Now that Japan has an open door to buy euro to ‘help out’ the region’s finances, and the ECB’s funding terms and conditions forcing deflationary austerity measures that continue to bring euro zone deficits down, I’m itching to buy the euro vs the yen.

At some point, however, and maybe as soon as q3 this year, or even sometime in q2, the austerity in the euro zone will fail to reduce deficits and instead the tightening measures will cause growth to go into reverse and deficits to increase, causing fundamental euro weakness.

But until then, the euro remains fundamentally strong, with technicals/one time portfolio shifts causing the sell offs.

Headlines:
Portugal Finance Minister says no need for bailout
Euro May Decline to 2010 Low Against Yen: Technical Analysis
ECB intervenes as debt crisis deepens
Portugal faces growing tensions
Tensions Rise Before Portugal Auction
Germany May Soften Objections to Euro Fund Increase
German 2011 Construction Sales May Drop, HDB Building Lobby Says
German Trade With China Rose to a Record in 2010
French Business Confidence Rose in December for Fourth Month
Italian deficit narrows in third quarter

Italian deficit narrows in third quarter

(FT) Italy’s public budget deficit narrowed in the third quarter of last year, putting the economy on track to hit government austerity targets of about 5 per cent of gross domestic product in 2010. As a result of austerity measures passed in December, Italy is targeting a public budget deficit of 3.9 per cent in 2011 and 2.7 per cent in 2012. Debt is expected to peak at about 120 per cent of gross domestic product this year, giving the economy ministry little room to manoeuvre. In the third quarter, the public deficit narrowed to 3.2 per cent of GDP compared with 3.9 per cent in the period a year earlier, according to data from the national statistics office. It narrowed to 5.1 per cent of GDP in the first nine months, down from 5.5 per cent a year earlier.

JAPAN FINMIN NODA: JAPAN WILL BUY EURO BONDS TO HELP BOOST TRUST IN EFSF SCHEME

EURO RISES AFTER JAPAN FINMIN NODA SAYS JAPAN TO BUY EURO BONDS

JAPAN NODA: TO BUY ABOUT 20 PCT OF BONDS PLANNED TO BE ISSUED JOINTLY BY EURO ZONE LATER THIS MONTH

Japan Joins China in Assisting Debt-Crisis-Hit Europe

By Toru Fujioka

January 11 (Bloomberg) — Japan plans to buy euro-zone
sovereign bonds, its finance minister said, joining China in
assisting a region hit by a fund-raising crisis.

Finance Minister Yoshihiko Noda told a news conference in
Tokyo today that Japan will use its foreign-exchange reserves to
buy more than 20 percent of bonds to be issued under a special
assistance program to help Ireland.

“It’s appropriate for Japan to make a contribution as a
leading nation to increase trust in the deal,” he said.

China has also expressed support for the euro zone, with
Vice Premier Li Keqiang last week expressing confidence in
Spain’s financial markets and pledging more purchases of that
nation’s debt. Chinese Vice Premier Wang Qishan said on Dec. 21
his nation has taken “concrete action” to help the European
Union address its debt crisis.

The euro climbed immediately after Noda’s comments, rising
as high as $1.2991, before trading at $1.2952 at 11:50 a.m. in
Tokyo.

>   
>   This is being done in an effort to weaken ¥ vs €.
>   

Yes, with the cover of helping the euro zone, just like China, who announced the same a short while ago to lead the way for Japan.

Japan has been actively seeking ways of weakening the yen to support their exporters.

They publicly bought some $ last year, and their US Tsy holdings have been falling, indicating something unannounced has been going on as well.

And their budget was somewhat expansionary.

Weakening the yen like this is one of the things somewhat subtly working to limit US aggregate demand growth, which should be a good thing for us (we can have lower taxes for a give size govt) but unfortunately our leadership simply lets aggregate demand languish.

Market Color

Short~medium term JGB rallied due to additional monetary ease expectation related to unsterilized FX intervention money.

First, intervention in this direction- buying dollars- does ‘work’ and is infinitely sustainable.
It’s a political decision, much like the ECB buying national govt. debt. There is no nominal limit.

Second, the only reason they stopped was political pressure from the US, with the then Treasury secretary resorting to name calling like ‘currency manipulator’ and ‘outlaw.’ Otherwise the yen probably would not have been allowed to go under 100.

Third, their institutional structure functions to support the classic export led growth model- suppress domestic demand with consumption type taxes, relatively tight fiscal given institutionally driven savings desires, etc.

Fourth, this strategy causes the currency to strengthen and requires the govt. buy dollars to sustain desired levels of exports and employment.

