This is my overall view of the economy.

The US was on the move by Q4 last year. A housing and cars (and student loans) driven expansion was happening, with slowing transfer payments and rising tax revenues bringing the deficit down as the automatic stabilizers were doing their countercyclical thing that would eventually reverse the growth. But that could take years. Look at it this way. Someone making 50,000 per year borrowed 150,000 to buy a house. The loan created the deposit that paid for the house. The seller of the house got that much new income, with a bit going to pay taxes and the rest there to be spent. Maybe a bit of furniture etc. was bought on credit as well, again adding income and (gross) financial assets to the recipients of the borrowers spending. And increasing sales added employment as well as output, albeit not enough to keep up with population growth etc.

I was very hopeful. Back in November, after the ‘Obama is a socialist’ sell off, I wrote that it was time to buy stocks and go play golf for three years, as, left alone, the credit accelerator in progress could go on for a long time.

But it wasn’t left along. Only a few weeks later the cliff drama began to intensify, with lots of fear of going over the ‘full cliff’. While that didn’t happen, we did go over about 1/3 cliff when both sides let the FICA reduction expire, thus removing some $170 billion from 2013, along with strong prospects of an $85 billion (annualized) sequester at quarter end. This moved me ‘to the sidelines’. Seemed to me taking that many dollars out of the economy was a serious enough negative for me to get out of the way.

But the Jan and then Feb numbers showed I was wrong, and that the consumer had continued to grow his spending as before via housing and cars, etc. Even the cliff constrained -.1 GDP of Q4 was soon revised up to .4. Stocks kept moving up and bonds moved higher in yield, even as the sequester kicked in, with the market view being the FICA hike fears were bogus and same for the sequester fears. Balancing the budget and getting the govt out of the way does indeed work to support the private sector. The UK, Eurozone, and Japan were exceptions. Austerity inherently does work. And markets were discounting all that, as it’s what market participants believed and the data supported.

Then, it all changed. April releases of March numbers showed not only suddenly weak March numbers, but Jan and Feb numbers revised lower as well. The slope of things post FICA hike went from positive to negative all at once. The FICA hike did seem to have an effect after all. And with the sequesters kicking in April 1, the prospects for Q2 were/are looking worse by the day.

My fear is that the FICA hikes and sequesters didn’t just take 1.5% of GDP ‘off the top’ as forecasters suggest, leaving future gains from the domestic credit expansion there to add to GDP as they had been. That is, the mainstream forecasts are saying when someone’s paycheck goes down by $100 per month from the FICA hike, or loses his job from the sequester, he slows his spending, but he still borrows to buy a car and/or a house as if nothing bad had happened, and so GDP is reduced by approximately the amount of the tax hikes and spending cuts, with a bit of adjustment for the ‘savings multipliers’. I say he may not borrow to buy the house or the car. Which both removes general spending and also slows the credit accelerator, shifting the always pro cyclical private sector from forward to reverse. And the ‘new’ negative data slopes have me concerned it’s already happening. Before the sequesters kicked in.

Looking at Japan, theory and evidence tells me the lesson is that lower interest rates require higher govt deficits for the same level of output and employment. More specifically, it looks to me like 0 rates may require 7-8% or even higher deficits for desired levels of output and employment vs maybe 3-4% deficits when the central bank sets rates at maybe 5% or so, etc. And US history could now be telling much the same.

And another lesson from Japan we should have learned long ago is that QE is a tax that does nothing good for output or employment and is, if anything, ‘deflationary’ via the same interest income channels we have here. Note that the $90 billion of profits the Fed turned over to the tsy would have been earned in the economy if the Fed hadn’t purchased any securities. So, as always in the past, watch for Japan’s QE to again ‘fail’ to add to output, employment, or inflation. However, their increased deficit spending, if and when it materialize, will support output, employment, and prices as it’s done in the past.

Oil and gasoline prices are down some, which is dollar friendly and consumer friendly, but only back to sort of ‘neutral’ levels from elevated ‘problematic’ levels And there is risk that the Saudis decide to cut price for long enough to put the kibosh on the likes of North Dakota’s and other higher priced crude, wiping out the value of that investment and ending the output and employment and currency support from those sources. No way to tell what they may be up to.

So my overall view is negative, with serious deflationary risks looming.

And the solution is still fiscal- a tax cut and/or spending increase.
However, that seems further away then ever, as the President is now moving towards an additional 1.8 trillion of deficit reduction.

:(

Bad for US banks if they are coming to compete in the US market again.
This will cut into net interest margins.

BOJ Shockwave Leveling Rates Sends Banks to Dollar: Japan Credit

By Monami Yui & Emi Urabe

April 16 (Bloomberg) — Shizuoka Bank Ltd. (8355) joined Japanese national lenders in expanding U.S. dollar finance activity, anticipating monetary easing will crush margins on yen loans.

The nations second-biggest regional bank by market value raised $500 million in zero-coupon notes due 2018, the first public sale of dollar-denominated convertible bonds by a Japanese company since 2002. The average interest rate on long- term yen loans from the countrys lenders fell to 0.942 percent in February, compared with 3.348 percent companies worldwide pay on dollar facilities, according to data compiled by Bloomberg.

Mitsubishi UFJ Financial Group Inc. plans to increase energy and utility financing in the U.S., as the Bank of Japan (8301)s focus on cutting long-term borrowing costs undercuts earnings from yen loans, President Nobuyuki Hirano said. Sumitomo Mitsui (8316) Financial Group Inc. aims to sell a record amount of dollar bonds this year for overseas business, even as the BOJ policy seeks to spur domestic lending to revive the economy.

