Though Bank of Japan Gov. Haruhiko Kuroda played up the positive at Thursday’s news conference, economic indicators point to a foundering economy that calls his strategy and his unshakable confidence into question.
The average estimate of 15 private-sector research institutes puts annualized gross domestic product growth for the January-March quarter at just 0.35%. Excluding a 1.2 percentage-point boost from the extra day caused by the leap year would leave growth in negative territory for a second straight quarter, with GDP having shrunk 1.1% in the October-December period.
“Even though growth looks positive on the surface, the economy’s actually weak,” Yoshiki Shinke of Dai-ichi Life Research Institute said.
All eyes are on preliminary GDP data for the quarter, to be released by the Cabinet Office May 18. The data will be a key factor in the government’s decision on whether to raise the consumption tax to 10% in April 2017 as planned.
Kuroda, speaking after the bank’s policy board meeting, asserted that the BOJ can engineer 2% inflation, arguing that growing incomes continue to promote consumer spending. But price and consumption data tell a different story.
Bank of Japan governor Haruhiko Kuroda has dismissed the immediate prospect of “helicopter money” being deployed in Japan, claiming any such extraordinary measures would be illegal under the country’s constitution.
Speaking at a press conference in Tokyo following the BoJ’s latest decision to stay steady on rates cuts, Mr Kuroda said interest rates could still venture further into negative territory.
But despite affirming that there was “no limit” to its monetary policy measures, an embattled Mr Kuroda seemed to rule out the BoJ injecting stimulus directly into the hands of consumers – a policy known as “helicopter money” – claiming it cannot be adopted “under Japan’s current legal system”, according to Reuters.
His comments echo remarks made by ECB chief Mario Draghi earlier this month, who also dismissed helicopter money as illegal under the treaties that govern the eurozone.
Markets have been left disappointed after many analysts had expected further easing from the world’s third largest economy. The yen has duly surged by nearly 2.88 per cent.
Bank of Japan ETF purchases make it largest holder of Japanese companies
Bloomberg is calling the Bank of Japan ‘The Japanese Whale’ is the central bank takes increasing stakes in public companies.
The BOJ is a top-10 shareholder in about 90% of the Nikkei 225, they report. Annual purchases are currently at $27.2B.
“The central bank effectively controls about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder,” Bloomberg writes.
The central bank meets again on Thursday and many believe they could boost shares, something that would extend recent gains in the Nikkei. If they double purchases this week, they would be the top shareholder in 40 of the 225 companies by the end of 2017.
Fitch Ratings has affirmed Japan’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘A’. The issue ratings on Japan’s senior unsecured local-currency bonds are also affirmed at ‘A’. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘AA’ and the Short-Term Foreign-Currency IDR at ‘F1’.
KEY RATING DRIVERS
Japan’s ‘A’ IDRs reflect the following key rating drivers:
– The key factor constraining the rating is high and rising government debt. Fitch expects gross general government debt to reach 245% of GDP by end-2016, by far the highest ratio of any rated sovereign. Fitch’s projections indicate the government debt / GDP ratio will stabilise in 2020 at about 247%, not far above the current level. However, high indebtedness and weak nominal growth leave the projections highly vulnerable to economic or financial shocks.
– The Japanese sovereign also has a large stock of assets. General government financial assets were worth about 112% of GDP at end-2015, including gross official foreign reserves worth about 31% of GDP. However, the agency focuses on gross debt for assessing solvency in its sovereign rating methodology. Moreover, Japan’s net indebtedness is also high and rising. The OECD estimates Japan’s net financial liabilities at 132% of GDP at end-2015, jointly second-highest in the 28-nation group with Italy (BBB+/Stable). The rise in Japan’s net liabilities as a ratio to GDP between 1995 and 2015 was the highest in the group – 87 percentage points (pp), ahead of Greece (73pp) and Portugal (70pp).
April 4 marks the third anniversary of the introduction of the Bank of Japan’s “quantitative and qualitative” monetary easing policy. Yet the battle against the country’s persistent deflation is far from being won.
