Japan’s household spending falls 3.0% in June

July 29 (Kyodo) — Average Japanese monthly household spending fell a price-adjusted 3.0 percent in June from a year earlier to 272,791 yen. The average monthly income of salaried households came to 710,375 yen, down 6.6 percent in real terms. Household spending rose 1.5 percent in June from the previous month in seasonally adjusted terms, reversing the contractions seen in April and May. Retail sales fell 0.6 percent in June from a year ago, faster than a 0.4 percent decline in the year to May. The pace of decline was slower compared with 1997 when the sales tax was last raised, the trade ministry said.

Squeaking By on Abenomics

By Joseph Sternberg

July 2 (WSJ) — Preliminary data show cash earnings, including bonuses, rising by 0.8% year-on-year in May. Base pay increased 0.2%, its first rise in around two years. This looks like the “wage surprise” Japanese workers’ purchasing power fell another 3.6% year-on-year in May, after declines throughout much of Mr. Abe’s tenure. This is partly due to the price effects of the consumption-tax hike, and partly due to the import-price inflation stimulated by Mr. Abe’s weak-yen policy. Because Mr. Abe has yet to generate meaningful economic growth, the consumption tax merely redistributes income away from households and toward other government purposes.

As previously discussed, it’s a case of ‘bad inflation’…

Abenomics Spurs Most Misery Since ’81 as Senior Scrimps

By Isabel Reynolds and Chikako Mogi

June 6 (Bloomberg) — Mieko Tatsunami finds Prime Minister Shinzo Abe’s drive to reflate Japan’s economy hard to digest.

“The price of everything we eat on a daily basis is going up,” Tatsunami, 70, a retired kimono dresser, said while shopping in Tokyo’s Sugamo area. “I’m making do by halving the amount of meat I serve and adding more vegetables.”

Tatsunami’s concerns stem from the price of food soaring at the fastest pace in 23 years after April’s sales-tax increase. Rising prices helped push the nation’s misery index to the highest level since 1981, while wages adjusted for inflation fell the most in more than four years.

With food accounting for one quarter of the consumer price index and the central bank looking to drive inflation higher, a squeeze on household budgets threatens consumption as Abe weighs a further boost in the sales levy. The prime minister may be forced to ease the pain with economic stimulus, cash handouts or tax exemptions championed by his coalition partner.

“Price hikes without confidence that wages are going to rise will hurt appetite for spending,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Abe has to raise people’s belief that the economy will improve.”

Food prices rose 5 percent in April from a year earlier, with fresh food climbing 10 percent. Onions soared 37 percent, and salmon — a staple of the nation’s lunch boxes — jumped 30 percent. Abe lifted the sales tax by 3 percentage points on April 1.

Greenhouse Vegetables

The yen’s 5 percent fall against the dollar over the year through April boosted the cost of imports in a nation that is only 39 percent self-sufficient on a calorie basis and more reliant on inbound shipments of fossil fuels after a nuclear disaster in 2011.

The cost of imported beef rose to 230 yen ($2.24) for 100 grams at stores in central Tokyo in April from 187 yen a year earlier, government data show. Growing vegetables in greenhouses is more expensive as a result of increased energy prices, according to Naoyuki Yoshino, the Tokyo-based dean of the Asian Development Bank Institute.

Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, said food inflation likely accelerated in May and will remain high.

As Abe aims to create a “virtuous cycle” of rising production, incomes and spending, the Bank of Japan is targeting 2 percent inflation — stripped of the impact of the higher sales tax. Its key gauge of prices excluding fresh food rose 3.2 percent in April from a year earlier.

Tax Exemptions

Even so, the prime minister’s drive to fatten paychecks more than inflation is at risk of stalling, with wages excluding overtime and bonus payments falling for a 23rd straight month in April.

Goldman Sachs Group Inc. sees base wages rising about 0.5 percent on year from May as salary gains from spring labor negotiations take effect — lagging the median forecast for 2.6 percent inflation this year in a Bloomberg News survey of economists.

The misery index, which adds the jobless rate — 3.6 percent — to overall inflation — 3.4 percent — climbed in April to 7, a 33-year high.

The squeeze on households could damage support for Abe’s administration, whose approval rating fell to 53 percent in a Nikkei survey in May from 62 percent when he took power in December 2012.

“The effects of Abe’s policies are kicking in and very soon people will start to take notice,” said Koichi Nakano, a professor of political science at Sophia University in Tokyo. Abenomics isn’t really trickling down to their wallets, he said.

