Monthly Archives: February 2013

Aso: Yen Has Weakened More Than Intended

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Now they give the nod to their life insurance companies and pension funds to back off?

Aso: Yen Has Weakened More Than Intended

Feb 8 (Reuters) — Japanese Finance Minister Taro Aso said on Friday that the yen has weakened more than intended during its recent decline to around 90 per dollar from around 78 yen a few months ago.

The dollar fell about 1 percent versus the yen shortly after Aso comments, as traders pared bets on further declines in the Japanese currency.

Since November, the yen has fallen around 16 percent versus the dollar in anticipation that new Prime Minister Shinzo Abe will push his agenda of aggressive monetary policy easing to weaken the currency.

The finance minister’s comments indicate some surprise within the government at how quickly those expectations among traders translated into declines in the yen.

“It seems that the government’s policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78,” Aso told lawmakers in the lower house budget committee.

Recently, Aso has reacted strongly to criticism from German and other European officials that Japan is intentionally trying to weaken its currency with monetary easing, so his comments on Friday could cause some confusion about Japan’s currency policy.

The dollar fell 1.3 percent on the day to 92.29 yen. The dollar hit an almost 3-year high of 94.075 yen earlier in the week on expectations the Bank of Japan will pursue aggressive monetary easing to shore up the economy.

Abe, while campaigning for an election last year, repeatedly said his economic policy had three arrows: monetary policy easing, fiscal spending and structural reforms to increase competitiveness.

Abe, since taking office in December, has put the central bank under relentless pressure to do more to lift the economy and made it clear he wants someone in the job who will be bolder than the outgoing BOJ chief in loosening monetary policy.

Current BOJ Governor Masaaki Shirakawa will leave his post on March 19.

Last month,the BOJ signed a joint statement with the government adopting a new 2 percent inflation target as a sign of its commitment to fighting deflation. It also announced a shift to “open-ended” asset buying.

Officials from the Group of 20 economic powers say that although top economic policymakers are likely to discuss how Japan’s new monetary stance is weakening the yen when they meet next month, they will stop short of calling it a competitive devaluation.

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Fiscal Devaluation in Europe

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It’s a policy designed to drive exports.
A form of protectionism.
It reduces consumption of imports to the extent domestic prices are helped by lower labor costs where domestic goods a compete directly with imports, which is probably limited.

And of course without further support of fx intervention (dollar and yen buying etc.) it makes the currency go up to the point where the effects are offset/no gains in employment, etc.

And if one nation does it the currency move hurts the others who don’t so it opens up a race to the bottom.

Recap:
It hurts low income consumers
It helps corporate profits
It supports the currency
And so those are the people that support it.
:(

Am I missing something?

Harvards Gopinath Helps France Beat Euro Straitjacket

By Rina Chandran

Feb 6 (Bloomberg) — When French President Francois Hollandeunveiled a plan in November for a business tax credit and higher sales taxes as a way to revive the economy, he was implementing an idea championed by economist Gita Gopinath.

Gopinath, 41, a professor at Harvard University in Cambridge, Massachusetts, has pushed for tax intervention as a way forward for euro-area countries that cannot devalue their exchange rates. Fiscal devaluation is helping France turn the corner during a period of extreme budget constraints, former Airbus SAS chief Louis Gallois said in a business- competitiveness report Hollande commissioned.

She advocated fiscal devaluation for Europes currency union in a 2011 paper she co-authored with her colleague Emmanuel Farhi and former student Oleg Itskhoki, an assistant professor at Princeton in New Jersey.

Despite discussions in policy circles, there is little formal analysis of the equivalence between fiscal devaluations and exchange-rate devaluations, they wrote. This paper is intended to bridge this gap.

The paper examines a remarkably simple alternative that doesnt require countries to abandon the euro and devalue their currencies, Gopinath said. By increasing value-added taxes while cutting payroll taxes, a government can create very similar effects on gross domestic product, consumption, employment and inflation.