You know its a big deal when a conservative lender like Shizuoka Bank does this, a sure sign that yen debt is just not cutting it anymore, said Nozomi Kokubun, a Tokyo-based analyst at SMBC Nikko Securities Inc. Dollar-denominated loans are attractive for banks because they offer a spread you simply wont find in Japan.

Excess Cash

Prime Minister Shinzo Abes call to boost fiscal and monetary stimulus hasnt been enough to spark corporate demand for loans, leaving Japans banks with a record amount of excess cash. Customer deposits held by Japanese lenders exceeded loans by 176.3 trillion yen ($1.8 trillion) in March, central bank data show.

The BOJ decided on April 4 to double monthly bond buying to 7.5 trillion yen and lengthened the average maturity of the purchases by twofold to about seven years. The central banks previous program under Governor Masaaki Shirakawa focused on notes maturing in one to three years.

The announcement sent Japans benchmark 10-year bond yield to a record low of 0.315 percent the following day. The rate surged to almost double that level in the same session and traded 6 1/2 basis points lower at 0.575 percent as of 2:20 p.m. in Tokyo today.

Without Precedent

This round of monetary easing is without precedent and we must prepare for the interest rates to fall even further, Mitsubishi UFJs Hirano said in an interview on April 8. The decline in yen-denominated interest rates is weighing heavily on earnings from capital.

The average interest rate on long-term loans from Japans six so-called city banks, which include Mitsubishi UFJ, Sumitomo Mitsui and Mizuho Financial Group Inc., dropped below 1 percent for the first time in January and was 1.01 percent in February, according to data compiled by Bloomberg. The rate for regional banks was 1.097 percent, after matching a record low of 1.075 percent in December, the data show.

Elsewhere in Japans credit markets, Nissan Motor Co. plans to price about 60 billion yen of five- and seven-year bonds later this week, according to a person familiar with the matter. The automaker is marketing 50 billion yen of the shorter-term notes at 16 to 21 basis points more than government debt and the remainder at an 18 to 24 basis point spread, the person said, asking not to be name because the terms arent set. A basis point is 0.01 percentage point.

7-Eleven Bonds

Seven & I Holdings Co. plans to raise 60 billion yen split between three-, six- and 10-year bonds, marketing all tranches at a yield spread of 10 to 14 basis points, a separate person familiar with the matter said yesterday. The operator of 7- Eleven convenience stores last sold debt in June 2010, offering 80 billion yen of seven- and 10-year debt, according to data compiled by Bloomberg.

A Ministry of Finance sale of about 2.5 trillion yen of five-year notes today attracted bids valued at 3.09 times the amount available, showing the weakest demand since December 2011, according to ministry data. The gap between the average and low prices at the auction was 0.05, the widest since June 2008, another sign of low demand.

Shizuoka Banks offering is the first sale of convertible notes by a Japanese company in the U.S. currency since Orix Corp.s May 2002 offering, according to Hiromitsu Umehara, a Tokyo-based general manager in its banking department. The lender, headquartered in Shizuoka Prefecture west of Tokyo, home to Suzuki Motor Corp. and Yamaha Corp., will use the proceeds to fund dollar offerings to its mostly Japanese clients seeking to expand overseas, Umehara said.

Loan Demand

Domestic loan demand should gradually improve, but at this moment company spending remains at a low level, said Shigeki Makita, deputy general manager at Shizuoka Banks corporate planning department. Higher interest rates on dollar loans make overseas facilities more profitable than domestic lending, he said.

Japans corporate bonds have handed investors a 0.56 percent return this year, compared with a 1.43 percent gain for the nations sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has climbed 1.54 percent.

The yen traded at 97.41 per dollar at 2:30 p.m. in Tokyo today, after falling to a four-year low of 99.95 last week. The currency has plunged 10 percent this year, the worst performance among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

Sovereign Risk

The cost to insure Japans sovereign notes for five years against nonpayment was at 71 basis points yesterday, after reaching 78 earlier this month, the highest since Jan. 23, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the credit-default swaps signals improving perceptions of creditworthiness.

Japanese regional lenders and megabanks alike are very keen on opportunities for dollar financing, SMBC Nikkos Kokubun said. They dont even have to use the proceeds for lending and may just accumulate overseas securities.

Sumitomo Mitsuis lending unit targets two issuances that could total as much as $4.5 billion, matching last years amount as the most in the companys 11-year history, President Koichi Miyata said in a Dec. 19 interview. The two sales would range from $1 billion to $3 billion each, he said.

Sale Ranking

The bank raised 2.15 trillion yen from dollar bond sales this year, making it the third-largest Japanese borrower in the currency after Mitsubishi UFJ with 2.25 trillion yen, according to data compiled by Bloomberg. Toyota Motor Corp. led the rankings with 3.193 trillion yen, the data show.

Mitsubishi UFJ is looking to buy a regional bank on the west coast of the U.S., President Hirano said. The Tokyo-based lender acquired San Francisco-based UnionBanCal Corp. in 2008 and Santa Barbara, California-based Pacific Capital Bancorp last year as persistent deflation inhibits loan demand at home.

The balance of outstanding loans at Japanese banks rose 0.6 percent to 404.8 trillion yen in March, the highest level since April 2009, according to data compiled by Bloomberg. Lending by city banks climbed to 199.1 trillion yen in the period, 3.7 percent short of the level three years ago, the data show.