Economic Stimulus

As Abe considers corporate tax cuts, he faces pressure from his coalition ally New Komeito to exempt food should he go ahead with plans to raise the sales levy further to 10 percent in October next year from 8 percent.

Mizuho’s Ueno said an option for Abe would be to provide more cash handouts to help low-income households, which would run counter to the government’s effort to reel in the world’s largest debt burden.

With higher food prices, people will cut back on durables, luxury goods and eating out as they did after the sales tax was last increased in 1997, the ADBI’s Yoshino said. “A government stimulus package is needed to compensate for the consumption decline.”

The elderly, many of whom are on fixed incomes, may be hit the hardest, said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo. Kumano estimates households headed by people over age 60 accounted for nearly half the nation’s consumption last year.

“If prices keep rising, there is a risk that consumption by seniors may be damped as they don’t enjoy the benefit of wage increases,” Kumano said.

Kumano’s concerns are reflected in Sugamo, an area of northern Tokyo bustling with elderly shoppers like Tatsunami.

“Abenomics may be helping the big corporations, but life’s tough for people like me,” said Tatsunami, who has seen her pension shrink. “We don’t go out as much as we did — we’re having to cut back.”

BOJ Survey Shows Consumer Sentiment Worsen As Energy Prices Rise

October 2 (Dow Jones) — A Bank of Japan survey showed Wednesday that consumer sentiment worsened for the first time in three quarters as a rise in energy prices amid a lack of major wage increases negatively affected their views on the economy. The central bank’s survey of the general public showed that the diffusion index measuring the current state of the economy fell to minus 8.3 from minus 4.8. Of the poll of 2,252 consumers, 83% of respondents said they expect the prices of goods and services to rise over the coming year. That’s higher than 80.2% in the previous June survey. The survey also showed that 16.2% of the respondents see the economy improving in coming year, down from the previous 24.3%.

Not helping US domestic demand…

Japan Export Gains Offer Growth Momentum as Sales-Tax Rise Looms

By Andy Sharp & Toru Fujioka

September 19 (Bloomberg) — Japan’s exports rose the most since 2010 in August, boosting Prime Minister Shinzo Abe’s growth drive even as rising energy costs extended the streak of trade deficits to the longest since 1980.

Exports rose 14.7 percent from a year earlier, the sixth straight advance, a Finance Ministry report showed in Tokyo, in line with the median estimate of analysts surveyed by Bloomberg News. The trade gap was 960.3 billion yen ($9.8 billion).

A surge in exports to the U.S., along with a rebound in shipments to China in the wake of bilateral tensions last year, are offering momentum to Japan as it prepares for the first sales-tax increase since 1997. Rising competitiveness from the yen’s 20 percent drop against the dollar the past year also has helped manufacturers including Panasonic Corp. (6752) as they cope with higher energy costs with the nation’s nuclear industry shuttered.

“We are finally seeing a clear recovery in exports, led by a weak yen and a moderate global recovery,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “My biggest concern is the planned sales-tax increase next year. A recovery in exports will help cushion the impact but a higher levy could still be a big drag on the economy, while risks remain in Europe and emerging markets.”

Seriously!
:(

Here’s what could make or break Abe’s reform plan

By Dhara Ranasinghe

July 22 (Bloomberg) — If Japan’s Prime Minister Shinzo Abe, riding high on Sunday’s election victory for his ruling coalition, is serious about transforming the economy, it’s crucial that he pushes ahead with plans to raise a controversial consumption tax, analysts say.

The tax on goods and services, under the current law, is due to rise to 8 percent next April from 5 percent and to 10 percent in 2015, although there has been a heated debated within the government as to whether this should happen.

On the one hand a consumption tax is seen as a key measure to improving Japan’s fiscal health. Japan, the world’s third biggest economy, has a debt pile that is the highest among industrialized nations and its debt-to-GDP ratio is expected to top 245 percent this year.

But on the other hand, the tax could hurt consumer spending and stifle the economic recovery Abe is trying to engineer through a mix of fiscal spending and aggressive monetary stimulus.

“The decision on whether to raise the sales tax as early as next April is a finely balanced one with significant implications – both for the economy and for the perceived credibility of Abenomics,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy.

“The last consumption tax increase in Japan ended in disaster, helping trigger a recession. Yet if Mr Abe puts it off, doubts about the fiscal credibility of his project will grow, potentially spooking the bond market,” he added

Very yen friendly!

