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.
The BOJ has just admitted, in effect, that it has a credibility problem
The confession is subtle, but it’s very much there. In a neat chart in appendix three of the BOJ’s “comprehensive assessment” of how its policy of the past three years has worked, is a calculation of “adaptive inflation expectations.” Put simply, long-run inflation expectations depend in large part on where inflation has been, not on the 2% target the BOJ sets for it to be in future.
This matters because inflation expectations are themselves a major determinant of where inflation ends up.
(You’ll recall that the major announcement from the July meeting of the BOJ monetary policy board was the comprehensive review they’d do for the September meeting. So these Minutes are not very interesting, unless you find “BRB” interesting I suppose).
Next week is slow on major economic releases, but central bankers will be making up for the lack of major economic releases. Here is the run down:
Fed Speak. There are no fewer than 12 Fed member speaking next week. Part of me says, “Who cares?”. We heard enough from the Yellen on Wednesday. Then again you have to start somewhere with the opinions and projections. So might as well be sooner rather than later. Note that because many are speaking, does not mean they will be talking about policy, their views on policy, where they fit in with the current consensus, etc.. We do know that George, Rosengren and Meister voted to raise rates. What day will each speak? Chair Yellen speaks on Wednesday to the House Panel on Bank supervisor. We already know her opinion Plus the topic is not exactly focused on Monetary policy. Vice chair Fischer, who spoke of possibly two tightenings not to long ago, will speak on Tuesday. As for the others, Tarullo and Kaplan speak on Monday. Mester and George, two dissenters, both speak on Wednesday along with Bullard and Evans. Feds Lockhart, Harker, Powell and Kashkari are scheduled to speak on Thursday.
ECB President Draghi, Monday at 10 AM ET.1400 GMT. The ECB president is scheduled to testify before the Committee on Economic and Monetary Affairs of the European Parliament.
BOJ Kuroda speaks. Thursday 2:35 AM ET, 0635 GMT. Due to speak at the National Securities Industry Convention in Tokyo.
US Durable goods order. Wednesday 8:30 AM ET/1230 GMT. The August reading is expected to show a headline decline of -1.4% vs 4.4% increase in July. The Ex transportation is expected down -0.5% (vs +1.3%).
US Conference Board consumer confidence Tuesday, 10 AM ET, 1400 GMT. US consumer confidence from the conference Board for the month of September we released with expectations of a decline to 98.7 from 101.1.