The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
The Bank of Japan may deliver a sunnier view of the country’s economy when its policy board meets next week, optimistic over steadying foreign economies boosting exports and production, as well as recovering consumption at home.
The central bank sees improvements in exports and production of automobiles and smartphone parts. It would mark the first upgrade in 19 months.
Since its March report, the BOJ has asserted that “Japan’s economy has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies.” This time, it may alter or strike the “exports and production have been sluggish” language. Some at the bank have suggested removing the “trend” in “moderate recovery trend” to emphasize that the economy’s recovery is ongoing.
In addition to the bullish American economy, the deceleration in emerging economies has slowed since the summer. As the BOJ sees it, combined with the effect of the Trump rally in the stock market, the real economy is headed toward recovery. Exports to China such as smartphone components continue to grow, while at home, consumers are opening their wallets for fall-winter clothes.
“Income is increasingly going toward consumption,” said a BOJ official.
The Bank of Japan last week offered to buy bonds at a fixed yield to curb rising interest rates, playing what was seen as an ultimate trump card far earlier than many expected.
The BOJ announced its first-ever fixed-rate purchase operation on the morning of Nov. 17 to counter mounting fears of an upswing in interest rates. Yields on 10-year Japanese government bonds had climbed steadily since the U.S. presidential election, rising as high as 0.035% the day ahead of the move. The fixed-rated option was introduced only two months ago as part of a monetary policy overhaul in late September that set a target of around zero for long-term yields.
A call went out for two- and five-year JGBs to address the rapid surge in short- and medium-term bond yields, according to the BOJ’s Financial Markets Department. There were no takers: The offered yields were higher than going market rates, meaning the offered prices were lower, sending wise traders elsewhere. But the conditions of the operation sent a strong signal as to how high the central bank will let rates go before stepping in. Yields slid across all maturities after the move was announced.
Since then, “interest rates’ upward climb has been weakened somewhat,” Takako Masai, a member of the bank’s policy board, told reporters after a speech Monday. “I get the sense that the purpose of fixed-rate operations has been well conveyed to markets.”
At first, the idea of central banks intervening in the equity markets was probably seen even by its fans as a temporary measure. But that’s not how government power grabs work. Control once acquired is hard for politicians and their bureaucrats to give up. Which means recent events are completely predictable:
(Bloomberg) – The value of the Swiss National Bank’s portfolio of U.S. equities rose nearly 1 percent to a record in the three months through September on the back of rallying share prices.
The holdings increased to $62.4 billion from $61.8 billion at the end of June, according to calculations by Bloomberg based on the central bank’s regulatory filing to the U.S. Securities and Exchange Commission and published on Monday.
The central bank had stakes in some 2,500 companies listed in the U.S., according to the SEC filing. Its biggest holdings were Apple Inc., Microsoft Corp. and Exxon Mobil Corp., according to data compiled by Bloomberg.———————-
(Bloomberg) – The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace.
Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy.
While the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. Forecasts of the BOJ’s future shareholder rankings assume that other major investors keep their positions stable and that policy makers maintain the historical composition of their purchases.
The central bank’s influence on Japanese stocks already rivals that of the biggest traders, often called “whales” in the industry jargon. It’s the No. 1 shareholder in piano maker Yamaha Corp., Bloomberg estimates show, after its ownership stake via ETFs climbed to about 5.9 percent.
The BOJ is set to become the top holder of about five other Nikkei 225 companies by year-end, after boosting its annual ETF buying target to 6 trillion yen last month. By 2017, the central bank will rank No. 1 in about a quarter of the index’s members, including Olympus Corp., the world’s biggest maker of endoscopes; Fanuc Corp., the largest producer of industrial robots; and Advantest Corp., one of the top manufacturers of semiconductor-testing devices.
The central bank owned about 60 percent of Japan’s domestic ETFs at the end of June, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. Based on a report released on Friday by the Investment Trusts Association, that figure rose to about 62 percent in July.
(Reuters) – The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday.
Speaking via video conference with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets.
But the Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds.”
“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” she said.If your first reaction to the above (especially Yellen’s clear misunderstanding of the respective roles of central banks and stock markets) is “these guys are idiots,” you’re probably in the minority. Most modern citizens see government intervention of any kind as at least a potentially good thing, depending on the situation. They’re wrong in this case, for the following reasons:
Bank of Japan Gov. Haruhiko Kuroda admitted for the first time his disappointment at not being able to reach its target of 2% inflation within the two-year deadline originally set.
Kuroda entered office in March 2013, promising to reach 2% inflation at the earliest possible time, initially with “two years in mind.” Almost four years on, and despite throwing everything but the kitchen sink at Japan’s deflation problem, he has not been able to deliver on the promise.
Kuroda did not stray from his usual tactic of blaming external factors on Tuesday after the BOJ’s two-day policy meeting. The governor cited the fall in oil prices, weak consumer spending after the consumption tax hike and the slowdown in emerging market economies as contributing factors. “The situation is similar with the central banks in the U.S. and Europe as well,” Kuroda said. But ultimately he was forced to admit he was “obviously disappointed that 2% inflation could not be achieved within 2 years.”
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.
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.