Japan Nears Switching on Reactors After Tepco’s Meltdown: Energy

By Jacob Adelman & Yuji Okada

July 3 (Bloomberg) — A countdown is starting in Japan for restarting some of the 48 nuclear reactors that were idled after the 2011 Fukushima meltdowns caused the worst atomic accident since Chernobyl.

The nation’s Nuclear Regulation Authority will receive applications for switching on plants starting July 8, and more than five utilities plan to seek permits. Tokyo Electric Power Co., operator of the wrecked Dai-Ichi plant that spread radiation in the Fukushima area, said yesterday it will seek permission to start its Kashiwazaki-Kariwa nuclear plant as soon as possible. Its shares jumped 19 percent yesterday.

Trumped!!!

:(

JAPAN’S NISHIMURA-STRONG GROWTH MEASURES NEEDED SO JAPAN CAN WITHSTAND FISCAL CONSOLIDATION

I see nothing ‘expansionary’ here:

JAPAN GOVT TOP PANEL: MUST AIM TO KEEP PRIMARY BUDGET BALANCE TARGETS TO FIX PUBLIC FINANCES

JAPAN GOVT PANEL: FISCAL REFORM IS VERY IMPORTANT FOR ‘ABENOMICS’ TO HAVE SUSTAINED EFFECTS

JAPAN GOVT PANEL: MONETARY EASING MUST BE BACKED BY GOVT’S FISCAL DISCIPLINE TO AVOID CONCERN ON MONETISATION

JAPAN GOVT PANEL: AIMS TO CREATE FAVOURABLE CYCLE OF ECONOMIC REVIVAL AND FISCAL REFORM

JAPAN GOVT PANEL: UPTREND IN CONSUMER PRICES WILL STRENGTHEN GRADUALLY FROM MIDDLE OF THIS YEAR

JAPAN GOVT PANEL: WILL KEEP CLOSE WATCH ON IMPACT FROM RISE IN IMPORT PRICES AND FINANCIAL MKT MOVEMENTS AND RESPOND APPROPRIATELY

JAPAN GOVT PANEL: MUST PAY ATTENTION TO GLOBAL ECONOMY, FINANCIAL MKT AND RESTRICTION ON POWER SUPPLY AS RISKS TO ECONOMY

JAPAN GOVT PANEL: WILL REVISE FISCAL SPENDING INCLUDING AREA OF SOCIAL SECURITY

TOKYO, June 6 (Reuters) – Japan aims to stick to its targets for fiscal consolidation to curb its massive public debt, the government’s top macroeconomic policy panel said on Thursday, despite concerns that Prime Minister Shinzo Abe might back pedal on the promises.

The previous Democratic Party-led government had set targets of halving its primary deficit – the budget excluding new bond sales and debt servicing – by March 2016 and returning to surplus by March 2021.

The Council on Economic and Fiscal Policy (CEFP) also said Japan aims to lower the country’s debt-to-GDP ratio in a stable manner after achieving the primary balance target.

Japan’s public debt is already more than twice the size of its 500 trillion yen ($5 trillion) economy and any sign that the government was backing off on the fiscal reform targets or on its plan to double the five percent sales tax by October 2015 could make the Japanese government bond market nervous.

Abe, who took office last December after his Liberal Democratic Party’s (LDP) big election win, has made his “Abenomics” prescription for rescuing the economy from deflation and engineering sustainable growth his top priority.

CEFP has legal authority to craft long-term fiscal and macroeconomic policies, and it issues policy guidelines around this time of the year, which will be reflected in an annual budget and other key policies.

Unfortunately what Japan risks is an exit from headline deflation but no growth in output and employment to show for it. What they’ve done might be to cause the currency to depreciate about 25% via ‘portfolio shifting’, which may not expand real domestic demand. In fact, in real terms, it may go down, leaving them with higher prices and a lower standard of living.

Yes, the currency shift makes imports more expensive, which means there will be some substitution to domestic goods which cost more than imports used to cost, but less than they now cost. But for many imports there are no substitutions, so the price increase simply functions like a tax increase.

And yes, exports, particularly nominal, will go up some, but so does the cost of inputs imported. And yes, some inputs sourced elsewhere will instead be sourced locally, adding to domestic employment and output, but not to real domestic consumption.

At the macro level what counts is what they do with regards to keeping the govt deficit large enough to accommodate the need to pay taxes and net save. Net exports ‘work’ by reducing real terms of trade when the govt purchases fx, which adds net yen to their economy. I call the fx purchases ‘off balance sheet deficit spending’. But so far the govt at least says they aren’t even doing that, and the lifers etc. now deny having done much of that either?

