Tag Archives: BoJ

LTRO birdie telling me maybe the BOJ gave the nod to its banks

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Just a hunch now, but Italian, Spanish, and related bond yields began falling coincident with the first ECB LTRO. The question is why, as I saw no operative channel of consequence from ECB liquidity provision of 3 year funds on a floating rate basis to the term structure of rates.

So it seemed to me that also coincident to the LTRO was some entity giving the nod to its banks to buy those bonds, or some reason sellers of those bonds backed off.

I’m now thinking it may have been the BOJ giving the nod to its member banks to buy euro member debt denominated in euro and keep the fx risk on their books, with the assurance govt policy would keep the yen weak and guarantee the banks an fx profit.

We learned after the fact that Japan had been selling yen well before they announced their new weak yen stance. And having their banks buy euro member euro denominated debt directly weakens the yen vs the euro.

The timing of the events- the LTRO/yen sell off/yen policy change- is close enough to get my attention.

So Japan managed to weaken the yen and firm euro member debt prices all under the cover of the ECB LTRO operation which they gladly allowed to take the credit.

In any case, I don’t expect any more from this next LTRO than I expected from the last, but I am keeping a close eye on the yen.

oil

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CB announcements

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Just looks like the Fed lowered the rate on its swap lines to keep libor down, which had been moving up to its prior swap line rate.

No big deal, apart from the fact the Fed shouldn’t be allowed to lend on an unsecured basis like this without explicit approval of congress.

Lending unsecured on an unlimited basis has the potential to be highly inflationary.

With the currency a public monopoly, the price level is necessarily a function of prices paid at the point of govt spending and or collateral demanded when govt lends.

Allowing unlimited unsecured lending has the potential to vaporize the currency. And while in this case that kind of abuse isn’t likely, the potential is there.

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BOJ Shirakawa Warns Japan Economic Outlook ‘Very Severe’

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After all these years they are still threatening to use policy tools that have no effect on the real economy, and little if any effect on finance.

And with the rest of world seemingly thinking the same way as well risks of a global double dip are increasing.

BOJ Shirakawa Warns Japan Economic Outlook ‘Very Severe’

By Leika Kihara

April 30 (Reuters) — Bank of Japan Governor Masaaki Shirakawa said on Saturday that the country’s economic outlook was very severe and that the central bank would take appropriate action to support the economy.
But he offered few clues on whether and when the BOJ would expand its asset-buying scheme, only saying that its next policy step would depend on economic conditions at the time.

“The BOJ sees the outlook for Japan’s economy as very severe,” Shirakawa told a financial committee meeting in the lower house of parliament. “We’d like to take appropriate policy steps as needed while monitoring the economy and prices, taking into account that uncertainty over the outlook is high,” he said.

Asked by a lawmaker whether the BOJ would consider buying more government bonds to support the economy, Shirakawa said only: “We’d like to consider in earnest what would be the desirable step to take.”

The BOJ kept monetary policy unchanged on Thursday even as it lowered its growth forecast for the current fiscal year, which began in April, and warned of uncertainties over the extent of damage that last month’s devastating earthquake would inflict on the economy.

Shirakawa reiterated that having just expanded its asset purchasing scheme days after the March 11 quake, the BOJ preferred to spend more time examining the impact the step would have on the economy.

But he also left open the possibility of easing monetary policy further if damage from the quake proved bigger than expected, stressing that the central bank was focusing on downside risks to growth for the time being.

In a sign some in the BOJ were more cautious about the economic outlook than Shirakawa, Deputy Governor Kiyohiko Nishimura proposed on Thursday expanding the central bank’s asset buying scheme by 5 trillion yen ($62 billion).

While the proposal was outvoted by the board, some market players said it may be a sign the BOJ may loosen policy as early as next month.

Japan is facing its worst crisis since World War Two after the 9.0 magnitude earthquake and subsequent tsunami devastated its northeast coast last month.

Reflecting the economic impact, factory output fell at a record monthly pace in March, household spending declined at a record annual rate and another private survey showed manufacturing activity languishing at a two-year low.

The BOJ eased policy days after the quake by doubling to 10 trillion yen the funds it sets aside for purchases of a range of financial assets, such as government bonds and corporate debt.

If the central bank were to next ease policy, the most likely step would be to expand the scheme again, sources familiar with the BOJ’s thinking say.

Aside from the government bonds it purchases under the asset buying scheme, the central bank buys 21.6 trillion yen worth of long-term government bonds from the market each year.

Some lawmakers have called on the BOJ to buy more government bonds from the market, or even underwrite them directly, to help the government fund the huge costs for reconstruction.