Theres been great demand for dollar funding among Japanese banks as they increase lending overseas, said Chikako Horiuchi, a Hong Kong-based analyst at Fitch Ratings Ltd. The trend is likely to continue.

Not that the presumptions will turn out to be right, but just based on the presumptions:

The presumption is that the BOJ’s action will weaken the currency, stocks are up due to the weaker yen, which is presumed to support exports and restrain imports, and help with earnings translations

So the presumed increase in exports/higher stocks is not about total global sales/profits increasing. The presumed increase in exports is just about Japan gaining market share.

Which means the same presumptions lead to the further presumption that the equity gains in Japan from increased exports are at the expense of the ‘rest of world’s’ sales/profits/equity valuations/etc.

In other words, the equity rally in Japan is not based on the presumption that Japan will be an ‘engine of growth’ for the rest of world. Quite the opposite, in fact.

After two decades of this, how can anyone believe it makes any difference???

Bank of Japan Unveils Aggressive Monetary Policy

By Dhara Ranasinghe

April 4 (CNBC) — The Bank of Japan (BOJ) on Thursday embarked on an aggressive monetary policy to end years of deflation in the world’s third largest economy, moving its target when setting policy to base money from the current overnight call rate.

The central bank concluded a two-day policy meeting, the first under new Governor Haruhiko Kuroda, with a statement that it would pursue quantitative easing as long as it needed to achieve its 2 percent inflation target.

The BOJ said it would double its holdings of long-term government bonds and exchange-traded funds and purchase Japanese government bonds (JGBs) off all maturities.

It also plans to bring forward the timing of open-ended asset purchases and said it was likely to buy 7 trillion yen in long-term JGBs a month.

Markets welcomed the BOJ’s moves, with the benchmark Nikkei stock index reversing its losses to nudge into positive territory. The yen weakened to about 94.22 per dollar, having traded around 93.50 just before the decision.

Japanese shares have surged since mid-November and the Nikkei on Wednesday enjoyed its biggest one-day rise in two months on expectations for aggressive monetary easing.

Those expectations have also knocked the yen down about 16 percent against the dollar since mid-November, although the currency had risen in recent days on some caution as to whether Kuroda would be able to build a consensus among the nine members of the BOJ policy board for an unorthodox monetary policy.

Significantly then, the BOJ said its decisions were made unanimously.

Tough Task

Japan has suffered from persistent deflation and has slipped in and out of recession in recent years.

Prime Minister Shinzo Abe, whose ruling Liberal Democratic Party returned to power following elections in December, has pledged to revive the Japanese economy and pushing for a much bolder monetary policy than the BOJ has pursued in the past is part of his plan.

Kuroda has pledged to do whatever it takes to achieve the 2 percent inflation target, adopted by the central bank in January, within two years.

There is some skepticism among economists as to whether the target can be achieved. Jesper Koll, head of Japanese equity research at JPMorgan Securities, believes it can be.

“You’ve got credit growth, you’ve got demand for credit and you will find that within 15 to 18 months, consumer price inflation in Japan will be well in excess of 1 percent,” he said.

Latest data shows that Japan’s core consumer prices fell 0.3 percent in February from a year earlier.

Kuroda will hold a news conference later in the day. The BOJ meets again on April 26.

Debt to GDP over 200%
0 rates for decades
Strong currency
Alarmingly low term structure of rates

Recent yen weakness looking ‘fundamental’ as trade goes negative maybe until nukes are restarted and ‘replacement’ gas and oil imports go back to where they were.

Trade going negative after initial yen weakening due to ‘j curve’ effect where initially actual quantities of imports stay pretty much the same but prices are higher. Only some time later do quantities respond to the higher price.

Cooler Heads: The Rebuttal to Kyle Bass’s Japan Market Meltdown Scenario from JPMorgan’s Jesper Koll and Masaaki Kanno

By Stephen Harner

Bass comments:

At 24 times central government tax revenues, cumulative Japanese government debt has reached a level which ensures financial collapse.

Not, just a reserve drain.

With the Abe/Aso government setting a 2% inflation target, the collapse will occur sooner—probably within the next 18 to 24 months.

Not, inflation targets are meaningless. Inflation expectations theory is a myth.

The revelation will be that interest on the debt—currently 25% of national tax revenue—will double under higher interest rates.

Could be. But deficits generally come down as well during an expansion, of course posing a risk to that expansion, etc.

The result will be massive JGB selling, a collapsing yen, and systematic financial crisis resulting from a collapse in yen asset prices.

Yes, when rates go up bond prices go down. There are both winners and losers when/if prices change.

Koll suggests:

Rising interest rates would of course raise debt service costs for all borrowers, and especially the hugely indebted government. But they would enable lenders–including household depositors–to charge higher rates on new debt and raise returns on non-fixed rate debt. Since net stock of private savings is larger than the net stock of public sector liabilities, Koll reckons that the overall effect on the economy would be positive.

Agreed! Rate hikes are expansionary, cuts contractionary due to interest income channels.

Rising interest rates would not spell large losses for Japanese financial institutions because these institutions’ bond–and especially JGB–portfolios are largely held to maturity, avoiding the requirement to be marked to market. The institutions would have no incentive to sell, and ample incentive to hold the JGBs [the weighted average duration of which they have in any event been shortening to well under five years--Harner].