Net exports necessarily equal net domestic holdings of foreign currency. Think of it this way. If Japan sells something to the US, and we pay for it in dollars, they have two choices. Either hold the dollars, in which case nothing more happens in the real economies and Japan has net exported and the US net imported. Or buy something in the US or any other nation with the dollars and import it to Japan in which case there are no net exports.

Japanese government started FX intervention last night with JY100bn in Tokyo and continued their effort in overseas and ended up with selling JY2trn in total. Many market participants are now saying that it will lead to monetary ease since BOJ will not absorb this JY2trn from the market and this is one of the main reasons for JGB rally today. However, I don’t think it will cause any such impact since government issues T-Bill for that amount (JY2trn) anyway.

When the BOJ buys dollars for the MOF, and pays for them with yen, that adds yen deposits to the domestic economy, thereby increasing the yen net financial assets held domestically. That’s an inflationary bias which is what they are trying to do.

In the first instance those newly added yen sit as yen balances in member accounts at the BOJ. And since they earn no interest the marginal cost of funds is 0, which happens to be where the BOJ wants it anyway.

‘Sterilizing’ is simply offering alternative interest bearing accounts such as JGB’s to the holders of the clearing balances. This would need to be done if the BOJ wanted higher rates. Or, the BOJ could simply pay interest on clearing balances if it wanted higher rates.

But the quantity of balances per se is of no ‘monetary’ consequence. As I like to say, for central banking it’s necessarily about price (interest rates) and not quantities.

So with rates already at 0, there is no more ‘monetary easing’ possible. The only ‘monetary easing’ the BOJ can do at this point is bring longer rates down some, but there isn’t much scope for that either. And they probably know by now lowering long term rates does nothing of major consequence for the real economy.

The question now is how far they will go. They’d probably like the yen back to north of 100 vs the dollar, and will move slowly to see how much political pressure they get from the US as they move in that direction. In fact, they may already be getting political pressure. I don’t know either way.

With political pressure building for China to adjust their currency upward as the US elections approach, this move by Japan might attract more attention than otherwise.

The irony/tragedy for the US is, of course, we should welcome all such moves, open ourselves for virtually unlimited imports from anywhere in the world (with sufficient quality control restrictions- no poison dog food, contaminated wall board, etc.), and enjoy the tax cut that comes along with it so we have sufficient purchasing power to be able to buy all of our own domestic output at full employment plus whatever the rest of the world wants to net export to us.

And apparently that’s a LOT right now. So with current policy of grossly overtaxing us for the size govt. we currently have, the losses of grossly over taxing ourselves may be north of 30% of US gdp, which is a staggering loss for us, and gone forever.

The only thing between what we have now and unimaginable prosperity remains the space between the ears of our policy makers, etc.

Please feel free to distribute, plagiarize, post anywhere, whatever!

*Rinban Result*

*upto 1yr to maturity (310bn)

Highest: +0.1bp
Average: +0.3bp
Allocation: 27.7%


* 1yr~10yr to maturity (250bn)

Highest: +1.5bp
Average: +2.1bp
Allocation: 19.0%

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Highlights:

 
 
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:

 
 
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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Housing Starts Down 8.7% In April

(Dow Jones) Japan’s housing starts fell 8.7% in April from a year earlier to 97,930 units, the Ministry of Land, Infrastructure and Transport said Friday.

The result was better than the 11.0% decline forecast by a Dow Jones and Nikkei poll of economists.

That was the 10th straight month of declines. The orders fell 15.6% in March and 5.0% in February.

Annualized housing starts stood at 1.151 million units.

Note that this is now higher than in the US, with a far lower population.

US starts should move well above this level over the next few months.

Housing starts for individual homes in April fell 7.8% to 27,274 units, while rental housing starts slipped 5.3% to 39,220 units.

Starts for multiunit dwellings, meanwhile, fell 10.4% to 31,048 units, including condominiums.

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Only the rising euro has kept the ecb from hiking, so far.

Highlights

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doesn’t look too bad?

Highlights:

Japan data volatile as usual, but a few interesting bits that are worth a quick look:

Industrial Output Falls 1.2% In Feb

(Dow Jones) Japanese industrial output declined in February, partly due to weaker overseas demand for electronic parts and devices, increasing worries that a downturn exports will slow the economy.

Separate data, meanwhile, showed that Japanese workers’ salaries rose for the second consecutive month. But the rise was mostly canceled out by higher consumer prices, so the higher wages are unlikely to give the broader economy much support.

Higher nominal wages probably represents elevated ‘inflation expectations’ to their mainstream economists.

