Category Archives: UK

ADP

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Continuing evidence of deceleration.

A 150,000 jobs print Friday puts the 3 month average back to around where it was when the Fed expanded QE due last year due to cliff fears, etc.

So with CPI also weak, at least for now the Fed continues to fail on both its mandate targets. Seems the FOMC doesn’t yet appreciate the power of the interest income channels, as expanded QE means that much more interest income is being removed from the economy.

And the ‘government getting out of the way’ means less ‘free income’ for the economy, meaning increased domestic ‘borrowing to spend’/’dipping into savings’ for all practical purposes is the only way to ‘jump the gap’ of reduced govt deficit spending and sustain output and employment.

In other words, the risk is that the already narrowing govt deficit was proactively made too small to support the current domestic credit structure.

And if so, market forces work to increase govt deficit spending/restore required private sector net financial assets the ugly way- falling revenues and increased transfer payments, aka the automatic fiscal stabilizers.

Much like we’ve seen in the euro zone, the UK, Japan, etc. etc. etc. etc. etc.

ADP graph

ADP reports 135,000 private-sector jobs created in May, vs. estimate of 165,000

By Jeff Cox

June 5 (CNBC) — Private-sector job creation was weaker than expected in May, as the economy struggled to break free of what appears to be a summer slowdown on the horizon.

ADP and Moody’s Analytics reported just 135,000 new positions for the month, below expectations of 165,000.

Services were responsible for all the new jobs, adding 138,000, while the goods-producing sector lost 3,000 positions.

Construction added 5,000 workers, but that was offset by a loss of 6,000 manufacturing jobs.

The poor showing sets the stage for a possibly weak nonfarm payrolls report on Friday, when the Labor Department had been expected to show 169,000 new jobs.

Economists sometimes will use the ADP numbers to adjust their estimates for the government account, even though the private-sector count has been a historically unreliable gauge.

“The job market continues to expand, but growth has slowed since the beginning of the year,” Moody’s economist Mark Zandi said in a statement.

Financial markets offered muted reaction to the report, with stock market futures off their lows. Investors have been using the weak economic reports to fuel hopes that the Federal Reserve will continue with its aggressive easing program.

The Fed is creating money to buy $85 billion in Treasurys and mortgage-backed securities each month.

Recently, some members have suggested that the central bank begin easing its purchases, and markets in turn have been unsettled as interest rates have climbed and equities have been volatile.

A weak payrolls number Friday could go a long way toward squelching talk that the Fed will begin tapering purchases as soon as this month.

“As far as the tapering debate goes, the report does nothing to bolster expectations that the Fed will ease its foot off the pedal over the summer,” Andrew Wilkinson, chief market economist at Miller Tabak, said in a note.

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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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CBO Updated Budget Projections: Fiscal Years 2013 to 2023

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Updated Budget Projections: Fiscal Years 2013 to 2023


Karim writes:

Deficit projected 200bn less than 3mths ago for current fiscal year. Projected at 2.1% of GDP for 2014-15, or 600bn less than 3mtgs ago.

No more grand bargain talk?

Maybe, but this is still being said:

For the 20142023 period, deficits in CBOs baseline projections total $6.3 trillion. With such deficits, federal debt held by the public is projected to remain above 70 percent of GDPfar higher than the 39 percent average seen over the past four decades. (As recently as the end of 2007, federal debt equaled 36 percent of GDP.) Under current law, the debt is projected to decline from about 76 percent of GDP in 2014 to slightly below 71 percent in 2018 but then to start rising again; by 2023, if current laws remain in place, debt will equal 74 percent of GDP and continue to be on an upward path (see figure below).

And it all begs the question of whether the proactive tax hikes and spending cuts will through the credit accelerators into reverse, as nominal GDP growth continues to decelerate.

I sat next to Al Gore at dinner at Monty Friedkin’s house in Boca for 45 minutes in front of that election. Cliff was there as well. Al asked me how we should spend the $5.6 trillion surplus projected for the next 10 years. I told him there wasn’t going to be a $5.6 trillion surplus as that implied a reduction of that much of net global $US financial assets, to the penny. Instead, a $5.6 trillion deficit was more likely to bring deficit spending back in line with ‘savings desires’ which I also described. He’s a pretty good student, went through the numbers, and agreed with the logic. He then said something like ‘You know I can’t get up and say any of this’ as he got up and explained how he was going to spend the $5.6 trillion surplus.

Point is, the CBO makes assumptions about growth that don’t recognize that growth can be a function of fiscal balance.