They represent at least lost income, and if implied costs of funds rise implied losses. Etc. Again, winners and losers with change.

As to who is or would buy JGBs, the answer for the present and foreseeable near term future is: the Bank of Japan. BOJ is already committed to buying the entire debt out to a maturity of three years and a new governing board to be installed in April may extend the range to three to five years. Interest rates will rise only as much as BOJ will allow. This is why foreigners and domestic institutions are still buying the bonds.

Note that functionally the BOJ buying is the same as the MOF not issuing.

Whether or not significant inflation develops in Japan depends on productivity. Significant increases in productivity could fully mitigate inflationary pressures.

I’d guess most ‘inflation’ comes through the ‘cost channels’ as low aggregate demand tends to keep ‘monetary inflation’ in check.

There is plenty of room in Japan’s economy for raising productivity. Agriculture, in particular, has abysmal productivity that could easily be raised through deregulation. Land policy that affects housing is another. Health care is another. Indeed, deregulation is needed throughout the economy. “The Abe administration must implement real deregulation, so that private investors put their savings and capital to work, by building new factories, new hospitals, and so forth.” [This is a point I emphasized in my post a week ago on Abe’s “Three Arrows” program.--Harner]

Deregulation could be deflationary as suggested.

The proposed BOJ policies won’t do anything, the fiscal could move the needle some. And relighting the nukes will firm the yen.

The only measures that would work have been left out:

> MORE: Kuroda Says BOJ Easing Isn’t Aimed at Weakening the Yen
> *KURODA: DIFFICULT FOR BOJ TO BUY FOREIGN BONDS
> *KURODA: LAW STATES CURRENCY INTERVENTION NOT BOJ’S JOB
> *KURODA: FOREX INTERVENTION IS FINANCE MINISTRY’S RESPONSIBILITY
> *KURODA: CURRENCY RATE SHOULD BE DETERMINED BY MARKET
> *KURODA SAYS BOJ EASING ISN’T AIMED AT WEAKENING THE YEN

Full comments:

