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David Fuller and Eoin Treacy's Comment of the Day
Category - Japan

The Bank of Japan's Moment of Truth Decision Day Guide

This article by Toru Fujioka for Bloomberg may be of interest to subscribers. Here is a section:

The Bank of Japan’s two-day policy meeting ends Wednesday, with investors anxiously awaiting the outcome of a comprehensive policy review that may set the future course of Governor Haruhiko Kuroda’s monetary stimulus program.

The biggest questions for many are whether the BOJ is willing to increase the record scale of its asset purchases or to cut its negative interest rate further. By doing neither at recent meetings, even as some consumer prices were falling, Kuroda and his board have fueled speculation that the BOJ’s main policy tools are running up against their limits. Taking little or no action today risks reinforcing that view.  

A narrow majority of economists surveyed by Bloomberg expect the BOJ to announce expanded stimulus. Most of the rest forecast action in November, December or next year, while a few predict no additional easing at all. Any weakening of the BOJ’s commitment to push further with stimulus is likely to force the yen higher and weigh on stocks, while a boost from Kuroda may soften the currency and underpin Japanese shares.

 



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Email of the day on Japan's stimulus program

Hello I read your analysis about the Topix bank index, for the first time I don't really agree with you. The bank of Japan is doing something new and it could push the Topix banks index up. I cannot attach graphs here to this message, but if on Bloomberg you compare the Topix bank index (or any bank index) to the difference in 30 year and 10 year JGB yields the correlation in the last 2 years is almost perfect. I believe they intend targeting yields to keep the curve ripid to help the banks. The same thing will probably happen in the Eurozone as they soften some capital rules as well, so I think the bank indexes should be watched even if only on a relative basis (bank indexes should outperform general indexes like sp500 and DAX and the yield curve become more ripid in Eurozone Japan and US), sorry I can't attach my Bloomberg graph. I hope at the chart seminar in London you can let me understand why you do not consider correlations such as these. They are not long term correlations, but are valid in a zero bound environment.



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Banks Emerge as Winners From BOJ With Bonds, Yen Erasing Losses

This article by James Regan and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

The BOJ plans to maintain 10-year yields in the nation at around the current level of close to zero, it said Wednesday, giving it scope to keep loosening policy to revive growth and inflation, while limiting the negative impact on financial companies’ earnings. The BOJ faced a backlash after first deploying negative rates in January, with Governor Haruhiko Kuroda acknowledging it cut into the profits of lenders and insurers by driving long-term yields lower. Next, investors will be looking to the U.S. for any signals regarding the timing and pace of future Fed hikes, with all but four of 102 economists surveyed by Bloomberg predicting policy makers will hold off from raising interest rates.
     
“Central banks are acknowledging that excessively negative rates are damaging to bank profitability,” said Michael Hewson, a market analyst at CMC Markets in London. “There is a perception that maybe what the Bank of Japan is looking to do could be a template for the European Central Bank and potentially the Bank of England.”

Monetary authorities will continue to command attention on Thursday with speeches due from the new governor of the Reserve Bank of Australia as well as the heads of the European Central Bank and the Bank of England. In addition, central banks in countries including New Zealand, Norway and South Africa have policy decisions due that day.



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Bond Market's Big Illusion Revealed as U.S. Yields Turn Negative

This article from Bloomberg may be of interest to subscribers. Here is a section:

It’s been a “no-brainer since forever,” said Sekiai, a money manager at Tokyo-based DIAM Co., which oversees about $166 billion.

That truism is now a thing of the past. Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn’t happened since the financial crisis. It’s even worse for euro-based investors, who are locking in sub-zero returns on Treasuries for the first time in history.

That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. With everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years.

“People like a simple narrative,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Inc., which oversees $4.6 trillion. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”

 



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Amazon Takes on Alibaba With Japan Portal for Chinese Shoppers

This article by Grace Huang and Reed Stevenson for Bloomberg may be of interest to subscribers. Here is a section: 

“The opportunity is huge,” said Jasper Cheung, president of Amazon Japan. “We have already increased the selection that we can export by the millions over the last several weeks.”

Chinese shoppers are looking for authentic Made-in-Japan products, spooked by tainted baby milk and fake merchandise proffered on web stores in China. While that’s helping to drive an influx of shoppers to Japan -- 3.08 million Chinese tourists have visited the archipelago so far this year, up 41 percent -- it’s also boosting demand for Amazon.co.jp, Wandou and other web outlets featuring Japanese goods.

Rakuten Inc., the Japanese online store, also lets people shop for stuff from Japan in Chinese, as well as in Korean and English. Amazon’s Japan website has been available in English for years.

The new iteration of Amazon Japan’s shopping portal, in simplified Chinese, offers millions of products with more coming, the company said. Consumers in Asia’s biggest economy are demanding access to authentic brands and quality, from clothing and cosmetics to baby products and health goods. That’s why Costco Wholesale Corp. has a shop on Alibaba’s Tmall.com, while Macy’s Inc. and other U.S. retailers are tapping into China’s dominant online-payments system by accepting Alipay on their sites.

