Category Archives: Japan

Yen strength

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BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say

by Ron Harui and Stanley White

Nov. 6 (Bloomberg) — The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world’s biggest foreign-exchange traders.

Wrong! Japan can sell yen and buy dollars until the cows come home, if they wanted to. What’s stopping them (so far) is the risk of Paulson’s wrath.

As the US-Paulson/Bernanke/Bush- continues its ‘weak dollar’ policy to support US exports. Falling crude prices have (temporarily?) thwarted their efforts and strengthened the dollar. (And the euro has it’s own special issue as previously discussed.)


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Japan Daily

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This means they will accept it as collateral for the unlimited USD loans from the Fed.

This will not end well.

BOJ to Accept Asset-Backed Commercial Paper as Collateral from Tuesday

TOKYO (Dow Jones)–The Bank of Japan said Monday it will accept as collateral asset-backed commercial paper guaranteed by the bank’s counterparty financial institutions, starting Tuesday. This is a temporary measure until the end of April 2009 to ease tension in the short-term money market, the BOJ said.

Earlier this month, The BOJ announced a number of steps to ensure the smooth functioning of the country’s money markets, including providing greater access to U.S. dollar funds through a swap agreement with the U.S. Federal Reserve Board, and broadening the kinds of collateral the BOJ would accept for repurchase agreement transactions.


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Japan Daily- Current account surplus declines in August

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Unwinding of yen borrowings/shorts is also an increase in what I call ‘savings desires’, and drives the trade gap out of surplus towards deficit.

Japan doesn’t like it but it is an improvement in real terms of trade.

The appropriate fiscal response is to move to sustain domestic demand.

Highlights:

Highlights

Current Account Surplus Down 52.5% In August


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2008-09-16 JN Highlights

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Highlights:

Aug Consumer Sentiment Hits Record Low For 3rd Month
Govt Panel To Call For Cutting Corporate Tax To 30% By FY15
Ota Reelected As New Komeito Leader For Another 2 Years
Extra Budget To Total 1.81tn Yen, Govt Eyes 400bn Yen Bonds
Lehman Failure Not To Mar Japan Financial System: Ibuki
BOJ Injects Y1.5tln To Calm Markets
New-Condo Offerings Tumble 38% In Tokyo, Rise 7% In Osaka For Aug
Forex Focus: Yen To Benefit From Banking Woes
Stocks: Slide To 3-Year Low As Banks, Insurers Tumble
Bonds: Surge After Lehman Bankruptcy, Market Turmoil

 

Note Japan’s proposed fiscal responses: cutting corp tax and extra budget, while the proposed increased consumption tax has been delayed.

Same in most nations around the world.

Fiscal responses ‘work’ while interest rate cuts don’t.

The US tax rebates worked while there is no econometric evidence the rate cuts did anything, except maybe make things worse as they reduced personal income and contributed psychologically to a USD sell off and spike in import prices that probably hurt consumers at least as much as it helped exporters.

The Fed could to anything today from unchanged to a 50 cut.

They seemed to have decided to use interest rates for ‘monetary policy’ and other tools for ‘market functioning’.

So for market functioning they just expanded the scope of the TAF and the Treasury lending facility, and may do more of that type of thing at today’s meeting, including adjusting the terms of the discount rate.

The question is whether falling commodities and the stronger USD will lead to a further rate cut.

What the Fed knows and has recognized since the Bear Stearns episode is that markets are going to open every day and do their thing, as the last week’s activity has demonstrated.

The Fed’s perceived risk of markets simply not opening and not trading has subsided.

Also, with the Treasury take over of the agencies mtg rates have dropped over 50 bp and availability of mortgage funding has been sustained.

The Fed considers this an ‘easing of financial conditions’ and is the move they’ve wanted to see to support housing, which has shown signs of stabilizing.

And the Treasury has shown it’s there to ‘write the check’ as it sees the need to prevent systemic risk.

So from that point of view there has already been a substantial ease in ‘financial conditions’, and the Fed may not see a need for further immediate ease.

Their forecasts will continue to show ‘moderating inflation and continued downside risks to growth’.

It all depends on their fear factor. They could leave fed funds unchanged or cut up to 50, depending on their concern regarding systemic risk.


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Nikkei News: China exporting inflation to Japan

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Cliff Viner writes:

This is important. We’ve mentioned it before. And although the article is about Japan, it applies to many of China’s other export markets.

Yes, the whole global backdrop shifted from a deflationary to an inflationary bias over the last couple of years.

Also, with all of our outsourcing, these imports costs or some extent replace what was unit labor costs in previous cycle.