>*MORE: Kuroda to Consider Every Possible Measure to End Deflation
>*MORE: Kuroda Says More Easing Needed in Both Quality, Quantity
>*MORE: Kuroda Says Need to Consider Effects of Buying Risk Assets
>*MORE: Kuroda Says Up to Govt Whether BOJ Law Needs to Change
>*MORE: Kuroda Says BOJ Easing Isn’t Aimed at Weakening the Yen
>*MORE: Kuroda Vows ‘Even Bolder’ Steps to Approach 2% Target
>*KURODA: DIFFICULT FOR BOJ TO BUY FOREIGN BONDS
>*KURODA WILL TAKE EVERY POSSIBLE MEASURE UNTIL 2% TARGET IS MET
>*KURODA: BOJ’S JOB IS TO KEEP FINANCIAL SYSTEM, PRICES STABLE
>*KURODA WILL CONSIDER EVERY POSSIBLE MEASURE TO END DEFLATION
>*KURODA NOT CONSIDERING WHAT HE’D DO IF BOJ FAILS TO MEET TARGET
>*KURODA: STABLE CURRENCY IS GOVT’S RESPONSIBILITY
>*KURODA: LAW STATES CURRENCY INTERVENTION NOT BOJ’S JOB
>*KURODA: FOREX INTERVENTION IS FINANCE MINISTRY’S RESPONSIBILITY
>*KURODA SAYS INFLATION EXPECTATIONS CAN BOOST IMPACT OF EASING
>*KURODA SAYS MONETARY EASING TENDS TO WEAKEN OWN CURRENCY
>*KURODA SAYS MORE EASING NEEDED IN BOTH QUALITY AND QUANTITY
>*KURODA SAYS MID-TERM ECONOMIC GROWTH STRATEGY NEEDED
>*KURODA SAYS 2% TARGET IS WAY TO LIMIT INFLATION, BEAT DEFLATION
>*KURODA: NO PLAN TO FINANCE GOVERNMENT IF BECOME BOJ GOVERNOR
>*KURODA SAYS JUST EXPANDING MONETARY BASE WON’T BE EFFECTIVE
>*KURODA: BOLDER EASING COULD HAVE AVOIDED YEARS OF DEFLATION
>*KURODA WILL CONSIDER STARTING OPEN-ENDED ASSET BUYS EARLIER
>*KURODA: CURRENCY RATE SHOULD BE DETERMINED BY MARKET
>*KURODA: BOJ SHOULD BUY LONGER-TERM BONDS
>*KURODA: NO NEED TO LIMIT BOJ BOND BUYS TO 3 YEAR MATURITIES
>*KURODA: NEED BALANCED GROWTH FOR SUSTAINABLE ECONOMY
>*KURODA: SPECIFIC POLICIES TO BE DECIDED AT BOJ MEETINGS
>*KURODA: WIDE VARIETY OF ASSET PURCHASES SHOULD BE CONSIDERED
>*KURODA: MORE PURCHASES OF ASSETS NEEDED
>*KURODA: MORE EASING NEEDED TO BEAT DEFLATION
>*KURODA: EXISTING POLICIES NOT ENOUGH TO BEAT DEFLATION
>*KURODA: HAD DOUBTS OVER BOJ’S EXIT FROM EASING IN 2006
>*KURODA: END OF ZERO INTEREST RATE POLICY IN 2000 WAS A MISTAKE
>*KURODA SAYS BOJ SHOULD REGRET LACK OF COMMUNICATION WITH GOVT
>*KURODA: BOJ SHOULD NOT MONETIZE GOVT DEBT OR BUY BONDS DIRECTLY
>*KURODA SAYS HE KNOWS BERNANKE, DRAGHI AND BOE’S KING WELL
>*KURODA: WILL DO UTMOST VS DEFLATION EVEN IF BOJ LAW IS CHANGED
>*KURODA: MUST CONSIDER EASING EXIT, BUT DEFLATION IS MAIN ISSUE
>*KURODA SAYS MONETARY POLICY NOT DECIDED BY BOJ GOVERNOR ALONE
>*KURODA VOWS EVEN BOLDER MONETARY STEPS TO APPROACH 2% TARGET
>*KURODA SAYS ENDING 15 YEARS OF DEFLATION WON’T BE EASY
>*KURODA: MEETING INFLATION TARGET IN 2 YEARS IS GLOBAL STANDARD
>*KURODA: WOULD BE GOOD TO ACHIEVE 2% TARGET WITHIN TWO YEARS
>*KURODA WILL DECIDE POLICIES IN LINE WITH ECONOMIC DEVELOPMENTS
>*KURODA: NATURAL TO BUY LONGER TERM BONDS
>*KURODA: NEED TO CONSIDER EFFECTS OF BUYING RISK ASSETS
>*KURODA: VARIOUS WAYS TO ACHIEVE 2 PERCENT INFLATION
>*KURODA AIMS TO ACHIEVE 2 PERCENT INFLATION AS SOON AS POSSIBLE
>*KURODA SAYS NO COUNTRY AIMS TO ACHIEVE 2% INFLATION EVERY MONTH
>*KURODA SAYS BOJ IS RESPONSIBLE FOR STABLE PRICES
>*KURODA SAYS BOJ SHOULD NOT STEP INTO MONETIZATION
>*KURODA: UP TO GOVT WHETHER BOJ LAW NEEDS TO CHANGE
>*KURODA: UP TO GOVT WHETHER BOJ LAW NEEDS TO CHANGE
>*KURODA SAYS WAGE GROWTH NEEDED TO END DEFLATION
>*KURODA SAYS WAGE GROWTH NEEDED TO END DEFLATION
>*KURODA WILL COOPERATE CLOSELY WITH GOVERNMENT
>*KURODA SAYS WAGES AND EMPLOYMENT CRUCIAL FOR ENDING DEFLATION
>*KURODA SAYS BOJ INDEPENDENCE IS SECURED BY LAW
>*KURODA SAYS 2% INFLATION TARGET WON’T HARM BOJ INDEPENDENCE
>*KURODA SAYS BOJ INDEPENDENCE IS SECURED BY LAW
>*KURODA CONFIDENT THAT BOJ CAN MEET INFLATION TARGET
>*KURODA SAYS WON’T BE EASY TO MEET INFLATION TARGET
>*KURODA SAYS ACHIEVING INFLATION TARGET IS BOJ’S JOB
>*KURODA SAYS 2% INFLATION TARGET IS GLOBAL STANDARD
>*KURODA SAYS ACHIEVING INFLATION TARGET IS BOJ’S JOB
>*KURODA SAYS POSSIBLE TO ACHIEVE INFLATION TARGET
>*KURODA SAYS ENDING DEFLATION GOOD FOR GLOBAL ECONOMY
>*KURODA SAYS CAN’T DENY MONETARY POLICY AFFECTS CURRENCY MARKET
>*KURODA SAYS BOJ EASING ISN’T AIMED AT WEAKENING THE YEN
>*KURODA SAYS CAN’T DENY MONETARY POLICY AFFECTS CURRENCY MARKET
>*KURODA SEES POSSIBLE EFFECT ON YEN AMID BOJ EASING
>*KURODA SAYS BOJ’S PRIORITY IS CONQUERING DEFLATION
>*KURODA SAYS BOJ EASING ISN’T AIMED AT WEAKENING THE YEN
>*KURODA SAYS ABE’S ECONOMIC PLANS ARE RIGHT APPROACH
>*KURODA SAYS HE HAS WIDE INTERNATIONAL NETWORK

The usual excellent post!

Positive Currency Wars!

19 February 2013


Financial markets are today being buffeted about by a slew of highly complex and changing influences. As readers may recall, at end-January (Thaler’s Corner 31/01: Too Cloudy), we advised people to favor Risk Off positions (references 2725 Euro Stoxx and 141.85 Bund), but this morning we returned to a neutralization of asset allocation biases (references 2635 and 142.85).

Not only do European markets seem to have lagged too far behind their American and Japanese peers, but, above all, I consider the current jitters about currency wars to be completely off the wall!

That said, there are still dark clouds hovering over Europe, mainly the eurozone, which is why we have yet to join the clan of the optimists.

Let us examine the macroeconomic situation area-by-area.

United States

The Fed is pursuing its easy money policies, the target QE, and I do not see them ending these policies any time soon. Despite the prevailing conventional wisdom, these policies are not boosting inflation at all, quite the contrary!

By continuously removing treasuries and MBS from the private sector via its QE asset-purchasing program and by replacing them with base money reserves, the Fed is in reality absorbing the interest that the private sector would have received on these bonds, as base money does not pay a coupon! The best illustration of the absorption carried out by the government is the amount of profits earned and transferred to the Treasury, a total of €335 billion since 2009!