The higher VAT raises the price of imported goods as foreign companies pay the levy. The lower payroll tax helps offset the extra sales tax for domestic companies, reducing the need for them to raise prices. Since exports are VAT exempt, the payroll-cost saving allows producers to sell goods cheaper overseas, simulating the effect of a weaker currency, according to the paper.

The policy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue, Gopinath said.

Hollande is seeking to revive Frances competitive edge by offering companies a 20 billion-euro ($27 billion) tax cut on some salaries as he attempts to turn around an economy that has barely grown in more than a year. He also will lift the two highest value-added tax rates. The plan was inspired partly by Gopinaths paper, said Harvard professorPhilippe Aghion, an informal campaign adviser to Hollande, who was elected president in May.

Aghion, who co-wrote a column in Le Monde newspaper last October advocating Gopinaths theory, said Gallois proposed to Hollande that its the right strategy for France. Gallois is slated to become a member of the board at automaker PSA Peugeot Citroen this year.

We contributed to the adoption of the policy by Hollande, and Gallois called to thank me, Aghion said in a telephone interview. There is wider interest in the policy. Italy, Spain, Greece — they should all be interested. Its an idea that would work.

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the macro cons

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Skipping the pros and focusing on the cons regarding the economy:

1. 0 rates (including QE) continue to be a highly deflationary bias that require deficits to be that much higher.

2. The FICA hike’s a serious setback that reduces growth from 3 or 4% to 1.5 or 2.5% or less.

3. Corporate cash building, foreign dollar accumulation, pension fund rebuilding, etc. are demand leakages

4. Past expansions were fueled by things we won’t do again- sub prime fraud, tech/y2k bubble, S&L expansion leg, emerging market fx debt fueled bubble, etc.- and that Japan has been careful to avoid.

5. Global austerity, where, in general, everyone of consequence thinks the problem is deficits are too large when in fact they are far too small for current credit conditions.

The January ‘bounce back’ from avoiding the cliff, debt ceiling delay, ideologues angry at the election results, etc. and the head fakes from the accelerated dividends and bonuses in Dec, seasonal issues with claims, the strong euro, some relatively modest China strength, and a few other things, is all fading fast.

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Japan Pension Funds Bonds Too Many If Abe Succeeds, Mitani

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For all practical purposes this is about and part of ‘official policy’ to weaken the yen if they do it.

That is, it’s not a reaction to govt policy, it is govt policy.

Japan Pension Funds Bonds Too Many on Abe Plan, Mitani Says

By Anna Kitanaka, Toshiro Hasegawa & Yumi Ikeda

Feb 4 (Bloomberg) — Japans public pension fund, the worlds biggest manager of retirement savings, is considering the first change to its asset balance as a new governments policies could erode the value of $747 billion in local bonds.

Managers of the Government Pension Investment Fund, which oversees about 108 trillion yen ($1.16 trillion) in assets, will begin talks in April about reducing its 67 percent target allocation to domestic bonds, President Takahiro Mitani said in a Feb. 1 interview in Tokyo. The fund may increase holdings in emerging market stocks and start buying alternative assets.

The GPIF, created in 2006, didnt alter the structure of its holdings during the worst global financial crisis in 80 years or in response to the 2011 earthquake and nuclear disaster. Prime Minister Shinzo Abe and the Bank of Japan (8301) have pledged to restore economic growth and spur inflation, which will mean higher interest rates, Mitani said.

If we think about the future and if interest rates go up, then 67 percent in bonds does look harsh, said Mitani, who was appointed in 2010 after serving as an executive director at the Bank of Japan. We will review this soon. We will begin discussions for this in April-to-May. Any changes to our portfolio could begin at the end of the next fiscal year.

GPIF, one of the biggest buyers of Japanese government bonds, held 69.3 trillion yen, or 64 percent of total assets, in domestic debt at the end of September, according to its latest quarterly financial statement. That compares with 12 trillion yen, or 11 percent, in Japanese stocks; 9.6 trillion yen, or 9 percent, in foreign bonds; and 12.6 trillion yen, or 12 percent, in overseas stocks.

