Opponents of Abe-economics – a policy whose defining characteristic these days is ever more radical monetary experimentation and a creeping but serious deterioration in the public finances – are in despair. Yet again, as in March 2015, the Japanese PM Abe has called a snap election (one year short of a full term with a campaign limited to 3 weeks), this time with the intention of crushing a potential leadership challenge within his party (the LDP) which incidentally could have brought a change in economic policy direction. PM Abe took a gamble. The established opposition party to the LDP, the DPJ, is weak and indeed in meltdown. But the Party of Hope formed just in the last few weeks by popular governor Koike (the nationalist ex LDP defense minister, previously a television news anchor) could galvanize a protest vote. Opinion polls suggest now that the Abe’s LDP will obtain indeed a large majority in the Diet following the October 22 election. Governor Koike has gained from the corruption scandals beleaguering the PM but she articulates no alternative to Abe-economics. In fact her party’s program supports continuation of the mega-money printing program This time, like the last, the ostensible justification which PM Abe has advanced for a snap election is to win voter approval for his decision to over-ride already legislated fiscal discipline. In 2015 the election was called to postpone a looming increase in the consumption tax; this time it is to match that delayed tax increase (scheduled now for 2019) with a boost to social spending. The fact that such a rolling back of fiscal tightening is indeed saleable to a doubting public fully aware of the weak public finances is due to long-term interest rate markets having ceased to exert any constraint. They have become dysfunctional in consequence of monetary radicalism – now extending to the Bank of Japan (since September 2016) pegging long term interest rates at zero.
Japan’s economy grew by 1% sequentially, and 4% on an annualized basis in Q2, smashing expectations of a 2.5% print and well above the upward revised 1.5% in the first quarter; it was also the the highest quarterly growth since a 5% print in Q2 2015, Japan’s Cabinet Office reported, and the 6th consecutive quarter of expansion for recently embattled Prime Minister Shinzo Abe, who has plunged in the polls following a series of corruption scandals.
This post was published at Zero Hedge on Aug 13, 2017.
The shock landslide defeat of PM Shinzo Abe’s Liberal Democratic Party (LDP) in the recent Tokyo metropolitan elections – and the triumph there of Tokyo Governor Koike’s new party (Tomin First) – has lit a faint hope that the radical Japanese monetary expansion policy could be on its way out. The flickering light though is not strong enough to soothe the mania in Japan’s carry trades and so the yen continued to slide in the aftermath of the elections. Between mid-June and early July the Japanese currency depreciated by some 5% against the US dollar and 10% against the euro. The perception in currency markets is that Japan will not be embarking on monetary normalization this year or next, in contrast to Europe where ECB Chief Draghi has hinted that the train (to monetary normalization) will start next year, even though the journey promises to be very slow. The US train to normalization continues at a glacially slow pace including some periods of reverse movement. Moreover the monetary climate prior to the journey commencing is even more extreme in the case of Japan than in Europe or the US. It was possible to imagine that the shock election setback for the LDP could have caused Shinzo Abe to withdraw support from his money-printer in chief, Bank of Japan governor Haruhiko Kuroda (whose term ends in April 2008), thereby signaling an early end to negative interest rates and quantitative easing. But markets in their wisdom have concluded this is not to be. Many elderly Japanese are pleased with their stock market and real estate gains even though they complain about negative interest rates and the threat of inflation. In any case it was young voters, responding to the stink of alleged corruption scandals, who turned out en masse for Governor Koike’s new party.
Almost exactly ten years ago, on September 12, 2007 Japan’s current prime minister Shinzo Abe resigned less than a year into a tenure dogged by scandals, the suicide of a minister, a raft of resignations and corruption allegations, and a humiliating election drubbing for his Liberal Democratic Party. Never one to shrink away from resposibility, Abe blamed it on crippling diarrhea: Shinzo Abe resigned as Prime Minister, claiming that diarrhea was preventing him from carrying out his duties. The diarrhea was due to ulcerative colitis, a bowel illness caused by ulcers. Abe had suffered from this illness for decades, but after becoming Prime Minister, the stress of his job apparently made the symptoms worse. Apparently it did not prevent him from taking on the job again some five years later, when he was reinserted in the prime ministerial position again, largely as a smokescreen meant to keep the government together as BOJ’s then-new governor Haruhiko Kuroda unleashed the greatest “wealth creation” and bond monetization experiment in the history of Japan, which has culminated with the Japanese central bank owning nearly 100% of Japan’s GDP in Japanese Government Bonds. Unfortunately for Abe, it may be time to buy Imodium again.