This QE program functions like a tax, or more specifically, a savings tax somewhat like the French ISF or wealth tax (except that it is not at all progressive). It is nonetheless “progressive” in that it has helped the federal government, among others.

The 0% interest rate policy is certainly supposed to help reignite the American economy by making its easier for investment projects to achieve profitability, but at a time when the private sector feels overloaded with debt (deleveraging), its “inflationist” aspect is limited to the value of financial assets.

As long as US government budget policy remains frankly expansionist, with cumulative deficits totaling over $5 trillion since 2009, this deflationist aspect of the QE has little importance. However, not only have US budget deficits been trending downwards since 2009 (at a record high of $1.415 trillion), falling from 10.4% to 6.7% of GDP, but the latest budget measures raise concerns that the trend will accelerate.

In the first place, the hike in the payroll tax has had a direct impact on the American consumer. This 2% decrease in take-home income, for which employees were hardly prepared, led Wal-Mart Vice President Jerry Murray to declare February sales figures to be a “total disaster”:

“In case you haven’t seen a sales report these days, February MTD (month-to-date) sales are a total disaster. The worst start to a month I have seen in my seven years with the company. Where are all the customers? And where’s their money?”

Moreover, if sequester negotiations between Congress and the White House do not lead to a deal by the beginning of March, the ensuing decline in spending would represent about 1% of GDP and thus a new tightening of budget policy.

In contrast, the real estate market continues to give encouraging signs of a rebound. I will provide you the stats fresh February 22nd publication date.

The yen’s decline (currency wars) is a positive factor, which I will examine in the conclusion.

Europe

The eurozone is the world’s weakest economic zone, with the economic outlook as desperate as ever. The zone is suffering from an unfortunate mix of pro-cyclical budgetary policies and monetary policy, which refuses to use all the means available to counter recessive austerity.

Aside from their crazy devotion to Ricardian theories, supporters of “expansionist austerity” do not seem to take into account that the rare examples of such policies being successful are with very open small economies who, boasting their own currency, devalue their money and cut interest rates while defaulting on or restructuring foreign debt!

As for the distressed eurozone countries, which mainly trade with their neighbors, they not only lack their own currency and thus the possibility of devaluation, but also, in addition, suffer from a euro that remains high compared to the currencies of its trading partners!

And that’s leaving aside monetary policy and how its non-transmission to peripheral countries is making their economies even worse.

In addition, there are the problems specific to the zone, as exemplified by the Cypriot turmoil, the Italian elections, the protest movements in Spain and Portugal and the painful establishment of a common banking solution, etc.

But a ray of hope may be on the horizon, with the restructuring plan of the Promissory Notes just established by Ireland. Without going into the highly technical details, you can believe me when I say that this is the closest thing to fiscal financing ever carried out by a central bank on the eurozone or even in a developed country!

Quite simply, the Irish state has issued very long-term bonds, at very low interest rates, directly into the capital of the restructured bank, which then refinances it with the Irish central bank. The state thus skirts appealing to markets; this is monetary financing, albeit indirectly so. In any case, it would have had a hard time raising capital on such good terms with the public.

And Mario Draghi’s apparent nod to this operation, limiting himself to stating the ECB board had unanimous taken note of the deal, augurs well! We will not be surprized to hear the screams of alarm from Mr Weidmann and the Bundesbank, but they seem to have definitely lost control.

In short, while the euro’s rise is a drag on European exporters in the short term, reflecting more far more restrictive monetary and budgetary policies than those of our trading partners, this is also a case of the tree hiding the forest, as I will explain in the case of the Land of the Rising Sun.

Japan

This is where things are really going to play out!

The latest comments by Japanese government officials suggest that the next BoJ President will not only be a lot more dovish than his predecessors but that he will also work much more closely with the government.

Such coordination is absolutely necessary in times of deflation when the country has been faced with 0 Lower Bound for so many years. Check out the excellent paper written by Paul McCulley and Zoltan Pozsar on this topic in MG.

If a country in the midst of severe deflation/recession, like Japan, whose trade balance has deteriorated so abruptly since 2011, does not have the right to use all the tools at its disposal to pull itself out of this quagmire, who does?

I would farther than the prevailing discourse, with its focus on Japanese-style quantitative easing, and say flat out that the country should electronically print money!

Screams of a Weimer situation aside, such an approach would technically change little, since it would amount to injecting the budget deficit into the economy in the form of Monetary Financing instead of JGBs (Bonds Financing), which are nearly identical to cash (floor rate and possibility of going through the repo market).

In contrast, one thing is for sure: the fears generated by such an announcement would be enough to send the yen back to 110 vis-à-vis the dollar, which is in no way catastrophic. Bear in mind that this parity averaged 118.40 between the two shocks of 1987 and 2008!

These jitters would also fuel inflationist expectations, which is precisely the goal of a country in which the latest statistics show the economy stuck in deflation.

But the main reason I say that such a monetary and budgetary turnabout by Japan would be good for the rest of the world is that one of its main goals is to reignite domestic consumption, a natural corollary of easier monetary conditions and higher inflationist expectations.

And that would also benefit its foreign trading partners!

We are not witnessing so much a race to competitive devaluation (currency wars) as a race to more accommodative monetary policies, under the impulsion of the Fed and the BoJ, not to mention the BoE and the SNB, among others.

And all this will end up influencing the ECB, which, if it does not change its policies, will end up with a euro climbing toward 140 against the yen and 1.45 against the dollar. Let’s not forget that in 2007-2008, the euro was trading at 170 against the yen and 1.60 against the dollar, mainly due to the ECB’s intransigence, with the results we all know.