Industrial output fell 1.2% from the previous month after adjustment for seasonal factors, according to data released Monday by the Ministry of Economy, Trade and Industry.

But better than expected:

The result was better than the 2.2% decline expected by economists surveyed by Dow Jones and Nikkei. The ministry said manufacturers expect their output to rise 2.0% in March, and to decline 1.0% in April.

Lower domestic production for pulp, paper and paper products, which was off 2.7% on month, also pushed overall output down.

Production issues?

Wages up for 2nd straight month
Meanwhile, Japanese workers’ average cash earnings rose for the second straight month in February, growing 1.3% on year to Y274,521, preliminary data from the Labor Ministry showed Monday.

Behind the rise was a 2.4% on-year increase in the number of full-time employees, the government said.

The rise in salaries and full-time employees “reflects businesses’ increasing efforts to secure against mid- to long-term labor shortages” and this could continue for a while, Yamamoto said.

Labor shortages and rising wages? That’s a change from the last fifteen years.

In January, wages climbed a revised 1.6% on year, following a 1.7% fall in December.

Still, “amid current price rises, it may take some time until salary rises help push up private consumption,” Yamamoto said.

Last Friday the government released data showing that the nationwide core consumer price index rose 1.0% on year, the biggest increase in almost a decade.

Average monthly wages excluding special allowances rose 0.9% on year to Y250,347, and average overtime pay also increased 2.6% to Y20,095. Special allowances jumped 28.1% to Y4,079.

Feb Construction Orders Up 18.4% On Year

Maybe they got the permit thing sort of straightened out? If so, most likely a large backlog to start working off.

(Dow Jones) Total construction orders received by Japan’s 50 leading domestic contractors rose 18.4% on year to Y1.221 trillion in February, the Ministry of Land, Infrastructure and Transport said Monday.

Orders fell 5.7% in January and rose 4.7% in December.

Orders from the public sector rose 45.9% to Y337.1 billion. Meanwhile, private sector orders gained 8.9% to Y776.8 billion.

Overseas construction orders rose 51.1% to Y59.1 billion, the ministry said.

Feb Housing Starts Fall 5.0% On Year

(Dow Jones) Japan’s housing starts fell 5.0% in February from a year earlier to 82,962 units, the Ministry of Land, Infrastructure and Transport said Monday.

The decline was larger than the 1.0% drop forecast by a Dow Jones/Nikkei poll of economists.

That was the eighth consecutive month of falls after orders dropped 5.7% in January and 19.2% in December.

Annualized housing starts stood at 1.15 million units.

That’s more than the US with maybe half the population.

Housing starts for individual homes in January fell 2.1% on year to 22,494 units, while rental housing fell 3.1% to 33,063 units.

Multiunit dwellings, meanwhile, declined 9.7% to 26,757 units, including condominiums.

And the drop is part of the permit problem?

The results suggest the fallout from a legal change that created bottlenecks for housing permits is gradually easing. Economists said, however, that a sudden recovery remains unlikely with corporate and household sentiment at multiyear lows.

Oil Imports Rise 8.2% In Feb, Up For 5th Straight Month

Demand remains high at current prices?

(Kyodo) Japan’s crude oil imports in February rose 8.2 percent from a year before to 127.18 million barrels, marking the fifth straight month of expansion, the Natural Resources and Energy Agency said Monday.

Imports from the Middle East accounted for 86.7 percent of the total, down 1.4 percentage points from a year before, the agency, under the Ministry of Economy, Trade and Industry, said in a preliminary report.

By country, Saudi Arabia remained the biggest supplier to Japan, exporting 35.98 million barrels, up 4.2 percent.

The United Arab Emirates stayed second with shipments rising 3.9 percent to 32.65 million barrels.

Iran was in third, exporting 16.48 million barrels, up 28.6 percent, followed by Qatar’s 9.56 million barrels, up 5.3 percent, and Kuwait’s 9.44 million barrels, up 5.7 percent.

Domestic output of petroleum products such as gasoline, naphtha and jet fuel in February rose 5.8 percent to 18.32 million kiloliters for the fifth straight month of increase. One kl equals 6.29 barrels.

Sales of such products in Japan increased 4.2 percent to 20.12 million kl, the second straight month of growth, the agency said.

Number Of Full-Time Workers Posts Highest Rise In 16 Years

(Kyodo) The number of full-time workers at firms with at least five employees in Japan rose 2.4 percent in February from a year earlier to 33.02 million, marking the highest pace of expansion in almost 16 years, the government said Monday.

The number of such workers, including permanent and nonpermanent jobholders, increased by more than 700,000 from a year before, the Ministry of Health, Labor and Welfare said in a preliminary report.

