All 25 pages of ‘em. Enjoy …

Minutes of the
Monetary Policy Meeting
on May 21 and 22, 2013

(PDF)

• members agreed economy has started to pick up
• reaching 2% in 2 years is hard, could lead to speculation BOJ will ease for a long time
• Timeline may be upsetting bond market expectations
• One member should limit QE to 2 years as could cause financial imbalances
• One member said limiting QE could help stabilise JGB market
• Massive JGB buys restraining upwards yield pressure
• Several members said need to monitor impact of the Fed’s tapering debate

An April post argued that Japan’s expanded QE would have a smaller positive impact on monetary conditions and the economy than many believed, because official bond purchases were likely to be offset by stepped-up selling by banks – such sales reduce the broad money supply and put upward pressure on short-maturity yields.

Consistent with this view, domestically licensed banks reduced their central government bond holdings by a monthly record ¥10.5 trillion in April, outweighing a rise of ¥8.7 trillion on the BoJ’s books. The fall is equivalent to 21% of planned official JGB purchases for the whole of 2013 (i.e. ¥51 trillion). >> Read More

Tokyo stocks trimmed most of their losses to end slightly lower Wednesday after selling triggered by the Bank of Japan’s inaction was offset by buybacks on a halt in the yen’s strength.

The 225-issue Nikkei Stock Average closed down 28.30 points, or 0.21 percent, from Tuesday at 13,289.32 after sliding to as low as 12,994.08. The broader Topix index of all First Section issues on the Tokyo Stock Exchange was down 4.61 points, or 0.42 percent, at 1,096.54.

Decliners were led by paper, real estate and automakers, while gainers included utilities, retailers and textile firms.

The market got caught by surprise by the BOJ not extending loan maturities on their low-rate loan program… and keeping everything steady in the face of the bond/stock/currency market turmoil. Adam gave us a head’s up about the BOJ growing cautious on extending loan maturities here: BOJ growing cautious on extending low-rate loans – Nikkei

Kuroda’s press conference is scheduled for 0.630GMT. His commetns will be embargoed, and are expected to come out after 0715 GMT.

If you are wanting to stay up late for the announcement from the Bank of Japan today, or maybe set your alarm to wake you up for it, I’ve got some bad news.

There is no scheduled time for a BOJ announcement after their policy board meeting.That’s right – no scheduled time. Announcements are made when the BOJ meeting finishes (i.e. when they’ve drunk all the sake).

There is, however, a window during which we can expect it, 0330 to 0530GMT. The more there is for discussion and debate at a meeting, the later the announcement is to be expected.

BUT – I have some good news too. Governor of the BOJ, Kuroda, will be holding a press conference after the meeting and the announcement, and there is a scheduled time for this, 0630GMT.

The Bank of Japan started a two-day policy meeting Monday, with discussions likely to focus on ways to ease volatility in the government bond market including providing longer-term loans to financial institutions.

The nine-member Policy Board is expected to consider extending the term of its low-interest-rate fund provision operation from up to one year to two years or longer to increase liquidity in the market to contain an unwanted spike in interest rates that could impede an economic recovery.

As for its aggressive monetary easing policy introduced in April, the central bank is likely to keep intact measures centering on doubling the monetary base and boosting the purchase of government bonds.

The BOJ may upgrade its current economic assessment if it confirmed a pickup in corporate production activities, observers say. >> Read More

As we noted just two weeks ago – before the hope-and-change-driven exuberance in Japanese equities came crashing down – “those who believe in Abenomics are suffering from amnesia,” and Nomura’s Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe’s comments late last year by closing out their positions in the euro (having been unable to profit from the Euro’s collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects thatonly a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible…

Had they understood this, they would not have behaved in the way they did.

Many domestic institutional investors understood that private-sector borrowing in Japan is negligible in spite of zero interest rates and that there was no reason why monetary accommodation—including the BOJ’s quantitative easing policies – should be effective. In that sense, the period from late last year until mid-April was a honeymoon for Abenomics in which everything that could go right, did. However, the honeymoon was based on the assumption that the bond market would remain firm. The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.

Via Nomura’s Richard Koo,

Divergence in investor behavior fueled virtuous cycle of lower yen and higher stocks

More specifically, the sharp rise in equities that lasted from late in 2012 until a few weeks ago and the several virtuous cycles that fueled this trend were themselves made possible by a special set of circumstances.

Whereas overseas investors responded to Abenomics by selling the yen and buying Japanese stocks, Japanese institutional investors initially refused to join in, choosing instead to stay in the bond market.

Because of that decision, long-term interest rates did not rise. That reassured investors inside and outside Japan who were selling the yen and buying Japanese equities, giving added impetus to the trend.

Japanese institutional investors understand private demand for funds is negligible >> Read More

 Japan’s factory output picked up in April and deflation abated slightly as a weaker yen and firmer overseas demand boosted growth, boding well for Prime Minister Shinzo Abe’s efforts to shake the world’s third-largest economy out of nearly two decades of stagnation.

Which incidentally was long overdue: with the BOJ scrambling to contain bond (and stock, if only to the downside) volatility, it was always the FX market that was the primary uber-levered culprit moving both asset classes. As such, it was very surprising that in a world in which all correlated asset classes (just look at the USDJPY-ES relationship) are driven by FX, that currency leverage and margin rules have remained largely untouched by regulators and central bankers whose credibility is suddenly slipping away, alongside the surge in global market volatility in the past week.

More from the Nikkei:

• Changes are intended to protect investors and limit scope for speculation, Nikkei newspaper reports, without attribution.
• Firms to be required to settle trade, even when rate movement favors trader; fine for violation up to 100m yen
• FSA to restrict trading in binary options, will ban trades less than two hrs ahead as early as this yr
• FSA to strengthen oversight of cos. with automated trading systems

While the details are still unclear, it is clear that Japan is finally focusing on JPY vol. Which also means that the days of unbridled soaring of the USDJPY pair are limited. And since the US market has been linked to the Yen for the past month, the drop spike in the Yen is what has caused a suddenly air pocket under the US market to develop.

What happens further: we wait and see for the reaction by Mrs Watanabe in a few hours.