As Mr Draghi has declared that he will take the euro’s level into consideration, not as a target, but as a variable in monetary policy, we can only hope that it will continue to appreciate and thus force our central banks to carry out its own Copernican revolution and enter into concertation with the world’s central banks managing modern currencies.

In conclusion, thanks to these monetary hopes stemming from the Japanese initiatives, I have decided to put between parentheses the still heavy clouds, cited above, and advise clients this morning to abandon the Risk Off bias to capture profits offered by the last market shifts and to, at minimum, put ourselves in a position of maximum reactivity.

The old J curve as previously discussed.

Japan Trade Deficit Hits Record as Yen Inflates Imports: Economy

By James Mayger and Andy Sharp

Feb 20 (Bloomberg) — (Bloomberg) Japan’s trade deficit swelled to a record 1.63 trillion yen ($17.4 billion) on energy imports and a weaker yen, highlighting one cost of Prime Minister Shinzo Abe’s policies that are driving down the currency.

Exports climbed 6.4 percent in January from a year earlier, the first rise in eight months, exceeding the median 5.6 percent estimate in a Bloomberg News survey of 24 economists. Imports increased 7.3 percent, the Finance Ministry said in Tokyo today.

>   
>   (email exchange)
>   
>   On Thu, Feb 7, 2013 at 1:06 PM, wrote:
>   
>   There was an almost sensible article by Samuelson in the WP today. What caught my eye
>   was this comment that claims Japan failed at using Keynsian over the years. Can you
>   clarify this:
>   
>   Here is the comment:
>   

The problem is that economists have not recognized the failure of Keynsian economics. I think the uniform failure of deficit spending to promote growth has to be recognized.

They just didn’t run large enough deficits.

If the model worked, we would not be talking about Japan’s lost decade, or more accurately lost generation. Japan’s debt is now over 200 percent of GDP.

So?

Their growth rate in response to an ocean of deficits is uniformly poor.

Because they aren’t large enough to cover their savings desires.

The story is similar in Europe, particularly Southern Europe. There is no way Uncle Sam can continue to borrow 40 cents of every dollar spent.

Why not?

When governments get this far behind, they usually pay off the debt with hyper inflation.

Usually? hardly!

This never ends well. The usual outcome is social disintegration followed by dictatorship. For example, the hyper inflation of Weimar Germany after WWI lead to Hitler.

That was due to deficits of 50% of GDP to sell marks for fx and gold to pay war reparations. Any other examples???

The Federal Reserve’s constant quantitative easing in search of economic growth is going to lead to increasing inflation and interest rates.

Japan’s been doing it for over 20 years and still has no inflation and a strong currency.

They are buying 70 percent of the debt the Federal Governments incurs this month. Once Once interest rates go up, the deficits will balloon, 160 billion dollars a year for each percentage point.

So?

We have got to cut spending and stop the coming train wreck.

What train wreck? The train wreck is the current state of affairs from a deficit that’s too small.

Note that every move towards deficit reduction in Japan made things worse, and every supplementary budget made things better. they just haven’t ever done enough

>   
>   Its a typical RW comment, but what am I missing. How can you keep stating Japan did this
>   wrong for the other reason?
>   

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.

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.

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.

As previously discussed, the euro looks to keep going up until the trade surplus reverses. Problem is the strong euro doesn’t necessarily cause the trade surplus to reverse, at least not in the short term. But it does tend to work against earnings and growth. And there’s nothing the ECB can do about it, short of buying dollars via direct intervention, which would be counter to their core ideology, as building dollar reserves would give the appearance of the dollar backing the euro. The solvency issue has now been behind them for quite a while, and still no sign of any ‘official’ recognition that deficits need to be higher to restore output and employment.

And, also as previously discussed, while the future was looking up for the US a few months ago, the caveat of ‘austerity’ has come into play with the year end FICA and other tax hikes, and now the odds are the sequesters are allowed to come into play March 1 as well. Note this has been Japan’s policy as well- fiscal tightening at the first sign of any hope for expansion. Fed policy also looks to remain restrictive as blatantly evidenced by the recent turn over of some $90 billion of ‘profits’ to the Treasury that otherwise would have been earned by the economy.

The headline ‘deficit doves’ pushing for larger deficits with their ‘out of paradigm’ arguments are also serving to continue to support austerity. They have been arguing that the low interest rates are a signal from the markets (as if they know anything about markets) indicating the economy wants the govt to sell more bonds. This is in response to the hawk’s equally out of paradigm argument that financing deficits will eventually drive up interest rates. So now that interest rates have started going higher, the dove’s case is for higher deficits is pretty much gone, removing the resistance to ‘getting our fiscal house in order’ just as the sequester date is approaching. Whether it’s gross ignorance or intellectual dishonesty doesn’t matter all that much at this point- it’s happening. At the same time oil and gasoline prices have been creeping up, taking a few more shekels away from consumers. January and it’s strong equity inflows/allocations and releases of December’s stats ends tomorrow. February’s releases of Jan stats will bring more post FICA hike clarity.