Relative Yield

The fund, which took over management of government employee retirement savings when it was set up, returned to profit in the three months ended Dec. 31 from a 1.4 percent loss in the first six months of the fiscal year, Mitani said. He declined to be more specific. It needs to raise about 6.4 trillion yen this fiscal year through March 31 to meet payments.

The yield on Japans 10-year government bond climbed 3.5 basis points to 0.8 percent as of 4:35 p.m. in Tokyo today. By comparison, the projected dividend yield for the Topix Index (TPX), the countrys broadest measure of equity performance, is 2.05 percent. The Topix added 1.4 percent today.

Japans bonds handed investors a 1.8 percent return in 2012, according to a Bank of America Merrill Lynch Index, compared with the 18 percent surge in the Topix.

Even as shares jumped amid optimism surrounding Abes stimulus plans, benchmark Japanese government bond yields have remained below their five-year average yield of 1.18 percent. Benchmark 10-year yields are the lowest in the world after Switzerland and are less than half the level in the U.S.

Rates Outlook

JGBs were how we made money over the past 10 years, Mitani said. The BOJ said that they are increasing buying bonds, but theyre also putting power into lowering interest rates. If the economy gets better, then long-term interest rates like a 10-year yield at less than 1 percent are unlikely.

The five-year JGB rate touched a record low 0.14 percent last month amid speculation the Bank of Japan will expand bond purchases as part of the monetary easing advocated by Abe.

The comments by Mitani show the pension manager needs to consider higher-risk, higher-yield assets to help fund retirements of the worlds oldest population. About 26 percent of the nation is older than 65, according to data compiled by Bloomberg.

Under Mitanis leadership, the GPIF began buying emerging- market assets in September 2011 and started purchasing shares in countries included in the MSCI Emerging Market Index (MXEF) last year. Mitani said in July 2012 that the fund was selling JGBs to pay for peoples entitlements and might consider alternative investments as it seeks better returns.

100 Years

We havent changed the core portfolio for a long time so it was thought that its about time to review this, Mitani said. The portfolio was based on a prerequisite of things such as long-term interest rates at 3 percent on average for the next 100 years. Whether this is good will be a possible point of discussion.

Holdings have been broadly unchanged since inception, when the fund was formulated with an outlook for consumer prices to rise 1 percent annually. Instead, the nations headline CPI has fallen an average 0.1 percent each month since the start of 2006, according to data compiled by Bloomberg.

The Bank of Japan last month doubled its inflation target to 2 percent, a level last seen in 1997, when a sales tax was increased, with no sustained price gains of that magnitude in two decades. Falling prices reduce incentives to borrow and invest in new business projects, erode tax receipts and increase the attractiveness of saving in cash rather than spending or putting money into stocks or bonds.

Topix Surge

GPIF is the biggest pension fund in the world by assets, followed by Norways government pension fund, according to the Towers Watson Global 300 survey in August.

Japans Topix Index surged 30 percent from Nov. 14, when elections were announced, through Feb. 1 on optimism the Liberal Democratic Party will lead the economy out of recession and end deflation. The yen weakened almost 14 percent against the dollar in that time, and touched its lowest level since May 2010 last week.

Even after 12 straight weekly advances, the longest streak in 40 years, the Topix is still 67 percent below its December 1989 record high.

Relative Value

The measure trades for 1.1 times the value of net assets. That compares with 2.3 times for the S&P 500, 1.6 times for the Hang Seng Index and 1.9 times for the MSCI World Index. A reading above one means investors are paying more for a company than the value of its net assets.

The yen dropped 11 percent last year versus the dollar, the most since 2005. A weaker yen increases the value of exports and typically raises import costs, boosting consumer prices.

Japanese stocks do not look expensive, Mitani said. Were still in the middle of a rising stocks, weakening yen trend. It will continue for a while.

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