In other words the tax hikes and spending cuts (aka ‘austerity’) initially cause the deficit to fall, but if the deficit is proactively brought down too much then undermines private sector credit expansion/spending causing sales/output/employment to slow sufficiently for the deficit to rise to where it ‘needs to be’ from suddenly falling revenues and rising transfer payments. As demonstrated by proactive fiscal tightening in the UK, Europe, and Japan, for example.

This is not to say the tax hikes and spending cuts in the US have crossed that line.
Nor is it to say they haven’t.
For me the jury is still out.

Today’s Tepper rally apparently was based on the idea that the ‘QE money has to be invested somewhere’ which is of course total nonsense.

(See if you can spot any sign of QE in the attached nominal GDP chart)

But it moved the market nonetheless.

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Fitch: Why Sovereigns Default on Local Currency Debt

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Seems like subversive propoganda to me.
They deliberately ignore the obvious fixed vs floating fx distinction, for example.
A few comments below:

Fitch: Why Sovereigns Default on Local Currency Debt

May 10 (Fitch) — Fitch Ratings says in a newly-published report that the popular perception that sovereigns cannot default on debt denominated in their own currency because of their power to print money is a myth. They can and do.

Local currency defaults in the recent era include: Venezuela (1998), Russia (1998), Ukraine (1998), Ecuador (1999), Argentina (2001) and Jamaica (2010 and 2013). Nonetheless, we recognise that local currency defaults are less frequent than foreign currency defaults and are unlikely for countries with debt mainly denominated in local currency at long maturity.

Russia and Argentina, for example, had headline, well publicized fixed exchange rate policies, where they fixed the value of their currency to the $US. Failing to recognize that in this report is intellectually dishonest.

To assess the capacity which sovereigns have to inflate away their debt, this report uses our debt dynamics model to illustrate how much surprise inflation might be required for three hypothetical scenarios. For a country with a large primary budget deficit, gains to the debt to GDP ratio from even quite high inflation would be short-lived. While for a country with a debt to GDP ratio of 100%, primary deficit of 1%, real growth equal to the real interest rate and a 10-year average debt maturity, it would take a jump to 30% inflation (from our 2% baseline) for three years and 10% thereafter to bring the debt ratio below the 60% Maastricht threshold.

There is no such thing as ‘inflate away their debt’ as govt debt represents the global net savings of financial assets of that currency. So all that can be said in this context is that ‘savings desires’ are, for all practical purposes, always going to be there as some % of GDP.

Undoubtedly, higher inflation can be used to raise seigniorage (the difference between the value of money and the cost to print it)

This is nonsensical with floating exchange rate policy ( non convertible currency) as, for example, all US govt spending can be called ‘printing’ as it’s just a matter of the Fed crediting a member bank account. Likewise, taxing is ‘unprinting’ as it’s just a matter of debiting a member bank account. With fixed fx policy, it’s the ratio of convertible currency outstanding vs the actual fx reserves at the CB, a very different matter.

and remittance of central bank profits to the government, up to a point. Nevertheless, in the long run, the ratio of government debt/GDP will rise if the government is running a primary budget deficit (excluding interest payments and including seigniorage), assuming the real growth rate does not exceed the real interest rate, irrespective of the inflation rate.

An unanticipated burst of inflation can reduce the real value of government debt as long as the debt is not of short maturity (as higher inflation is quickly reflected in the marginal cost of funding), index linked or denominated in foreign currency (as the exchange rate would depreciate). Thus countries with such characteristics – which give them ‘monetary sovereignty’ – do have some capacity to inflate away their debt.

Linking govt payments to an index is a form of fixed exchange rate policy and yes, govts can and do default on these types of fixed exchange rate ‘promises.’

Inflation is economically and politically costly.

Politically costly, yes, but economically, there are no studies that show real costs to the economy from inflation.

Thus, even if a sovereign has a capacity to inflate away its debt, it might choose not to. It is also far from clear how much money would need to be printed to deliver the ‘right’ inflation rate, as the current debate over quantitative easing highlights. Instead a sovereign might view a Distressed Debt Exchange (DDE) as a less bad policy option. Fitch classifies a DDE as a default.

This is a confused rhetoric and a display of total ignorance of actual monetary operations.

The myth that sovereigns that can print money cannot default on debt in their own currency has also fed the proposition that such local currency ratings are irrelevant.

Fitch is again refusing to distinguish convertible and non convertible currency policy.

Fitch disagrees that default is inconceivable or impossible. The agency agrees that countries with strong monetary sovereignty and financing flexibility are unlikely to default and these are important factors in Fitch’s sovereign rating methodology that affect both local and foreign currency ratings.

A sovereign’s local currency rating is closely linked to its foreign currency rating. It is typically one or two notches higher, owing to the sovereign’s somewhat greater capacity to pay debt in local currency, as taxes are usually paid in local currency and it may have better access to a stable domestic capital market, as well as some capacity to print money. It may also be more willing to service local currency debt if more of it is held by local banks and other residents.