 



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Email of the day on the Dollar and Yen

I very much enjoyed last Friday's and yesterday's audio recordings. I think too that we are close to entering the final phase for this bull run notwithstanding a potential pull-back first. The expected further liquidity injections by the global central banks has intensified the hunt for yield. Emerging markets should do well as they offer both yield and the potential for large capital gains. Incidentally, if as David suggests, the $ index (developed markets) rises towards 100 again, will the EM currencies also weaken? Or as they have already fallen substantially in recent years, the dollar's rise against the developed market currencies will not impact EMs much? Your thoughts would be appreciated. I'm also interested in your views on $/Yen on a medium term basis.

 



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Japan Won't Intervene in FX Lightly, Finance Minister Aso Says

This article by Yoshiaki Nohara for Bloomberg may be of interest to subscribers. Here it is in full:

Finance Minister Taro Aso signaled that Japan’s government won’t intervene to stem the yen’s strength without due consideration, saying the markets have already somewhat taken into account the potential impact of a vote in favor of Brexit.

“Speaking of FX intervention, we won’t do it lightly,” Aso said at a press conference in Tokyo on Tuesday. “The G-7 and G-20 have agreed that abrupt moves are not desirable and we aim for stability. We will take action in line with that agreement.”

Aso’s comments came as the yen has surged more than 5 percent versus the dollar in June as global markets await the outcome of Britain’s June 23 referendum on European Union membership. The vote and its effect on the global economy has boosted the yen’s demand as a safe-haven currency.

The finance minister said the market has already taken into account Brexit to some degree, limiting upward pressure on the yen. Aso last week voiced strong concern about one-sided, abrupt and speculative moves in the foreign exchange market. The yen traded at 104.03 per dollar as of 12:49 p.m. in Tokyo.  

 



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Yen Surges to Strongest Since August 2014 as BOJ Holds Fire

This article by Anooja Debnath and Kevin Buckland for Bloomberg may be of interest to subscribers. Here is a section: 

“100 is a serious risk that’s growing by the day,” said Cliff Tan, the East Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ in Hong Kong. “Both domestic and foreign investors are giving up on the idea the government can do much to revive Japan.”

The yen’s jump comes after about a quarter of analysts surveyed by Bloomberg had predicted additional BOJ stimulus today. More than half forecast action at the July meeting.

“Further easing is still on the cards,” said Kohei Iwahara, director of economic research at Natixis in Tokyo. “The yen is already stronger than most companies feel comfortable with, and a dovish Fed could strengthen the yen further.”

Projections released by the Federal Open Market Committee Wednesday showed the number of officials who see just one rate increase in 2016 rose to six from one in the previous forecasting round in March. The U.K.’s June 23 referendum was also “one of the uncertainties that we discussed and that factored into” the decision, Fed Chair Janet Yellen said.

 



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Banks Bear Brunt of U.S. Stock Reversal in Tumble Few Saw Coming

This article by Oliver Renick and Anna-Louise Jackson for Bloomberg may be of interest to subscribers. Here is a section: 

Expectations for higher rates this summer tumbled after the jobs report. Based on Fed funds futures, traders are now pricing in a 31 percent chance of a Fed boost by July, down from 55 percent earlier, while odds for a June hike have fallen to 4 percent from 20 percent.

The selloff was deepest among banks and insurers, with all but 15 of 92 members in the S&P 500 Financials Index retreating. Goldman Sachs Group Inc. and JPMorgan Chase & Co. fell at least 2.1 percent, while brokerages E*Trade Financial Corp. and Charles Schwab Corp. sank more than 5 percent.



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Negative Interest Rates: A Tax in Sheep's Clothing

Thanks to a subscriber for this article by Christopher J. Weller for the Federal Reserve Bank of St. Louis. Here is a section: 

But a negative interest rate is just a tax on the banks’ reserves. The tax has to be borne by someone:

The banks can choose not to pass it on and just have lower after-tax profits. This will depress the share price of banks and weaken their balance sheets by having lower equity values.

The banks can pass the tax onto depositors by paying a lower interest rate on deposits or charging them fees for holding the deposits. In either case, depositors have less income to spend on goods and services.

The bank can pass the tax onto borrowers by charging them a higher interest rate on a loan or higher fees for processing the loan. In either case, it is more costly to finance purchases of goods and services by borrowing.

None of this sounds very “stimulative” for consumer spending. But then, no tax ever is.
Negative Interest Rates in Other Countries

What has happened so far in countries that have tried negative interest rates? The figures below provide answers. As seen in the first chart, bank stock prices have definitely taken a hit. After initially continuing their downward trends, interest rates on mortgages have now risen in Germany and Switzerland (the second chart). Banks have been very reluctant to charge negative deposit rates for fear of a backlash from customers (the third chart).

At the end of the day, negative interest rates are taxes in sheep’s clothing. Few economists would ever claim that raising taxes on households will stimulate spending. So why would they think negative interest rates will?

 



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