This post was published at Zero Hedge on Jul 16, 2017.
Two days ago, Japan’s Asahi Shimbun newspaper reported that former South Korean President Park Geun-hye had made plans to assassinate North Korean leader Kim Jong-un, adding that Ex-president Park, who was impeached in a corruption scandal earlier this year, signed a document approving a ‘leadership change’ in North Korea back in 2015. According to the Japanese outlet, South Korea’s intelligence agencies were to prepare operations to carry out the plan. The report noted that the plotters considered arranging accidents, with a car accident or the derailment of a train carrying Kim Jong-un on the table. Park’s administration also reportedly considered staging a coup in North Korea. The military activities of South Korea’s communist neighbor, including its nuclear arms development programs, apparently motivated the alleged plot, Asahi Shimbun notes. Tension between Seoul and Pyongyang spiked in August of 2015 as the countries exchanged fire after the North fired a projectile at the border city of Yeoncheon. However, the plans to assassinate the North Korean leader were not picked up by President Moon Jae-in’s administration after Park’s impeachment, the daily reports.
This post was published at Zero Hedge on Jun 28, 2017.
The biggest banks on Wall Street, both foreign and domestic, have been repeatedly charged with rigging and colluding in markets from New York to London to Japan. Thus, it is natural to ask, have the big banks formed a cartel to rig the prices of their own stocks? This time last year, Wall Street banks were in a slow, endless bleed. The Federal Reserve had raised interest rates for the first time since the 2008 financial crisis on December 16, 2015 with strong hints that more rate hikes would be coming in 2016. Bank stocks never do well in a rising interest rate environment because their dividend yield has to compete with rising yields on bonds. Money gravitates out of dividend paying stocks into bonds and/or into hard assets like real estate based on the view that it will appreciate from inflationary forces. This is classic market thinking 101. Bizarrely, to explain the current run up in bank stock prices, market pundits are shoving their way onto business news shows to explain to the gullible public that bank stocks like rising interest rates because the banks will be able to charge more on loans. That rationale pales in comparison to the negative impact of outflows from stocks into bonds (if and when interest rates actually do materially rise) and the negative impact of banks taking higher reserves for loan losses because their already shaky loan clients can’t pay loans on time because of rising rates. That is also classic market thinking 101. Big bank stocks also like calm and certainty – as does the stock market in general. At the risk of understatement, since Donald Trump took the Oath of Office on January 20, those qualities don’t readily come to mind in describing the state of the union. Prior to the cravenly corrupt market rigging that led to the epic financial crash in 2008 (we’re talking about the rating agencies being paid by Wall Street to deliver triple-A ratings to junk mortgage securitizations and banks knowingly issuing mortgage pools in which they had inside knowledge that they would fail) the previous episode of that level of corruption occurred in the late 1920s and also led to an epic financial crash in 1929. The U. S. only avoided a Great Depression following 2008 because the Federal Reserve, on its own, secretly funneled $16 trillion in almost zero interest rate loans to Wall Street banks and their foreign cousins. (Because the Fed did this without the knowledge of Congress or the public, this was effectively another form of market rigging. Had the rest of us known this was happening, we also could have made easy bets on the direction of the stock market.)
Back in October, Masayoshi Son, Chairman & CEO of SoftBank Group Corp., announced the creation of the SoftBank Vision Fund, a UK-based technology fund, with a $45 billion capital commitment form the Public Investment Fund of the Kingdom of Saudi Arabia. The initial press release for the Vision Fund announced the company expected to invest at least $25 billion over the next 5 years and said that overall funding could reach $100 billion. Since Donald Trump won the US presidential election in November, Mr. Son has been actively courting the president-elect, by vowing to invest as much as $50bn in American start-ups…something the pair happily announced in the lobby of Trump tower back in December. Masa (SoftBank) of Japan has agreed to invest $50 billion in the U. S. toward businesses and 50,000 new jobs…. — Donald J. Trump (@realDonaldTrump) December 6, 2016
This post was published at Zero Hedge on Jan 5, 2017.
