The Bank of Japan last week offered to buy bonds at a fixed yield to curb rising interest rates, playing what was seen as an ultimate trump card far earlier than many expected.
The BOJ announced its first-ever fixed-rate purchase operation on the morning of Nov. 17 to counter mounting fears of an upswing in interest rates. Yields on 10-year Japanese government bonds had climbed steadily since the U.S. presidential election, rising as high as 0.035% the day ahead of the move. The fixed-rated option was introduced only two months ago as part of a monetary policy overhaul in late September that set a target of around zero for long-term yields.
A call went out for two- and five-year JGBs to address the rapid surge in short- and medium-term bond yields, according to the BOJ’s Financial Markets Department. There were no takers: The offered yields were higher than going market rates, meaning the offered prices were lower, sending wise traders elsewhere. But the conditions of the operation sent a strong signal as to how high the central bank will let rates go before stepping in. Yields slid across all maturities after the move was announced.
Since then, “interest rates’ upward climb has been weakened somewhat,” Takako Masai, a member of the bank’s policy board, told reporters after a speech Monday. “I get the sense that the purpose of fixed-rate operations has been well conveyed to markets.”
At first, the idea of central banks intervening in the equity markets was probably seen even by its fans as a temporary measure. But that’s not how government power grabs work. Control once acquired is hard for politicians and their bureaucrats to give up. Which means recent events are completely predictable:
(Bloomberg) – The value of the Swiss National Bank’s portfolio of U.S. equities rose nearly 1 percent to a record in the three months through September on the back of rallying share prices.
The holdings increased to $62.4 billion from $61.8 billion at the end of June, according to calculations by Bloomberg based on the central bank’s regulatory filing to the U.S. Securities and Exchange Commission and published on Monday.
The central bank had stakes in some 2,500 companies listed in the U.S., according to the SEC filing. Its biggest holdings were Apple Inc., Microsoft Corp. and Exxon Mobil Corp., according to data compiled by Bloomberg.———————-
(Bloomberg) – The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.
Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.
While the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. Forecasts of the BOJ’s future shareholder rankings assume that other major investors keep their positions stable and that policy makers maintain the historical composition of their purchases.
The central bank’s influence on Japanese stocks already rivals that of the biggest traders, often called “whales” in the industry jargon. It’s the No. 1 shareholder in piano maker Yamaha Corp., Bloomberg estimates show, after its ownership stake via ETFs climbed to about 5.9 percent.
The BOJ is set to become the top holder of about five other Nikkei 225 companies by year-end, after boosting its annual ETF buying target to 6 trillion yen last month. By 2017, the central bank will rank No. 1 in about a quarter of the index’s members, including Olympus Corp., the world’s biggest maker of endoscopes; Fanuc Corp., the largest producer of industrial robots; and Advantest Corp., one of the top manufacturers of semiconductor-testing devices.
The central bank owned about 60 percent of Japan’s domestic ETFs at the end of June, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. Based on a report released on Friday by the Investment Trusts Association, that figure rose to about 62 percent in July.
(Reuters) – The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday.
Speaking via video conference with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets.
But the Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds.”
“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” she said.If your first reaction to the above (especially Yellen’s clear misunderstanding of the respective roles of central banks and stock markets) is “these guys are idiots,” you’re probably in the minority. Most modern citizens see government intervention of any kind as at least a potentially good thing, depending on the situation. They’re wrong in this case, for the following reasons:
The biggest problem for the financial markets is not stocks nor is it the economy.
It’s the Bond Bubble.
Globally the bond bubble is now over $199 trillion in size. The world taken as a whole is sporting a Debt to GDP ratio of over 250%.
This is a systemic issue.
Once the bond bubble became large enough, Governments themselves are at risk of beingCentral insolvent. At that point, there were only three options:
1) Stop spending as much money.
2) Increase revenues (more on this shortly).
3) Make the debt loads easier to service.
Governments/ politicians will never push #1 because it is political suicide (the minute someone pushes for a budget cut the media and his/ her political opponents begin attacking the candidate for being “heartless” about some issue or other).
Option #2 is the so-called “growth” option. When Central Banks talk about focusing on “growth” what they’re really hoping to do is increase taxes (higher incomes, higher GDP growth=more tax money).
Remember, taxes=revenues for Governments. And revenues are what the Government uses to make debt payments. However, at some point, once you are deep enough in debt, the growth option becomes impossible.
This past Saturday October 8th, Bank of Japan Governor Haruhiko “Peter Pan” Kuroda delivered some prepared remarks on its new QQE with yield control (see here and here) at the Brookings Institute in Washington DC. The conference was attended by “luminaries” like Jeffries’ David Zervos, Princeton economist and Hillary supporter Alan Blinder, as well as many members of the press.
Kuroda began his remarks by praising the BOJ and its innovative yield curve control. In fact, in trying to explain the BOJ’s madness, Brooking’s fellow David Wessel concluded “it must something about the rice.”Kuroda noted that Japan is facing two major monetary policy challenges: 1) inflation expectations are formed in a backward looking manner and 2) figuring out what the link is between the optimum interest rate level and monetary easing. It should be quite comforting for investors to know that the man in charge of running the largest easing program in the world does not truly understand the link between low rates and easing.
