Category Archives: Japan

IMF on Japan’s debt

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Just when you think they are coming around…

IMF report cites concerns over Japan’s fiscal situation

August 3 (Jiji Press) — The International Monetary Fund has expressed concern about the fiscal situation in Japan, where public debt keeps soaring.

Simulations by the IMF “suggest that global output losses could reach 2 percent of GDP” if Japan is “exposed to a reconsideration of sovereign risk by investors” and experiences a long-term interest rate jump of two percentage points, the IMF said in a report.

The international body called for a credible fiscal consolidation plan by Japan in the report on the spillovers of the domestic economic and monetary policies of major contributors to the global economy.

Prime Minister Shinzo Abe’s three-pronged economic policy, Abenomics, is believed to have “positive, albeit small” spillover effects on the global economy in the short term if all three arrows are successfully deployed, the report said.

But the IMF also said, “The pickup in growth provided by short-term fiscal and monetary stimulus is expected to wind down after a year or so.”

In the absence of a successful reform package including fiscal consolidation, structural reforms and achievement of the new inflation target, the IMF’s simulations “suggest that output in Japan will be 4 percent lower after 10 years,” the report said.

In a different report, focusing on major nations’ external positions, the IMF said it can see “moderate undervaluation” of the yen relative to medium-term fundamentals and desirable policies, in the wake of the currency’s sharp drop since autumn last year.

But in the spillover report, the global body said, “The effects of the yen’s depreciation on competitiveness in other countries is broadly offset by the positive effects of higher growth in Japan and lower interest rates in trading partners as a result of greater capital inflows and lower sovereign risk in Japan.”

At a teleconference, an IMF economist said it has become very difficult to analyze developments in Japan because of volatile market movements and a sharp deterioration in the nation’s trade balance due to soaring imports of energy sources.

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Consumption tax hike to make or break Abe’s reform plan

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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

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

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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.

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Japan CEFP headlines – nothing expansionary here

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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.

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JPY

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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.

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Tokyo Urged to Undertake Serious Fiscal Reforms

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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.

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Overall view of the economy

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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.

:(

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BOJ Shockwave Leveling Rates Sends Banks to Dollar: Japan Credit

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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.

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