Yesterday, in our post-mortem on the Jackson Hole symposium, we found one particular highlight most notable: according to Princeton University economist Christopher Sims, “policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.” And, as has been customary over the past year, the place where this “shock therapy” will be tested first, will be the same place where 30 years of unconventional monetary policy has so far failed: Japan.
That is the scenario envisioned by Mark Haefele, global chief investment officer at UBS Wealth Management who oversees the investment policy and strategy for about $2 trillion in invested assets.
In a Bloomberg Television interview, on Monday, Haegele said that the BOJ could announce a “massive stimulus program” as the nation desperately seeks to reach a 2% inflation target.
“It is how much they do, and whether they can create that kind of shock and awe at this point in the cycle,” said Haefele, adding “they could announce a massive stimulus program both on the monetary and fiscal side or they could end up reducing their inflation targets. Right now, it looks like they are going to use more stimulus.”
It took the headline scanning algos several minutes to read Yellen’s speech, which the kneejerk reaction was to deem as more hawkish than expected, before they stumbled on the key section we pointed out earlier, and which unleashed a surge of buying because it hinted at even more potential QE in the future (under a different Fed chair):
On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets.
This section catalyzed such an aggressive buying impulse that it required Stan Fischer’s post-speech interview to pour cold water on the market’s enthusiasm, saying “Yellen’s comments are consistent with a possible September hike.” After all, as even Bullard admitted earlier, the Fed is perilously close to admitting stocks are in a bubble.
However, it was too late to appease one recently converted Fed critic, Bill Gross, who slammed Yellen’s suggestion that she could launch further asset purchases as the equivalent of “providing a walker or a wheelchair for an ailing economy.”
“She is opening the door to creating even greater asset bubbles as have the BOJ and ECB and SNB by purchasing corporate bonds and stocks,” Gross wrote Friday in an e-mail response to questions. “This is not capitalism. This is providing a walker or a wheelchair for an ailing economy. It may never walk normally again if monetary policy continues in this direction.”
The computerized portfolio management wave is hitting Japan, with a total of nearly 20 companies here and abroad to offer the algorithm-based solutions to retail investors by next spring.
A robo-adviser automatically puts together a portfolio in line with the individual investor’s wishes. After answering such simple questions as age and investment experience, the user is presented with an asset mix such as “developed-market stocks,” “emerging-market bonds” and “gold.” The entire process takes only minutes and can be handled on a personal computer or a smartphone. Roughly $40 billion alone in outstanding assets are managed by big U.S. investment firms through this method.
The biggest advantage of robo-advising is the low costs for investors. Commissions amount to just 0.2% to 1% of the investment capital. This is cheaper than the fees that private banking services offer to the affluent, or the roughly 2-3% commissions charged by existing wrap accounts overseen by financial institutions.
Direct comparisons of performance are difficult, owing to the vast diversity of portfolios that robo-advisers generate. But robo-advised investors very likely enjoy an edge in returns simply by virtue of the low commissions.
The Japanese currency strengthened beyond the psychologically important 100 yen level against the dollar at one point Tuesday, signaling that the goal of escaping deflation remains distant six months after the Bank of Japan introduced negative interest rates.
Foreign speculators sold the dollar for the yen here, taking advantage of slow trading due to Japan’s Bon summer holidays.
The Nikkei Stock Average ended down 1.62% at 16,596 on concerns that a strong yen would hurt Japanese corporations. The benchmark index stands just 4% higher than it did Feb. 15, the day before the BOJ adopted negative rates. U.S. stocks, on the other hand, are trading at record-high prices.
Japan’s currency last crossed 100 yen to the dollar July 8 amid market turmoil caused by the British vote to leave the European Union. The currency has appreciated by nearly 14 yen against the greenback since negative interest rates took effect.
The BOJ may not admit that it wants a weaker yen, but that was a clear motivation in its decision to introduce negative rates. Investors usually unload the yen in favor of the dollar if Japanese interest rates fall significantly under those in the U.S. and other markets — which is exactly what happened immediately after the BOJ announced its decision. But market players soon returned to the Japanese currency after uncertainty abroad squelched yen-selling.
In the aftermath of the BOJ’s unexpected lack of action on July 28, fears emerged that the central bank may be on pace to scrapping or at least revamping its entire QE program when it announced it would conduct a “comprehensive assessment” of its monetary program. This in turn sent the Yen surging back to levels where it was before scattered reports emerged that Ben Bernanke was pushing Abe and Kuroda to unleash helicopter money.
So in order to quell any further such speculation, moments ago the BOJ appears to have “leaked” what its September statement would be, and as Reuters reported the BOJ has “already prepared a preliminary outline of a “comprehensive” assessment of its policies due next month that will maintain a pledge to hit its 2 percent inflation target at the earliest date possible, sources familiar with its thinking said.”
The Bank of Japan may have to make its monetary easing program both more aggressive and more flexible in the face of a looming liquidity problem in the bond market.
Markets have been jittery ever since the BOJ announced on July 29 that it would conduct a “comprehensive assessment” of its monetary policy in September.