”Many companies are increasingly converting part-time workers to full-time workers, which may be behind” the highest pace of increase since June 1992, a ministry official said.

In contrast, the number of part-time workers at such firms increased by a mere 0.9 percent in February, with the pace of increase being smaller than that of full-time workers for the first time in 16 months, the report said.

The increase in full-time workers is attributable partly to the revised part-time labor law to be implemented Tuesday, which requires firms to take measures to promote shifting of part-timers into full-time employees on the regular payroll, analysts said.

Many companies have already been taking such steps ahead of the implementation of the law, they said.

Also, some big firms have been accelerating efforts to convert part-time and temporary workers into full-time workers amid the continuing expansion of the Japanese economy.

Such development is in contrast with the employment policy of large companies after the bursting of the nation’s asset-inflated economy in the early 1990s, in which they had to trim the number of full-time regular workers and increase the number of part-time workers in order to cut personnel costs.

Large companies including Takashimaya Co., Toyota Motor Corp. and Sumitomo Mitsui Banking Corp. have been increasing the number of full-time workers in a shift from past policy.

The ministry also said in the same report that average winter bonuses at the end of 2007 per regular employee at firms with at least five employees fell 2.8 percent from a year earlier to 417,507 yen for the first decline in four years.

The decline was partly attributable to lingering uncertainty over the Japanese economic outlook, the ministry official said.

Temporary Fall In Road Tax Not Seen Harming Economy

(Nikkei) If the rates on the gasoline and other road-related taxes are lowered from April, Japan’s economic growth may suffer, but the impact would be limited if lower rates are in place for only a few months, according to an estimate by Nikkei Digital Media Inc.

However, reduced taxes for a full year could cause economic growth to decline by up to 0.3 percentage point due to a cutback in road construction.

The firm’s Nikkei Economic Electronic Databank System (NEEDS) service projects that if road-related taxes become lighter, tax revenues for the central and local governments would shrink by a total of 2.6 trillion yen, while disposable income at households would increase by 1.6 trillion yen and corporate revenue would jump by 1 trillion yen. Other factors expected to affect actual economic growth include a reduction in public spending on road construction.

The tax rates are set to fall as a result of political deadlock over a bill to extend the provisional surcharge imposed on gasoline and other items.

The government and ruling parties aim to bring the lowered rates back to the current levels when the ruling coalition-controlled lower house gains the right to vote for the move in late April. If the higher rates are reimposed from the July-September quarter, and a 2.6 trillion yen reduction in public works spending is averted, fiscal 2008 economic growth would expand by 0.1 point. Under such a scenario, the impact from the tax rate change would be limited, with consumer spending estimated to grow by 0.1 point thanks to lowered gasoline prices, among other factors, and corporate capital investment is seen increasing by 0.2 point.

If the road-related taxes remain lower throughout fiscal 2008 and public works spending remains intact, financed by increased issuance of government bonds, economic growth would be boosted by 0.2 point, with consumption and corporate capital spending estimated to grow by 0.3 point and 0.4 point, respectively.

On the other hand, if the tax rates stay lower for the entire year and public spending is reduced, that would likely have a negative impact on economic growth. A 2.6 trillion yen reduction in public investment would hamper GDP growth by 0.3 point, and a 1.3 trillion yen cutback would push growth down by 0.1 point, with the positive effects of increases in consumer spending and corporate capital investment expected to be more than offset by a decrease in public works spending.

Highlights:

Adds to aggregate demand.

Don’t want Paulson to call them a currency manipulator.

They see inflation heating up over time.

Article:

Bonds: End Up On Weak Stocks: CPI, Tankan Eyed

TOKYO (Dow Jones)–Japanese government bonds ended higher Thursday due to weakness in Tokyo stocks but the upside was limited ahead of the fiscal-year end and major domestic events.

Market participants are now waiting for domestic economic data, including the consumer price index due out Friday, and the Bank of Japan’s quarterly tankan survey on April 1.

“If the CPI figure comes out better than market expectations (and tops 1%), BOJ rate cut views may slightly recede,” said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.

Note the rhetoric that states higher inflation is ‘better’ !!!

I still have a TIBOR short a year out as a bet they don’t cut as much as is priced in.

Japan’s nationwide core CPI, excluding fresh food, is expected to have risen 0.9% on year in February, according to economists surveyed by Dow Jones and Nikkei. The index climbed 0.8% in January. The five-year yield dropped 3.0 basis points to 0.725%. Yields on 10-year and 20-year JGBs were both down 1.0 basis point at 1.265% and 2.010% respectively.

News Headlines:

Seems to have done just fine last quarter without consumer confidence.