For a long time, I’ve advocated that the world’s governments should default on their debt. I recognize that this is an outrageous-sounding proposal. However, the debts accumulated by the governments of the U.S., Japan, Europe and dozens of other countries constitute a gigantic mortgage on the next two or three generations, as yet unborn. Savings are proof that a person, or a country, has been living below their means. Debt, on the other hand, is evidence that the world has been living above its means. And the amount of government debt and liabilities in the world is in the hundreds of trillions and growing rapidly, even with essentially zero percent interest rates. This brings up several questions: Will future generations be able to repay it? Will they be willing to? And, if so, should they? My answers are: No, no and no. The ‘should they’ is one moral question that should be confronted. But I’ll go further. There’s another reason government debt should be defaulted on: to punish the people stupid enough, or unethical enough, to lend governments the money they’ve used to do all the destructive things they do. I know it’s most unlikely you’ve ever previously heard this view. And I recognize there would be many unpleasant domino-like effects on today’s over-leveraged and unstable financial system. It’s just that, when a structure is about to collapse, it’s better to have a controlled demolition, rather than waiting for it to collapse unpredictably. That said, governments will perversely keep propping up the house of cards, and building it higher, pushing the nasty consequences further into the future, with compound interest. With that in mind, a few words on the euro, the E.U. and the European Central Bank are in order.
China is turning Japanese. That’s the increasingly held view of observers comparing China’s frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals. While the two scenarios aren’t a carbon copy, similarities between China’s record credit boom in recent years and Japan’s bubble era have been made at various times by a number of economists and investors. Now, those voices are being heard more often – even within China. Huang Yiping, a Peking University professor who advises China’s central bank, warned Saturday about leverage that continues to climb, saying that the top risk is more and more investment generates less growth. ‘That’s exactly the story that unfolded in Japan.’ The worry is that China repeats Japan’s mistake of not reining in excess credit and shutting down insolvent borrowers quickly enough, exacting longer-term damage to growth in the world’s No. 2 economy. With potential expansion rates coming down across developed nations, the global pain would be magnified. ‘What really troubles me is that this extended real-estate bull market has gone hand-in-hand with an extended period of rapid credit growth, debt accumulation, and some questionable practices on the part of both lenders and borrowers,’ said Russell Jones, who had a front-row seat working as an analyst in 1990s Japan during that country’s demise.
Goldman Sachs Group Inc. plans to cut about a quarter of its investment-banking jobs in Asia, excluding Japan, because of a slump in deal-making in the region, according to a person with knowledge of the matter. The New York-based bank plans to make the cutback of about 75 jobs in the region later this year, the person said, asking not to be identified because the matter is confidential. The job reduction comes as the bank faces its worst Asia ranking in equity issuance since 2008, according to data compiled by Bloomberg data. A Goldman Sachs spokesman said he was unable to comment. Asia ex-Japan equity offerings have declined 29 percent this year, and Goldman’s ranking plummeted to 11th from second in 2015, its worst showing in about eight years, the data show. The company also has come under scrutiny by authorities for its role in underwriting $6 billion of bond sales for 1MDB, the Malaysian government fund at the center of several international investigations into suspected corruption and money laundering. Chinese securities firms are mounting a challenge to western banks like Goldman Sachs and Morgan Stanley in Asia, with mainland companies occupying seven of the top 10 positions in advising on Hong Kong initial public offerings this year, data compiled by Bloomberg show. Postal Savings Bank of China Co. raised $7.4 billion in a Hong Kong initial public offering this week, the world’s biggest first-time share sale this year.
