Notes From Underground: More On Japan

The question for global macro: Why did the Japanese decide to become more aggressive on quantitative easing at this moment? The YEN had been stable for most of the year, trading between 101 and 106 YEN to the DOLLAR and between 135 and 140 on the EUR/YEN for the previous four months. The Japanese seem to exert pressure after international meetings. The IMF and G7 and G20 ended in mid-October so either the Japanese wanted to avoid criticism about depreciating its currency or it received the GREEN LIGHT from the G7 members to get more aggressive on its QE efforts. Readers of NOTES FROM UNDERGROUND can revisit a blog post from October 15, 2012 when I noted that the G7 communique seemed to give the Japanese authorities a “wink” in its efforts to weaken an overvalued YEN. Let’s examine some other possibilities for renewed efforts by the BOJ to weaken the YEN and, of course, lift equity prices in a simultaneous move:

1. The Japanese Government is ¬†considering raising the consumption tax to 10 percent from 8 percent in October 2015. PRIME MINISTER ABE is supposed to decide in December so it may be that ABE wants to show the electorate that he is serious about bringing about an end to deflation. In a Financial Times interview with the prime minister October 20, the Abe acknowledged “… that if higher taxes pushed the economy back into recession, government revenues could actually fall and the whole exercise would be meaningless.” Abenomics has lifted the debt-to-GDP ratio to 240 percent so Japanese finance officials are making an effort to show international investors that Japan is doing all it can to assure fiscal rectitude. Abenomics believes that GROWTH and INFLATION can be combined with higher consumption taxes to drastically reduce the massive public debt. If the JGBs’ decline in value due to higher inflation, it is only the BOJ‘s balance sheet that will suffer.

The Government Pension Investment Fund (GPIF), Japanese insurance firms, banks and annuity investors will have offloaded JGBs to the ultimate buyer of last resort, THE BOJ. It seems Governor Kuroda has initiated Bernanke’s PORTFOLIO BALANCE CHANNEL and it’s pension funds are disposing of riskless assets and undertaking the purchase of domestic and foreign equities, as well as foreign bonds, an “all in” play by the BOJ. Bernanke used financial repression to motivate private investors to take on more risk while its public sector entities buying equities in Japan. But maybe the banks, insurers and GPIF are dumping the highest weighted risk assets in favor of greater stability. Again, I would not wish to own Japanese long bonds at 0.45%.

2. The recent drop in global oil prices has given Japan a reprieve on the massive outflow of YEN to purchase fuel. The March 2011 TSUNAMI (and Fukushima) caused Japan to turn off its nuclear reactors. The lack of nuclear-generated electric power has caused Japanese consumers and industry to pay higher costs as the price of oil hovered around $100. When the YEN was 80 to the DOLLAR, importing oil was tolerable but as the YEN weakened the costs became more burdensome. The recent drop in oil has seen CRUDE OIL IN YEN return to prices of two years ago as it is now 8600 Yen to a barrel of OIL, significantly below the price level of 109,000 yen per barrel in June.

The recent price improvement may have provided Governor Kuroda with the wiggle room to dramatically increase QE. It may also be indicative of Japanese thoughts about where oil prices are headed and the outcome will be that a weaker yen will be somewhat benign. This was just an exercise to think through the BOJ‘s actions. The problem for the BOJ is that the vote on the enhanced policy was 5-4. In a consensus-driven institution in a consensus-based society that places the BOJ decision on very shaky ground. Now the cards have been dealt, chips are all in … INSURANCE ANYONE.

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4 Responses to “Notes From Underground: More On Japan”

  1. Yra Says:

    readers–click on the link to the october 15th 2012 and scroll back to the previous blog of october 14th,2012–that is the one to reread–sorry for the confusion

  2. Alex Says:

    What a puzzle for us all Yra.

    Yesterday you mentioned the ‘best technician’ you knew. Any chance you could list some of his/her other tips or sayings? This is a business where we never stop learning. Thanks.

  3. Yra Says:

    Alex—sayings yes,as they come along—he was full of all types of witticisms in an effort to teach about the importance of pricing patterns to help unlock the hidden knowledge of the markets—i use them when trying to make a point about why one needs many tools in the box and the ability to synthesize the data–so yes is the long answer

  4. asherz Says:

    The Fed ended its QE program on Wednesday. BOJ suprises the markets and announces a more aggressive QE program on Friday. Coincidence? Is the risk on baton being passed on from the Fed, with the ECB also getting closer to do its aggressive program with Draghi joining Kuroda in keeping the race going? Onward S&P, upward Nikkei, forward the Eurozone markets.

    And how will the collapse in commodities impact the EM producers? We’re in uncharted territory.

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