Corporate earnings in Japan look set to hit a record in the fiscal year to March, but the gloomy inflation outlook is discouraging business owners from increasing capital investment or raising wages. Abenomics, Prime Minister Shinzo Abe’s reflationary policy mix, is losing the tailwind of a weaker yen and higher stock prices. And it is unclear whether the BOJ’s negative interest rate will help the central bank achieve its 2% annual inflation target.
“If necessary, we will devise additional stimulus measures from the quantitative, qualitative and interest rate dimensions,” BOJ Gov. Haruhiko Kuroda said at a press conference March 15, expressing determination to put the country’s deflation behind it.
Initially the new program drove down the yen and propped up the stock market, which in turn pushed up the consumer price index. Inflation, excluding fresh food prices, hit about 1.5% at some points, not far from the BOJ’s target. But the effects have since worn off and inflation has been hovering near zero lately. Businesses and household inflationary expectations are weakening. With no exit from the program in sight, the BOJ is in a bind.
What went wrong? The Japanese central bank did not figure on such a weak world economy. Low crude oil prices are holding down inflation, and a slowing Chinese economy has raised doubts about that growth engine. The U.S., which was expected to continue to tighten its own ultraeasy monetary policy, has been forced to move more slowly.
The Bank of Japan’s negative interest rate policy has started disrupting another of the central bank’s key policies — its unprecedented monetary easing program — as commercial paper with yields dipping deep into negative territory surface at the bank’s auctions.
The BOJ came to a Monday commercial paper auction with 600 billion yen ($5.3 billion) in spending money. A total of 644.9 billion yen of commercial paper was on offer, but the central bank bought just 530.4 billion yen worth.
In normal auctions for outright purchases of commercial paper, the BOJ would exhaust its budget if the amount of paper exceeded its initial spending target. It would simply keep buying, starting with the best offers, until it drained its funds. This did not occur on Monday because the central bank set a minimum yield for the first time.
Amid the negative interest rate environment, more than 100 billion yen in commercial paper carrying negative rates of 0.5% or more were believed to have been put up for auction. But the BOJ set its own minimum yield threshold of minus 0.647%, fearing a possible growth in losses and a distortion in interest rate formation.
Japanese manufacturers’ confidence probably deteriorated to the lowest in nearly three years and it is expected to worsen in the coming quarter due to exporters concern over a strong yen and worries over the global economy, a Reuters poll showed.
Big firms are likely slash their capital spending plan for the new fiscal year beginning in April, according to the survey.
Firms tend to be cautious in their spending plans at this time of year, but concern over the outlook for profits makes it unlikely that they will become more ambitious in their capital expenditure budgets later in the year, analysts said.
Date due for release next week includes industrial production, which likely declined for the first time in two months in February due to weak demand in Japan and overseas.
The Bank of Japan’s quarterly tankan business sentiment survey was expected to show the headline index for big manufacturers’ sentiment slipped by 4 points to plus 8 points from plus 12 points three months ago, the poll of 23 economists showed.
It would be the lowest reading since the June 2013 survey when big manufacturers’ mood stood at plus 4 points.
It was only a matter of time, really, but Japan’s benchmark government bonds have rallied to a record high alongside a stronger yen.
The yield on the Japanese government’s 10-year bond, which moves inversely to price, hit a low of minus 0.125 per cent in lunchtime trade in Tokyo, surpassing the previous low on March 8.
The 10-year yield first crossed below zero on February 9, shortly after the Bank of Japan’s decision on January 29 to adopt negative interest rates in an effort to spur inflation and support the economy.
Further easing by the European Central Bank on March 10, as well as a cautious tone set by the Federal Reserve on Wednesday have cause global bond markets to rally this week. Furthermore, those policy stances in Europe and the US have acted to push the yen higher, likely to the chagrin of the Japanese central bank.
The Bank of Japan may need to ease monetary policy further in subsequent meetings in order to tame the yen, which is hurting earnings at exporters.