On July 14, 2006, the Bank of Japan raised its benchmark overnight rate off zero for the first time since introducing the world to ZIRP in 1999. In doing so, the BoJ noted that the Japanese economy in its view continued to ‘expand moderately’ and that risks inside the economy were ‘balanced.’ The central bank also sought to reassure, further commenting that despite one 25 bps rate hike ‘an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.’ These words, all of them, should sound frighteningly familiar, as they are being redeployed in nearly exactly the same phrasing by the Federal Reserve. Whether or not the FOMC votes for a second rate hike today still remains to be seen, as before that ‘news’ there is first the BoJ once more admitting that its prior efforts didn’t actually work. For the record, Japanese officials actually carried out two hikes, a second coming in February 2007 just in time for the open minded to finally see what really had been going on in the global economy. In other words, the Japanese policymakers made the same mistakes as are being made today. They assumed absence of further contraction was the same as recovery. In the singularly binary model of orthodox economics, if an economy isn’t in recession it must be growing; so if the economy isn’t in further recession and the economy is barely growing or even stagnating then it is assumed that growth is just being delayed. By the middle of 2006, the Bank of Japan believed there were enough signs the economic postponement had ended.
Japan’s poor exports performance continued in August, with shipments falling for an 11th straight month as a strong yen and tepid global economy undercut demand. Key Points Exports dropped 9.6 percent in August from a year earlier, the Ministry of Finance said on Wednesday. The median estimate of economists surveyed by Bloomberg pointed to a 4.7 percent decline. Imports fell 17.3 percent, resulting in a trade deficit of 18.7 billion yen ($184 million). Big Picture The trade data came just hours before the results of a highly anticipated Bank of Japan policy meeting.
As investors anxiously await the key monetary policy decisions from the Federal Reserve and the Bank of Japan next week, there have been signs that the powerful rally in bond markets, unleashed last year by the threat of global deflation, may be starting to reverse. There has been talk of a major bond tantrum, similar to the one that followed Ben Bernanke’s tapering of bond purchases in 2013. This time, however, the Fed seems unlikely to be at the centre of the tantrum. Even if the FOMC surprises the market by raising US interest rates by 25 basis points next week, this will probably be tempered by another reduction in its expected path for rates in the medium term. Instead, the Bank of Japan has become the centre of global market attention. The results of its comprehensive review of monetary policy, to be announced next week, are shrouded in uncertainty. So far this year, both the content and the communication of the monetary announcements by BoJ governor Haruhiko Kuroda have been less than impressive, and the market’s response has been repeatedly in the opposite direction to that intended by the central bank. As a result, the inflation credibility of the BoJ has sunk to a new low, and the policy board badly needs to restore confidence in the 2 per cent inflation target. But the board is reported to be split, and the direction of policy is unclear. With the JGB market now having a major impact on yields in the US, that could be the recipe for an accident in the global bond market.
Victory for Donald Trump in the U. S. presidential election could be a game changer for China’s economy. The candidate’s promise to slap punitive tariffs on Chinese imports would be highly contractionary, deflationary and wipe hundreds of billions off the value of the world’s second-biggest economy, according to new research by Kevin Lai, the Hong Kong-based chief economist for Asia (excluding Japan) at Daiwa Capital Markets. Lai estimates that Trump’s suggestion for a 45 percent tariff on Chinese goods to narrow the trade deficit with America would spark an 87 percent decline in China’s exports to the U. S. – a decline of $420 billion. That would, over time and factoring in multiplier effects, mean a 4.82 percent blow to China’s gross domestic product, or about a half trillion dollars’ worth. It doesn’t even take into account an estimated $426 billion in foreign direct investment repatriation if companies started to withdraw. ‘A loss of GDP or a slowdown in GDP growth of this scale would be staggering,’ Lai wrote in a note entitled ‘What would a Trump presidency mean for China.’ ‘Eventually, Trump and his administration may actually compromise with a watered-down version of tariffs.’
Japanese government bonds hit a six-month low today, and the 10-year came within a whisker of breaking into that long forgotten realm of positive yields. It’s been a ferocious sell-off- the worst in two decades to be precise. Since the 10-year JGB yield hit a record low -0.291 per cent at the end of July, yields have rocketed amid widespread headscratching over what the future holds for Japanese monetary policy, writes Joel Lewin. In July, the Bank of Japan underwhelmed markets with a stimulus boost that fell short of expectations, while the government unveiled a 4.6tn ($45bn) fiscal stimulus package, sparking concerns the BoJ has run out of ammunition and adding fuel to the sell-off.