Japan’s weak yen, pro inflation policy seems to have been all talk with only a modest fiscal expansion to do the heavy lifting. Changing targets does nothing, nor does the BOJ have any tools that do the trick as evidenced now by two decades of using all those tools to the max. And while I’ve been saying all the while that 0 rates, QE, and all that are deflationary biases that make the yen stronger, there is no sign of that understanding even being considered by policy makers, so expect more of same. What has been happening to weaken the yen is a quasi govt policy of the large pension funds and insurance companies buying euro and dollar denominated bonds, which shifts their portfolio compositions from yen to euros and dollars, thereby acting to weaken the yen. I have no idea now long this will continue, but if history is any guide, it could go on for a considerable period of time. Yes, it adds substantial fx risk to those institutions, but that kind of thing has never gotten in the way before. And should it all blow up some day, look for the govt to simply write the check and move on.

Debt approaching 1 quadrillion, and the highest as a % of GDP anywhere I know of, and still no bond vigilantes in sight!

Who would have thought???

Not to mention decades of 0 rates, massive QE, and in general the BOJ trying as hard as it can to inflate.

Maybe it’s not all that easy for a CB to cause inflation???

Anyway, net fiscal will add a bit to GDP, but nothing serious, and the hawkish rhetoric doesn’t seem to have changed any.

And note the cuts in welfare ‘paying for’ the increases in defense and infrastructure.

Of the Y92.6 trillion yen in spending, Y43.1 trillion will be financed with tax revenues and Y42.9 trillion with issuance of new bonds, adding to Japan’s massive public sector debt that already totals nearly Y1 quadrillion.

The FY2013 budget does show clear differences from those of the previous DPJ administration, with a clear shift away from social welfare toward defense and infrastructure programs.


It calls for a reduction of Y67 billion in welfare benefits over the next three years, an increase of Y712 billion, or 15.6% in public works programs and a Y35 billion, or 0.8% increase in spending for the Self-Defense Forces.

“Adequate amounts have been provided to ensure the safety of public infrastructure and to address public concerns about national defense,” Mr. Aso said.

The LDP’s call for aggressive public works spending got better reception after the collapse of an expressway tunnel in December that killed nine people. Simmering tensions with China have also increased support for spending programs to improve security of Japanese territory.

In a policy address Monday, Mr. Abe vowed to erase fiscal deficits in the medium-to-long term, but stopped short of saying when, leaving the task to his economic advisory panel.

Sayuri Kawamura, a Japan Research Institute economist, is worried that not enough attention has been given to the risk of fiscal implosion.

“As debt piles up, the cost of servicing that debt also goes up, eating deeper into tax revenue, and leaving less and less for policy programs. The government hasn’t explained how they are going to deal with this challenge,” Ms. Kawamura said.

Monetary doesn’t do the trick in any case. If this leads to a larger fiscal adjustment give him credit for the assist, intentional or not.

Shirakawa Leaves Onus on Abe for Stimulus as Action Deferred

By Toru Fujioka & Isabel Reynolds

January 22 (Bloomberg) — The Bank of Japan (8301)’s decision to hold off on fresh monetary stimulus for a year puts pressure on the Abe administration to revive growth through fiscal measures and risks capping losses in the yen that aid export competitiveness.

This of course fundamentally does nothing of consequence for aggregate demand or the level of the currency. The extra deficit spending due to start in April is what will help a bit.

BOJ Adopts Abes 2% Target in Commitment to Ending Deflation

By Toru Fujioka and Masahiro Hidaka

January 22 (Bloomberg) — The Bank of Japan set a 2 percent inflation target and shifted to Federal Reserve-style open-ended asset purchases in its strongest commitment yet to ending two decades of deflation.

So just like Japan, as soon as the economy starts doing a bit better we hike taxes. Still too early to say how the FICA hike will impact sales and profits, but it will. And spending cuts are on the way, though they may be delayed.

Not to forget the debt ceiling thing about to be kicked 3 months down the road as it stands guard to ensure ‘meaningful’ spending cuts.

Oil firm, but can still go either way. WTI converging to Brent indicates the seaway pipeline capacity increase may be enough to drain the surplus at pad 2, bringing wti up to brent, but too soon to tell for sure. And looks like the demand for saudi crude is dropping some, but not enough to dislodge them from being
swing producer/price setter.

Looks to me like the whole world is becoming ‘more competitive’ so it all cancels out. Bad for people, ok for stocks, with profits running at record highs as a % of GDP. Meaning the federal deficit has to be that much higher, all else equal, to fill the output gap.

The yen keeps going down. Looking more and more to me it’s off the radar screen intervention by the likes of insurance co’s, pension funds, and other quasi govt agencies got the note to buy fx denominated bonds in size. Not sure how far they will take it, but they have a serious herd instinct that has formed serious multi year bubbles in the past.

Europe? They fixed the solvency issue, sort of, and now just have the economy thing to deal with. Problem is the ECB grants solvency only with conditionality. Good luck to them.

Yes!

New Govt Office To Advise Small Firms On Consumption Tax

January 16 (Nikkei) — The government plans to set up a new office to provide advice to small businesses that wish to transfer consumption tax increases to the prices of their products and services, prior to the introduction of the 8% tax rate in April 2014, The Nikkei has learned.

Subcontractors are becoming concerned that they may be pressured into not passing tax increases over to their product and service prices, as many of them do not have the advantage in price negotiations.


The new office will address such concerns by helping firms to avoid taking on excessive costs. It will accept inquiries and complaints from throughout Japan by telephone and e-mail.


The Japan Fair Trade Commission will work closely with relevant ministries to inspect companies that are suspected of having rejected requests for price increases from their suppliers. The government also plans to come up with new legislation to impose strict controls on such companies.