So in that sense, labor costs are rising faster than our domestic labor numbers indicate.

China Switches From Deflation Exporter To Inflation Exporter

(Nikkei) The prices of Chinese goods are rising in Japan, with sharp increases hitting anything from clothing to audio equipment. If the rise persists, China, which has long underpinned Japan’s steady price structure with its inexpensive products, could become a factor in lifting Japan’s overall price level.

According to a Bank of Japan check on the July prices of imported products, of which more than 50% are supplied by China, polo shirts and gloves cost some 9% more than in July last year. Pajamas and sweat suits also were up 4%. As made-in-China items make up 80% of Japan’s total clothing imports, higher costs can translate into higher price tags at retailers down the road.

The price rise is not limited to clothing. Imports of toys, of which 90% come from China, shot up 10% in July on the year. The price tags on bags, 50% of which originate in China, also climbed 9%. Of audio and video equipment, with the Chinese import ratio of more than 50%, audio devices increased 3-4%. Among other items, China-made cotton cloth, used mainly for bedding and dress shirts, rose to nine-year highs indicating that rising prices of Chinese imports now run the gamut.

Running to a value of 15 trillion yen in fiscal 2007, Chinese products now account for some 20% of Japan’s total import bills. According to trade statistics compiled by the Ministry of Finance, the price index of Chinese imports, which had been falling, rebounded to positive territory in fiscal 2004 and climbed 7.7% on the year in fiscal 2007 with the uptick still continuing.

Increasing prices of Chinese imports are caused in large part by rising wages in that country. Average wages of China’s urban workers rose 18.7% during 2007 over the previous year. Moreover, labor costs in China are destined to rise further with the passage of the labor contract law in January this year which encourages employers to give employees longer contracts.

The substantial appreciation of the yuan is also to blame for increasing the costs of Chinese imports. The yuan’s value rose 20% against the dollar over the three years since Beijing revalued the currency’s exchange rate in July 2005.

So the Chinese factor is casting increasingly dark shadows over Japan’s price picture. “Attention tends to focus on soaring crude oil prices as the main culprit for the recent bout of inflationary pressure, but nearly 10% of the overall increase in imported products is attributable to the Chinese factor,” said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute. This is perhaps why many Bank of Japan economists see China as switching, as far as Japan is concerned, from a deflation exporter to an inflation exporter.


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2008-08-13 JN News Highlights

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Highlights:

Economy Shrinks Annualized 2.4% On Weak Domestic Demand

 
 
Articles:

Economy Shrinks Annualized 2.4% On Weak Domestic Demand

(Nikkei) Declining consumer and capital spending contributed to pushing down Japan’s gross domestic product 0.6% in real terms from the previous quarter during the April-June period, for an annualized rate of minus 2.4%, according to preliminary data released Wednesday by the Cabinet Office.

The first contraction in four quarters was also attributed to a drop-off in exports amid the U.S. economic slowdown.

Domestic demand contracted 0.6%, with personal spending shrinking 0.5% as price hikes for a number of daily necessities dampened consumer sentiment. The weaker demand also reflected the fact that the previous quarter had one more day than in normal years because 2008 is a leap year.

Capital spending declined 0.2%, while housing investment slid 3.4%. Overall domestic demand pushed down GDP growth by 0.6 percentage point.

Exports, which had until recently driven economic growth, fell 2.3%, meaning overseas demand failed to push up GDP growth in the three months ended June.

In nominal terms, GDP contracted 0.7% for an annualized rate of minus 2.7%.

Fails to mention it grew at over 3% in the prior quarter, so the two quarter average is marginally positive. Japan data seems to have more noise than US data.

Also note the nominal measure over the last year:

Nominal GDP Q/Q:

Q2/08 -0.7%
Q1/08 +0.2%

Q4/07 -0.1%
Q3/07 flat

 
 
Lots of noise due to ‘inflation’ as they measure it.

Yes, a soft quarterly report, but as expected or slightly better than expected on most counts.

Same twin themes as the US: weakness and higher prices.

And lots of talk about a fiscal program over there.


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Japan CPI

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from Dave:

Japan core CPI last night came out at 1.9% as expected

Petrol products were up +23.9% y/y

Non fresh food products were up +3.5% y/y

Core-Core CPI (ex energy and ex fresh food) rose +0.1% vs -0.1% in the previous month indicating some signs of higher energy and food prices filtering through the economy to other products and services

Price pressures continue to grow at the corporate level (see graph of Corporate Services Price Index CSPI and Corporate Goods Price Index CGPI)

Expectations from many dealers and BOJ’s Mizuno is that CPI could reach as high as 2.5% by the fall


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BOJ and inflation

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Bank of Japan keeps distance from Fed, ECB hawks

by Leika Kihara

(Reuters) Bank of Japan Governor Masaaki Shirakawa distanced himself on Friday from the hawkish tone of U.S. and European central bankers, and signalled slowing economic growth was still a key factor in deciding interest rates.

