Over the weekend, we asked rhetorically whether “The BoJ is The Next SNB?” after one BOJ official was overheard warning that “we have caused tremendous trouble for the financial industry,” and many others growing anxious about continuing its massive purchases of government bonds and pressure from the financial industry is strengthening by the day “to scale back monetary easing soon.” Overnight, it was none other than Goldman who reiterated precisely what we said, however when looking at the BOJ from the “other” angle - that of the central bank not doing enough to convince markets it will do everything in its power, i.e., print, until inflation is a “stable” 2%.
Here is Goldman’s Naohiko Baba with why the “BOJ at risk of losing credibility over its price commitment”
The Bank of Japan (BOJ) kept its monetary policy unchanged, as we expected, at the Monetary Policy Meeting on January 20-21. Two noteworthy points from Governor Kuroda’s subsequent press conference were as follows:
1. The BOJ released its interim assessment of the October Outlook Report at the MPM, and sharply lowered its core CPI outlook – for FY2014 to +0.9% from +1.2%, and for FY2015 to +1.0% from +1.7% – reflecting the recent slide in crude oil prices. However, the BOJ maintains its view that its 2% price stability target is likely to be achieved by around FY2015.
2. The MPM did not discuss lowering the 10 bp interest rate on excess bank reserves, despite heightened expectations among foreign investors in particular ahead of the meeting.
A few days after the SNB shocked the world when it became the first central bank to pull out of its currency war with the ECB, leading to an epic defeat not only for the Swiss economy whose exports are now set to crash and various brokers and macro hedge funds who were short the Swissy (even as the SNB is nursing an epic balance sheet as as result of its failed 3+ year intervention), and following the latest Chinese snub of its overzealous stock gamblers, next up on the “shock and awe” bandwagon may be none other than the Bank of Japan (something we noted over the weekend in “Is The BoJ The Next SNB?”), where according to Reuters, any hopes for even more QE may be dashed after a ruling party lawmaker and one of the architects of Prime Minister Shinzo Abe’s “Abenomics” policies said that the Bank of Japan “does not need to ease monetary policy further this year unless the economy is hit by a severe external shock.”
As a reminder, it was just hours after the Fed’s QE ended on October 31, when the BOJ shocked markets with expanding its own QE even further, sending the USDJPY soaring above 120. The problem is that with the Nikkei tracking the USDJPY tick for tick, implying all risk gains come at the expense of currency losses, last Firday the Nikkei had fully roundtripped to the level seen just after the announcement, suggesting any further gains would require even more easing. Easing, which will not come unless Japan’s economy, already in freefall, literally implodes.>> Read More
Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order.
Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82pc of the items in the producer price basket are deflating in China. The figures is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities.
Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147pc to 207pc of GDP in six years.
These countries face a Sisyphean Task. They are trying to deleverage, but the slowdown in nominal GDP caused by falling inflation is always one step ahead of them. “Debt to GDP has risen despite these efforts,” he said. If this sounds familiar, it should be. It is exactly what is happening in Italy, France, the Netherlands, and much of the eurozone.
Haruhiko Kuroda, governor of the Bank of Japan, sometimes asks close aides how he will be remembered. The central bank chief is well aware of the enormity of the challenge he is tackling.
The BOJ governor took the helm in March last year and soon after unleashed an unprecedented easing program that aimed to push inflation to 2% within two years.
If he manages to pull this off, and end the easing incident-free, Kuroda believes he will deserve the title of “great central banker.” The challenge is formidable: Japan’s growth potential is declining due to a confluence of factors, most importantly the shrinking population.
Short-term government bills, or T-bills, in recent days have been posting negative yields. That means investors are paying more money than they can expect to earn when the bills mature. In effect, they are paying simply to hold these securities.>> Read More
The Bank of Japan reiterated its stance in its monthly update on monetary policy, saying that the Japanese economy is continuing to “recover moderately as a trend,” although it acknowledged that the country’s recent sales tax hike was having some effect on production.
The BOJ said that there was “some weakness particularly on the production side….due mainly to the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike.”
Japan raised its sales tax for the first time in seventeen years in April, from 5 to 8 per cent, meaning people rushed out to buy cars, furniture and expensive items before it was implemented.
Otherwise, the BOJ added that private consumption “has remained resilient as a trend.” It maintained its 2 per cent inflation target.
Japan’s central-bank chief predicted victory in his battle to root out the deflation that has long sapped economic vitality in the world’s third-largest economy, but expressed impatience with the government’s pace in cutting red tape and encouraging businesses to invest more.
“Implementation is key, and implementation should be swift,” Bank of Japan Gov. Haruhiko Kuroda said in an interview with The Wall Street Journal. “The major work to be done is by the government and the private sector.”
Mr. Kuroda’s comments mark an important shift in tone more than a year after he was tapped by Japanese Prime Minister Shinzo Abe to engineer a newly aggressive monetary policy. The resulting “bazooka” of stimulus actions, including the purchase of trillions of yen in government bonds and other assets, has fueled Japan’s longest economic growth streak in nearly four years and a steady stream of positive inflation readings.>> Read More