temporary as a rebound in global growth fuels overseas demand.
Cost of Recovery
“The earthquake has increased the risk the economy won’t be able to emerge from its lull, which many believed would happen this quarter” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. He added that the government is likely to spend about 5 trillion yen for recovery efforts.
Policy makers may establish a lending program to help financial institutions in the Tohoku area, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo and a former Bank of Japan official.
Today’s decision was originally scheduled for tomorrow following a two-day meeting; the BOJ said it cut short the gathering to accelerate its response. Shirakawa plans a press conference after the announcement.
“The BOJ is very likely to focus on cautious operations aimed at preventing any problems in fund transactions between financial institutions,” Goldman Sachs Group Inc. economists including Tokyo-based Chiwoong Lee wrote in a research note. “We also expect it to devise new measures in the context of its current comprehensive monetary policy to support the rebuilding of affected areas and buoy the entire Japanese economy based on continuing assessments of the impact.”
Read the entire article HERE.