The Japanese economist argued that it is still not well understood how inflation expectations are formed by the public and how they can be raised, once they have been anchored to “undesirable low levels.” To further make his point, Kuroda noted that both the IMF’s Chief Economist Olivier Blanchard, as well as President and punk-rock lover John Williams had suggested to raise the inflation target from 2% to 4%. Mr. Kuroda kindly responded that “the argument that the BOJ can lift inflation expectations simply raising inflation targets seems a little naïve… the BOJ needs to strengthen credibility.” It appears even central bankers can mock the IMF.
In one of his starkest warnings about the endgame of existing unorthodox, monetary policy, in his latest letter titled “Doubling Down”, Bill Gross repeats a familiar tune, warning that “our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today’s highly levered world.”
Once again he slams central bankers such as Carney and Yellen whom he describe as “Martingale gamblers” adding that “they do have an unlimited bankroll and that they can bet on the 31st, 32nd, or “whatever it takes” roll of the dice. After all, their cumulative balance sheets have increased by $15 trillion+ since the Great Recession. Why not $16 trillion more and then 20 or 30? They print for free, do they not, and actually they make money for themselves and their constituent banks in the process. Why not?”
He continues by observing the mockery capital markets have become, slamming central bankers who “have fostered a casino like atmosphere where savers/investors are presented with a Hobson’s Choice, or perhaps a more damaging Sophie’s Choice of participating (or not) in markets previously beyond prior imagination. Investors/savers are now scrappin’ like mongrel dogs for tidbits of return at the zero bound.”
He does warn, however, that limitations are approaching: “low/negative yields erode and in some cases destroy historical business models which foster savings/investment and ultimately economic growth. Our argument is that NIMs (net interest margins) for banks, and the solvency of insurance companies and pension funds with long dated and underfunded liabilities, have been negatively affected and that ultimately, the continuation of current monetary policies will lead to capital destruction as opposed to capital creation.”
Comments coming from Moody’s and Fitch, Headlines via Reuters:
Moody’s says that persistent low economic growth and inflation in Japan has prompted a shift toward greater monetary and fiscal accommodation
Moody’s have thus raise its forecasts for real GDP growth to 0.7% this year and 0.9% in 2017
Cites delay in the consumption tax hik
Implementation of additional fiscal stimulus
And Bank of Japan’s new monetary framework
The positive impact of these structural reforms will be set against intensifying pressures on growth and fiscal expenditure from an aging population. In the absence of a marked boost to growth from structural reform, we estimate that Japan’s already high debt burden will further edge up over the next decade.
The Bank of Japan’s latest measures are unlikely to ease pressure on bank profitability, but add to the risks faced by financial institutions – and could end up undermining efforts to boost the economy
Japanese bank profitability is being eroded by a number of factors, and the BOJ’s measures in September came in recognition of the pressures brought about by negative interest rates
The weak domestic economy has kept loan demand subdued – which, on top of the fierce competition among financial institutions, has dragged on earnings
Moreover, the continued strengthening of the yen in the face of BoJ easing has added to the pressure on both banks and corporates in Japan
Banks’ net interest margins (NIMs) have fallen steadily since 2010, most recently as a result of the BoJ’s negative interest rate policy which has flattened the yield curve further
Confidence at big Japanese manufacturers held steady in September from three months earlier, a closely watched central bank survey showed on Monday, as the economy is slow to recover amid a strong yen and sluggish demand at home and overseas.
The headline index for big manufacturers’ sentiment stood at plus 6 in September and is expected to remain unchanged over the next three months, the Bank of Japan’s quarterly “tankan” survey showed.
The reading matched the previous survey in June and compared with the median estimate of plus 7 in a Reuters poll of economists.
The tankan’s sentiment indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists.
Although the Bank of Japan’s pivot toward interest rate controls has been the subject of much interest, Gov. Haruhiko Kuroda was mostly focused on an entirely different issue when forming the new monetary framework: how to ensure the ultraloose stimulus continues even after he steps down.
On Sept. 21, which capped the two-day monetary policy meeting, the BOJ vowed to keep expanding the monetary base until the inflation rate exceeds the 2% threshold “and stays above the target in a stable manner.” The conventional wisdom in the U.S. and Europe is that central banks should aim for price increases of 3-4%. That view was a hot topic during the late-August gathering of central bankers in Jackson Hole, Wyoming, which Kuroda attended. Deflation is becoming a bigger risk than inflation, goes the argument.
For Kuroda, it was only natural to show a fiercer resolve toward beating deflation, said a BOJ official. The fact that the BOJ chief is sticking with the epoch-making easy money policy is also rooted in the mistakes made by the central bank in the past.
Mario Draghi said little is known about the varying impacts of the European Central Bank’s extraordinary monetary policy measures on different pockets of the population, hitting back at criticism that central bank stimulus benefits only the rich.
“Little is known to date of the distributional consequences of the unconventional tools we have used, either in respect of their impact or over the medium term”, said the ECB chiefin a speech.
His comments come after former UK chancellor George Osborne said yesterday that the Bank of England’s move to cut rates and buy bonds after the financial crisis “makes the rich richer and makes life difficult for ordinary savers”.
Mr Draghi however said the absence of any action from the world’s central banks would have hurt “the most vulnerable in our society who are disproportionately affected by unemployment”.
He also reiterated his well-worn plea for governments to step up their fiscal support for monetary policy.