After keeping rates steady at 0.5 percent as expected, Shirakawa acknowledged that the rising global risk of inflation had prompted the U.S. Federal Reserve and the European Central Bank to deliver unusually candid warnings to markets this month.

But he said it was equally important to monitor the risk of slowing economic growth in Japan, with financial markets still bruised by a credit crisis weighing on the global economy.

My take is that over the years voters repeatedly show a larger dislike of inflation vs unemployment. They would rather have a slow down and rising unemployment than high inflation. That’s why the politicians charge the CB with controlling inflation. Inflation will get them kicked out of office even faster than unemployment will.

If the BOJ members ‘allow’ inflation and doesn’t hike rates to fight it (that’s what they all think fights inflation), I would expect the politicians will replace them members who will hike.


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Re: Fannie & Freddie

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(an email exchange)

>
>   On Mon, Apr 21, 2008 at 9:55 AM, Russell wrote:
>
>   Fannie and Freddie now back 82% of all mortgages in the U.S.,
>   up from only 46% in the second quarter of 2007. If they need
>   a bailout – could be a trillion dollars –

Funds are already advanced to the homeowners which supports demand.

A ‘bailout’ would only be an accounting entry between the government’s account and the agency’s account – no effect on aggregate demand.

>   the USA may lose its AAA credit rating.

Like Japan did. Just another sign of incompetance by the ratings agency if it happens.

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FT: US credit rating under threat

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Seems no end to the stupidity that continues to spew out from all kinds of places.

You’d think the ratings agencies would have learned their lesson with Japan – downgraded below Botswana and still funded JGB’s at under 1% for years until the BOJ raised rates.

And last I saw ten year US credit default was around ten basis points?

I had a discussion with S&P years ago. Seem to remember a name ‘David’?

He seemed to sort of grasp that operationally governments with their own (non convertible) currencies and floating fx policies aren’t revenue constrained, but obviously didn’t quite get it when they downgraded Japan.

The eurozone is another issue, where they have downgraded national governments and that does mean something regarding risk, just like the US States, but with no legal safety net by the Federal authorities like the US. Fortunately the eurozone banking system hasn’t been tested, yet.

Simple trade: sell US credit default, buy Germany, for example.

US credit rating under threat

by Aline van Duyn

The US government’s need to provide financial backing to the state-sponsored mortgage financiers that dominate the US housing market could pose a risk to the country’s triple-A credit rating, Standard & Poor’s, the credit rating agency, said on Monday.

In the event of a deep and prolonged US recession, S&P said the potential costs of propping up government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which have implicit government backing, could cost the US government up to 10 per cent of GDP.

The costs of supporting broker-dealers like Bear Stearns in a dire economic situation would be much lower, at below 3 per cent of GDP, S&P said.

“The size of GSEs, coupled with their current level of common equity, could create a material fiscal burden to the government that would lead to downward pressure on its rating,” the S&P report said.

The S&P comments come amid increased pressure for better regulation of the mortgage financiers, especially as their role in the US housing market is likely to increase as they are used to provide support for struggling homeowners.

Policymakers are pushing for Fannie Mae, Freddie Mac and the lesser-known Federal Home Loan Banks to pump liquidity into the US mortgage market and this has prompted regulators to call for stronger oversight of such institutions.

Fannie Mae, Freddie Mac and the Federal Home Loan Banks have become the backbone of the troubled US mortgage market as purely private sources of finance have all but dried up or are offered only at punitive terms.

In the second half of 2007, about 90 per cent of new mortgage funding was provided by GSEs. They have about $6,300bn of public debt and mortgage securities outstanding, more than the $5,100bn of outstanding US government debt.

Fannie Mae and Freddie Mac have no formal state guarantees but investors believe the US government would step in if the system got into trouble. This allows the agencies to raise funds at very low rates against a triple-A credit rating, in spite of high levels of leverage.

The capital surplus ratio for GSEs was recently reduced to 20 per cent from 30 per cent, allowing them to operate on a more leveraged basis.

In January, Moody’s Investors Service, another credit rating agency, said the US could risk its triple-A rating within a decade unless soaring healthcare costs and social security spending was curbed.

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