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Japan CPI

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from Dave:

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

Petrol products were up +23.9% y/y

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

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

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

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


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BOJ and inflation

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Bank of Japan keeps distance from Fed, ECB hawks

by Leika Kihara

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

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

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

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

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


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FT: US credit rating under threat

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

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

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

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

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

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

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

US credit rating under threat

by Aline van Duyn

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

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

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

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

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

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

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

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

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

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

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

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Re: tell Paulson to let the MOF buy $

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(an email)

On Jan 23, 2008 9:26 AM, Mike wrote:
> Trichet and his standard model are going to engineer a market crash in
> europe it looks like… wonder if he will be FT’s man of the year next
> year?

and he’s playing with fire with the lack of credible deposit insurance in the ecb’s member banks.

buy some 2 year german credit default ins if you haven’t already!

I think the ‘chess move’ here is for the BOJ to start buying $US. They would like to, but don’t want Paulson coming down on them for being ‘currency manipulators.’

If I were Tsy sec I’d be calling the MOF and giving them the green light to buy $US.

by the way, Jack Welch is on CNBC saying gdp is muddling along at 1.5% based on what he hears from corp america. no recession, yet

warren

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Fed communications

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If conveying information is considered important for market function, why not just say it clearly and directly in a targeted announcement?

Kohn Says Fed Is Trying to Signal When Views Shift `Materially’

2008-01-05 11:15 (New York)
By Scott Lanman and Steve Matthews

(Bloomberg) Federal Reserve Vice Chairman Donald Kohn said the central bank has increased its communication on policy views to the public in the wake of the financial-market “turmoil” that began in August.

Fed officials have tried to signal when the central bank’s reading on the economic outlook shifted “materially” in between regular meetings, Kohn said in a speech in New Orleans. “We have tried to provide more information than usual to reduce uncertainty and clarify our intentions.”

Kohn spoke before a week in which Chairman Ben S. Bernanke and six other Fed policy makers are scheduled to deliver remarks. The speeches come amid increasing signs of danger to the U.S. economic expansion, including a jump in the unemployment rate to a two-year high and a contraction in manufacturing. Traders anticipate the Fed will cut interest rates again Jan. 30.

Still, investors “should understand” that officials “do not coordinate schedules and messages, and that members’ views are likely to be especially diverse” when circumstances are rapidly changing, Kohn said.

Kohn held out Bernanke’s last speech on Nov. 29 as a signal of a change in the Fed’s views. The chairman said at the time that volatility in credit markets had “importantly affected” the economic outlook and declined to repeat the Federal Open Market Committee’s October statement that inflation and growth risks were about equal. The Fed then cut rates on Dec. 11.

`Let People Know’

“We have attempted to let people know when our views of the macroeconomic situation had changed materially between FOMC meetings,” said Kohn said in prepared remarks at the National Association for Business Economics panel discussion, part of the Allied Social Science Associations annual meeting.

The vice chairman didn’t comment on the outlook for monetary policy or the economy in the text of his remarks.

Bank of Japan Deputy Governor Kazumasa Iwata and European Central Bank Vice President Lucas Papademos were also scheduled to speak in the same session.

Traders yesterday shifted to bets on 50 basis points of interest-rate cuts by the Fed this month from 25 basis points after U.S. hiring slowed more than forecast in December and unemployment rose to 5 percent. The Fed lowered its main rate a quarter percentage point to 4.25 percent at its last meeting on Dec. 11. A basis point is 0.01 percentage point.

Fed Speakers

Bernanke speaks Jan. 10 in Washington. Other Fed officials giving talks include Boston Fed President Eric Rosengren and Kansas City Fed President Thomas Hoenig, the last two policy makers to cast dissenting FOMC votes. Charles Plosser, head of the Philadelphia Fed, votes as an FOMC member for the first time this month; he will discuss his economic outlook Jan. 8.

The FOMC is scheduled to meet Jan. 29-30 in Washington.

Separately, Kohn said today that the FOMC’s new forecasts for inflation three years out do not represent an “explicit numerical definition of price stability,” something the committee decided against, but rather the inflation rate that is “acceptable and consistent with fulfilling our congressional mandates.”

Kohn, who said in 2003 that he was “skeptical” about a price target, chaired a subcommittee of officials that coordinated work on the Fed’s communication review that began in 2006. He suggested in September that his doubts about the idea had eased.

Inflation Expectations

“I expect that our new projections will provide some of the benefits of an explicit target in better anchoring inflation expectations while not giving up any flexibility to react to developments that threaten high employment,” Kohn said today.

He also echoed remarks by Bernanke that the Fed will continue to look for “additional steps” to improve communication.

Fed officials decided last year not to report members’ assumptions of the “appropriate” path of interest rates because of concern that investors would “infer more of a commitment to following the implied path than would be appropriate for good policy,” the vice chairman said.

Kohn, speaking yesterday at the same conference, said diverse views on the 19-member FOMC lead to better monetary policy decisions. “The authority of the chairman rests on his ability to persuade the other members of the committee that the choices they are making under his leadership will accomplish their objectives,” he said.

–Editor: Chris Anstey, Christopher Wellisz
To contact the reporter on this story:
Scott Lanman in Washington at +1-202-624-1934 or
slanman@bloomberg.net;
Steve Matthews in New Orleans at +1-404-507-1310 or
smatthews@bloomberg.net.

To contact the editor responsible for this story:
Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net

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