Japan’s benchmark 10-year government bond yield has climbed from around minus 0.3% to nearly 0%. The yen strengthened to the upper 100 range against the dollar Thursday, driven partly by a comment by BOJ Deputy Gov. Kikuo Iwata that diminished expectations for additional easing.
“Let me make it clear that we do not have any specific future directions of monetary policy at this moment,” Iwata said Thursday in a speech to business leaders.
These market movements indicate fear that the BOJ will scale back its 80 trillion yen ($791 billion) per year bond-purchasing program. With the supply of Japanese government bonds running short, some reckon that the BOJ will hit a ceiling in one or two years if it keeps buying at the current pace. Some observers see the assessment as an opportunity for the bank to start to taper purchases.
Even some at the BOJ realize that quantitative easing is running on borrowed time. Deputy Gov. Hiroshi Nakaso said in June that the BOJ “will continue to carefully monitor” the JGB market. Other top BOJ officials are open to a more flexible approach to bond purchasing if long-term interest rates hold steady at low levels.
The Bank of Japan’s small expansion of monetary easing Friday could be the warmup for a bold offensive next time around in concert with fiscal policy moves.
The central bank’s statement on the “enhancement of monetary easing” drew attention not so much for its immediate impact, as for the pledge to “conduct a comprehensive assessment” of economic and price developments when the policy board next meets. This is aimed at hitting the target of 2% price growth “at the earliest possible time” — phrasing that inevitably calls to mind the possibility of further easing. BOJ Gov. Haruhiko Kuroda, for his part, did not rule out that interpretation when speaking to media after the meeting.
The governor emphasized the importance of a healthy mix of fiscal and monetary measures. Most likely, any expanded easing will complement whatever large-scale stimulus the government has in store.
On its own, bold fiscal spending funded by Japanese government bonds would put upward pressure on long-term interest rates by sucking up capital from the private sector. Adding stronger monetary easing to the mix combats that pressure, maximizing the impact of stimulus. Such a combination also would likely be easier for the BOJ to swallow than bolstering the economy with monetary policy alone.
The central bank’s policy board will next meet for two days starting Sept. 20 — good timing in relation to fiscal policy mileposts. Prime Minister Shinzo Abe’s government will unveil its stimulus package Tuesday. By the end of August, government ministries and agencies will have put in funding requests for the fiscal 2017 budget. Another supplementary budget for this fiscal year will be brought before the Diet when an extraordinary session convenes in September.
Many market analysts predict the Bank of Japan will further loosen monetary policy at its upcoming meeting, to bolster flagging inflation expectations and price trends, a recent survey shows.
Nikkei Quick News conducted a survey of “BOJ watchers” — economists at banks and brokerages who are familiar with the central bank’s thinking — on July 19-24. The results, released Monday, showed 22 out of the 28 analysts expected the BOJ to take additional easing steps at the monetary policy meeting scheduled for Thursday and Friday.
Many BOJ watchers believe the bank will take interest rates further into negative territory and step up purchases of exchange-traded funds; few predicted more purchases of government bonds.
The government is set to put together its latest economic policy package as early as the end of July. Speaking to reporters in Chengdu, China on the sidelines of a meeting of the Group of 20 finance ministers and central bank chiefs, BOJ Gov. Haruhiko Kuroda said Saturday that if a government takes fiscal steps while a central bank is simultaneously easing monetary policy, it has a great economic impact. Kuroda reiterated the bank will take additional measures, if necessary.
Contrary to conventional wisdom, we think monetary policy remains an important variable for asset prices.Interest rates and foreign exchange are two dimensions of the price of money. There is a relationship, even if it is not linear or temporally consistent.
Moreover, as a great discounting mechanism, the markets often price in the likelihood an event before it happens. In our day-to-day lives, causes take place before the effects by definition, but in the markets, sometimes, the effect comes place before the cause. The effect was selling yen since earlier this month, for example, and the cause is the Bank of Japan meeting on July 28-29.
A couple of days before the BOJ meets the Federal Reserve Open Market Committee will gather. While there is much uncertainty about what the BOJ will do, there is great confidence in the outcome of the FOMC meeting–nothing. This does not mean that the meeting is unimportant.
Bank of Japan Governor Haruhiko Kuroda said on Saturday he would ease policy further if necessary to achieve its 2 percent inflation goal, while reiterating a commitment to continue with the current stimulus until prices are anchored there.
Speaking to reporters on the sidelines of a G20 meeting of finance ministers and central bankers in the southwestern Chinese city of Chengdu, Kuroda maintained an upbeat view on the Japanese economy and price outlook in spite of rising market expectations for more BOJ monetary stimulus.
A majority of economists polled by Reuters expect the BOJ to ease policy next week, forecasting a combination of measures in another attempt to kick-start inflation.
“If the economy’s (recovery) trend continues, leading wages and prices to rise in a virtuous cycle, which is continuing, prices will eventually rise to the 2 percent price stability goal,” Kuroda said.