Japan’s subzero-rates policy has had a ‘powerful impact,’ as Bank of Japan Gov. Haruhiko Kuroda recently said, in pushing down interest rates. But judging by the collateral damage – record low profits at Japanese banks, which are charged with transmitting the BOJ’s easy-money policy to stimulate the economy – it has likely gone a touch too far. Signs have emerged that the central bank intends to steepen its yield curve – that is, push long-term rates up and suppress short-term rates. It has shifted around its bond purchases, buying more short-term Japanese government bonds and on the whole buying fewer bonds. Long-term rates rose are up almost half a percentage point since July. Yet even after the recent steepening, the difference between two-year bonds and 10-year bonds is half what it was before negative rates came into effect. To alleviate further pain, the BOJ at its policy meeting Sept. 21 could nudge the yield curve steeper by committing to lowering the short-term rates that banks typically borrow at, while letting long-term rates that they lend at float higher.
In Japan, the yield hunters have become the hunted. Investors who refused to swallow negative yields to hold Japan’s shorter-dated bonds are suffering, as an index of sovereign debt maturing in 20 years or more has lost 9 percent this quarter. The yield on 2036 bonds climbed to the highest since March 16 as BOJ Governor Haruhiko Kuroda noted last week that low long-term yields hurt returns on pension and insurance investments, even as he signaled there would be no reduction in easing with a policy review due Sept. 21. A 20-year debt sale Tuesday drew the lowest demand in six months. ‘JGBs are responding unreservedly to the BOJ’s message that it’s not desirable for superlong yields to be too low,’ said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. ‘The problem is we don’t know what the BOJ’s desired level is, and that’s created an atmosphere of paranoia in the market.’ The intensity of Japan’s bond selloff has sparked concern the market will become the epicenter for a global rout, just as it led a record rally in the first half of 2016. Federal Reserve officials are cautioning against waiting too long to tighten policy, while the European Central Bank is playing down the prospect of further stimulus. DoubleLine Capital Chief Investment Officer Jeffrey Gundlach is among those recommending investors prepare for bonds to fall.
Call bond-market veteran Bill Gross a ‘broken watch.’ He doesn’t care. His gripe about negative interest rates and a flood of debt, which he considers a risk, not a fix, for a global economy that’s still limping out of the financial crisis, is challenged daily by resilient demand for the bonds he’s bearish on. But even if being ‘right’ eventually is a hard sell right now, he’s not backing down, Gross said in his latest monthly commentary. ‘The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes,’ Gross wrote. ‘But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies.’ Germany, Switzerland, France, Spain and Japan are among countries that have negative yields on government-issued debt. Their hope is that cheap, even free, borrowing raises inflation and revives asset prices that can filter through economies; they argue extreme policies have been needed. Gross and others have argued that rates, including those at the Federal Reserve, at near zero or below won’t create sustainable economic growth and actually undermine capitalism.
The most remarkable aspect of the WTI crude oil futures curve this month has been its amazing ability to maintain its shape no matter which direction or by how much. Previously, as ‘dollar’ pressures either built or ebbed, the futures curve would either steepen at the front (liquidation pressure) or flatten toward more normal backwardation (easing of the ‘dollar’ difficulties). That was the case since June 8 when the WTI curve was at its flattest in well over a year; but as funding pressures built primarily, I believe, via Japan (increasingly negative and record negative cross currency basis swaps) the curve morphed from nearly flat to once more highly angular contango in the tell-tale sign of the ‘dollar.’ In short, the Japanese end of the Asian ‘dollar’ had become distressingly disruptive through June and July, but much less so once BoJ singled out the ‘dollar’ in its actual policy changes. Thus, from around June 8 until about August 2, the Japanese-connected ‘dollar’ pressure was increasingly acute and globally disruptive (stock markets obviously notwithstanding because of their own liquidity supply and buying interests, largely myths about what central banks can’t do). Since August 2, much less so; leaving oil once again as a function of ‘dollars’ this time in relatively better shape. [emphasis in original]
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.