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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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Franklin College Receives Swiss Institutional University Recognition

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Congrats!!!

FW from President Gregory Warden:

It is with great pleasure and tremendous pride that I am able to announce that the Swiss University Conference [SUK/CUS], the governing body for higher education in Switzerland, has granted Franklin College Switzerland full university institution accreditation, stating in its recent notification:

We are pleased to inform you of the positive decision made by the SUK [CUS] on April 18, 2013 regarding the accreditation of Franklin College Switzerland as a university institution.

The notice of accreditation went on to state:

The expert team is convinced that Franklin College Switzerland has gone through a major development since the last accreditation. This is largely the result of the realization of the recommendations by the 2005 OAQ expert team. Franklin College Switzerland now is better integrated within the Swiss landscape, as well as being connected within Europe. According to the expert team, it has above all strengthened its research activities. The qualifications and in particular the research activities of the faculty have significantly increased since the last accreditation.

In 2005 the Swiss University Conference granted Swiss university accreditation to all major programs of study leading to the Franklin College Bachelor of Arts degreemaking Franklin the first and only university to receive such recognition. With our new institutional accreditation, it is with even greater pride that Franklin is now the first and only university to have institutional university accreditation in both the United States and Switzerlanda distinction that will serve Franklin and its past and future graduates well.

In the Swiss Center of Accreditation and Quality Assurance in Higher Educations expert team recommendation to the Swiss University Conference they stated that Franklin College fulfills all accreditation standards, making the following statement and recommendation:

Franklin College is an American and private institution of higher education in Europe, and thus it represents a kind of hybrid organization. It has introduced new educational principles into the European setting, it is very international by its course offerings and by its student body, and in its teaching it puts heavy emphasis on the general skills and human values, that are especially appropriate for the 21st century world. Its programs are well linked to meet the current challenges in higher education, also on a global scale. Its teaching methods are innovative and appropriate. The students also have a strong feeling of belonging to the Franklin community. The network of its alumni appears to be very active, spread all over the world. The Franklin graduates appear to be well placed especially in international companies. Its strategic goals appear very appropriate to meet the needs and challenges higher education at large is currently facing at least in Europe, but also globally. The experts group recommends accreditation of Franklin College Switzerland, without conditions.

Everyone associated with Franklin should be very proud of all that has been achieved since it was founded in 1969. This recognition is an affirmation of the quality of the institution as a whole and the hard work and contributions of so many peoplefaculty, staff, students, alumni, parents and trustees. Franklin would not be the special place it is today if it were not for each and everyones efforts on its behalf.

Thank you and best regards,

P. Gregory Warden
President

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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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U.S. Warns Japan on Yen

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So does the US have a strong dollar policy, a weak dollar policy, or an ‘unchanged’ dollar policy?

In any case, President Obama and Congress still fail to recognize that imports are real benefits and exports real costs. And that net imports mean taxes can be lower and/or spending higher to sustain full employment levels of demand.

So what would you rather have?
1. A strong dollar, rising net imports, and lower taxes, or
2. A weak dollar, falling net imports, and higher taxes?

How hard is this???

As for Japan, the BOJ hasn’t actually done anything to weaken the yen. Nor has fiscal policy, at least yet, though if the announced deficit hike goes through it could be a modestly weakening influence. The trade flows going into deficit from surplus have hurt the yen, as gas and oil replaced the nukes that were shut down, though they are in the process of relighting them. And portfolio shifting has probably weakened the yen the most, with life insurance companies, pensions, etc. reportedly adding risk to their portfolios by shifting from yen assets to dollar and euro assets. Yes, this is a ‘one time’ adjustment, but it can be sizable and take years, or it could have already run its course. I personally have no way of knowing, but no doubt ‘insiders’ are fully aware of how this will play out.

Furthermore, the US is going the other way with tax hikes and spending cuts a firming influence on the dollar, which is at least part of the yen/dollar weakness.

Too many cross currents for me to bet on one way or another. If you have to trade it go by the charts and don’t watch the news…

U.S. Warns Japan on Yen

By Thomas Catan and Ian Talley

April 12 (WSJ) — The Obama administration used new and pointed language to warn Japan not to hold down the value of its currency to gain a competitive advantage in world markets, as the new government in Tokyo pursues aggressive policies aimed at recharging growth.

In its semiannual report on global exchange rates, the U.S. Treasury on Friday also criticized China for resuming “large-scale” market interventions to hold down the value of its currency, calling it a troubling development. The U.S. stopped short of naming China a currency manipulator, avoiding a designation that could disrupt relations between the world powers.