What has changed fundamentally is they are importing more energy since shutting down their nukes. Again, this functions as a tax on their economy (taxonomy for short? really bad pun intended!).

On the other hand, as above, buying fx by either the private or public sector is, functionally, deficit spending, which in this case first supports exports, but could add some to aggregate demand, depending on the details of relevant propensities to consume, etc.

The entire point of all this is Japan can cause some ‘inflation’ as nominal prices are nudged up by the currency depreciation, but with only a modest increase in real output via an increase in net exports that fades if not supported by ongoing fx purchases. And all in the context of declining real terms of trade as the same amount of labor buy fewer imports, etc. which is the engine that makes it ‘work’ on paper.

And for the global economy it’s another deflationary shock in a deflationary race to the bottom as other wanna be exporters compete with Japan’s massive cut in real wages.

So yes, they are trying to cause inflation, but not for inflation’s sake, but as a way to increase output and employment. But I’m afraid what they are missing that the causation doesn’t work in that direction.

In conclusion, this was the thought I was trying to flesh out:

Just because increasing output can cause inflation, it doesn’t mean increasing inflation causes real output and employment to increase.

sorry, this all needs a lot more organizing. Will redo later.

More of: “In the land of the blind the one eyed man gets his good eye poked out…”

Operationally, the BOJ, monopoly supplier of yen reserves, can peg long rates just as easily as short rates.

If they back off on fiscal they’re right back where they started from, as QE is a bit of a tax hike, but for the most part just a placebo.

And lighting up the nukes likely puts trade back in surplus, firming the yen again, with the lifers who sold JGB’s for foreign bonds and foreign currency exposure/got short yen adding a bit of excitement when they try to cover.

Not to mention the China slowdown.

And none of this helps US demand any.

Tokyo Panel Urges Abe to Tighten Finances

Mitsuru Obe

May 27 (WSJ) —TOKYO—Following last week’s brief jump in Japanese government bond yields that helped precipitate a sudden slide in Tokyo stocks, an advisory panel to Japan’s finance minister published a report Monday urging the government to undertake serious fiscal reform to avoid further rises in yields.

“Fiscal reconstruction has become all the more important” because of Prime Minister Shinzo Abe’s aggressive monetary and fiscal stimulus measures, the report said, while warning that a loss of fiscal rectitude could send bond yields higher and undermine the efforts of the Bank of Japan 8301.JA -1.43%to stimulate the economy.

The report comes after the central bank launched an aggressive bond-buying program in April. The BOJ’s change in stance initially pushed bond yields down. But uncertainty over the impact of buying on such a huge scale—up to 70% of newly issued debt—saw yields bounce back up.

As the country’s currency, the yen, broke above 100 to the dollar earlier this month for the first time in more than four years, bond yields climbed along with equity prices. When they hit 1% on May 23, a level not seen in more than a year, the equity market’s upward march halted.

The panel’s chairman, Tokyo University Prof. Hiroshi Yoshikawa, declined to say how last week’s financial turmoil may have influenced the panel’s conclusion in the report. But Mr. Yoshikawa didn’t mince his words, as he warned against any attempt by the Abe administration to push back painful reforms, such as planned tax hikes and fiscal consolidation.

“Any attempt to go ahead with more fiscal stimulus would be a contravention of the spirit of this report,” he told a news conference.

Mr. Abe’s administration came into office in late December, amid an economic slowdown in Europe and China. Pledging to lift the Japanese economy out of decadeslong stagnation, Mr. Abe’s government has launched aggressive monetary easing and fiscal stimulus measures, a policy program popularly known as Abenomics.

The report argued, however, that “such unusual policy measures cannot be continued indefinitely.”

“Unless the government moves ahead with and makes progress in fiscal consolidation, the BOJ’s policy could be viewed as an act of debt financing by the central bank, causing bond yields to rise, and canceling out the effects of its monetary easing,” it said.

The report also noted that a rise in bond yields would also complicate the task of the exiting the so-called quantitative easing program down the line. Under a newly introduced inflation target, the BOJ is obliged to achieve 2% price growth, and the bank has said it would keep its aggressive easing in place until it secures that target.

The report said that “even if the BOJ wants to reduce its government bond purchases, it won’t be able to do so unless there are alternative buyers of bonds in the market.” Without private sector buyers, long-term interest rates could go up far beyond levels in line with economic growth rates, the report warned.

The Abe administration is expected to make clear its fiscal reform goals next month.

The report urged the government to produce a credible and concrete fiscal reform road map that would include specific numerical targets, rather than just expressing a strong determination.

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