The Chinese Embassy didn’t immediately respond to a request for comment. A Japanese government official reached early Saturday in Tokyo declined to comment directly on the Treasury report, but said, “We will continue to abide by” recent commitments by global financial policy makers to avoid intentional currency devaluation”as we have done until now.”

The Treasury report appears to be part of a broader strategy by the Obama administration in response to a sharp shift in economic policy in Japan under new Prime Minister Shinzo Abe.

Hours before the currency warning, the White House said it had accepted Mr. Abe’s request to join negotiations to create an ambitious pan-Pacific free trade zone, despite objections from the American auto industry and other domestic sectors worried about new competition from Japan. The U.S. government is welcoming economic reforms in Japan while trying to discourage Tokyo from reverting to prior tactics of trade manipulation.

The Bank of Japan kicked off the latest drop in the yen by shocking markets last week by announcing plans for a massive increase in money supply, pledging a sharp increase in purchases of government bonds and other assets. The dollar has risen nearly 7% against the yen since then, and is up 15% since Mr. Abe came into power on Dec. 26.

Policy makers in Japan sensitive to currency complaints and warnings have repeatedly insisted in recent days that the yen’s sharp fall has merely been a byproduct of its stimulus policies, not a goal.

“We have no intention to conduct monetary policy targeting the exchange rate,” Haruhiko Kuroda, the new Bank of Japan governor whose policies have helped push down the yen, said in a Tokyo speech Friday. The BOJ’s policies, he added, were aimed at pulling Japan out of its long slump and that “achieving this goal will eventually provide the global economy with favorable effects.”

Amid sluggish global growth, governments face the temptation to lower the value of their currencies to juice exports. Those pressures are aggravated as central banks in the U.S., Europe and Japan seek to spur their economies by pushing cash into the systempolicies that have the effect of weakening their currencies. Seeking higher returns, investors are putting their money into emerging markets, putting upward pressure on those countries’ currencies and making their exports more expensive abroad.

The U.S. said it would “closely monitor” Japan’s economic policies to ensure they are aimed at boosting growth, not weakening the value of the currency. The yen is now hovering near a four-year low against the dollar, in response to Mr. Abe’s policies.

“We will continue to press Japanto refrain from competitive devaluation and targeting its exchange rate for competitive purposes,” the Treasury report said.

The yen quickly strengthened following the report, pulling the dollar to as low as 98.08, its lowest level this week, in a thin Friday afternoon market. The yen later gave back some of those gains, as investors came to see the comments less as criticism than as a statement of fact.

American officials have been walking a tightrope in recent months. While worried about a deliberate currency devaluation, they have also tried to encourage Japan’s attempts to jump-start growth, after years of frustration in Washington that Tokyo wasn’t doing enough to fix its economy.

“The wording does make it clear that the U.S. Treasury is watching extremely closely” to ensure that Japan lives up to promises not to purposely weaken its currency, said Alan Ruskin, a currency strategist at Deutsche Bank in New York. But, he added, “the report does not infer that Japan is breaking any agreement.”

The Treasury report, required by Congress and closely followed by markets, highlighted the need for more exchange-rate flexibility in many Asian countries, most notably China.

The Treasury used tougher-than-usual language on China, saying Beijing’s “recent resumption of intervention on a large scale is troubling.” While it noted that China had allowed the yuan to appreciate by about 10% against the dollar since June 2010or 16% including inflationthe report said the Chinese currency remained significantly undervalued and “further appreciation” was warranted.

The Treasury in recent years under both Republican and Democratic administrations has declined to formally label China as a currency manipulator, with officials suggesting publicly and privately that such a step would hurt efforts to encourage Beijing to let the yuan rise.

Still, the question of China’s currency has become shorthand in Washington for the broader debate over the economic relationship between the two countries. It was a frequent topic on the campaign trail for both President Barack Obama and GOP challenger Mitt Romney last year, as Mr. Romney pledged that if elected, he would label China a currency manipulator.

On Friday, some U.S. manufacturers criticized the Obama administration for its reluctance to call China a currency manipulator. “The Treasury Department’s latest refusal to label China a currency manipulator once again demonstrates President Obama’s deep-seated indifference to a major, ongoing threat to American manufacturing’s competitiveness, and to the U.S. economy’s return to genuine health,” said the U.S. Business and Industry Council, an industry lobby group.

The Treasury report also took South Korea to task for seeking to keep a lid on the won as foreign investors flood the economy with cash. “Korean authorities should limit foreign-exchange intervention to the exceptional circumstances of disorderly market conditions,” and capital controls should only be used to prevent financial instability, not reduce upward pressure on the exchange rate, Treasury said.

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