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Are Central Bankers Losing Control?

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In light of all the money printing going on, including Japan going full retard with the printing press followed by the Nikkei index collapsing by 15% the question to be asked is, have the Central Bankers lost control? Although things went well in Japan initially, May has not been a good month and cracks are appearing.

The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. It was the first to have a major housing and banking bubble, the first to see that bubble burst, to respond with years of 1 percent interest rates, then zero rates, then various rounds of quantitative easing. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. This is called Abenomics, after Japan’s new prime minister, Shinzo Abe, the new poster-boy of policy hyper-activism. I expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody?

But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off.

Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?

 ‘Sell in May and go away’

Let’s turn back the clock for a moment, if only just a bit. Let’s revisit April 2013 for a moment. At the time I spoke of central bankers enjoying a kind of ‘policy sweet spot’: they were either pumping a lot of liquidity into markets or promising to do so if needed, and all of them were keeping rates near zero and promising to keep them there. Some started to consider ‘negative policy rates’. Yet, despite all this policy accommodation, official inflation readings remained remarkably tame – indeed, inflation marginally declined in some countries – while all asset markets were on fire: government bonds, junk bonds, equities, almost all traded at or near all-time highs, undeniably helped in large part by super-easy money everywhere. Even real estate in the US was coming back with a vengeance. And then, in early April, central bankers got an extra bonus: Their nemesis, the gold market, was going into a tailspin. I am sure Mr. Bernanke was sleeping well at the time: financial assets were roaring, happily playing to the tune of the monetary bureaucracy, seemingly falling in line with his plan to save the world with new bubbles, while the cynics and heretics in the gold market, the obnoxious nutters who question today’s enlightened policy pragmatism, were cut off at the knees.

But then came May and everything sold off.

However, that is not quite how the media presents it. Here, one prefers the phrase ‘volatility returned’, as that implies that everything could be fine again tomorrow. And it certainly can. Maybe this is just a blip. But what if it isn’t? And, more importantly, what is driving it?

A widely debated theory is that the prospect of the Fed ‘tapering’ its quantitative easing operation, of it oh-so carefully, ever-so slightly removing its unprecedentedly large and more than ever alcohol-filled punchbowl could end the party. There has for some time been concern about and even outright opposition to never-ending QE within the Fed. So there is, of course, a risk (a chance?) that the Fed may reduce or even halt its asset-buying program. (As a quick reminder, since the start of the year, the Fed has expanded the monetary base already by more than $340 billion, and at the present pace, the Fed is on course to create $1,000 billion by the end of the year.)

Ben Bernanke – tough guy?

However, I do not think that markets have a lot to fear from the Fed. Should a pause in QE lead to a sell-off in markets, to rising yields and rising risk premiums, then, I believe, the Fed will quickly revert course once more and switch on the printing press again. The critics inside the Fed will be silenced rather quickly. Remember that most of them seem to argue that additional QE is not needed; they do not appear to reject it on principle. Ultimately, nobody in policy circles is willing to sit on his or her hands when the markets seriously begin to liquidate. The ‘end’ to QE, if it is announced at all, is likely to be just an episode.

The last central banker who had the cojones to take on Wall Street was Paul Volcker. Ben Bernanke, as well as his predecessor Alan Greenspan, have been nothing but nice to the speculating and borrowing classes. Both subscribe to and have, on numerous occasions, articulated the notion that it is part of the central bank’s remit to bring good cheer to households and corporations by lifting their house prices and inflating their stock prices and executive option packages. What the country needs is optimism and what is more conducive to optimism than a rising stock market and happy faces on CNBC? Bernanke declared that boosting financial assets can kick-start a virtuous circle of borrowing, investing and self-sustained growth. David Stockman has aptly called this approach ‘prosperity management’ through ‘Wall Street coddling’. Of course, Greenspan tightened in 1994, and again very carefully in 2005, and yes, both times financial markets caved in. But this only serves to illustrated how unsustainably bloated and dislocated the financial system has become, and how addicted to cheap money from the Fed. I think the Fed will be very careful to reduce the dosage of its drug anytime soon.

Although he didn’t quite put it in those terms, global bond guru Bill Gross, founder and co-chief investment officer at asset management giant PIMCO, seems to see it similarly. In an interview with Bloomberg in the middle of May, he confirmed that he and his team saw “bubbles everywhere”, which certainly implied that everything could go pop at the same time. He also stated that the Fed would “not dare” to do anything drastic anytime soon as the system is so much more leveraged now than it was in 1994, when Greenspan briefly tried to play tough and tighten policy.

My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets? After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.

It is, of course, too early to tell. The whole thing could end up being just a storm in a tea cup. It could be over soon and markets could fall back in line with what the central planners prescribe. But somehow I doubt that this is just a blip – and interestingly, so does Mohamed El-Erian, Bill Gross’ colleague at PIMCO and the firm’s other co-chief investment officer. In an interesting article on CNN Money yesterday, he contemplated the possibility that markets were beginning to lose confidence in central bankers.

If that is indeed the case it won’t be confined to Japan but will rapidly reverberate around the world. This is a much bigger story than a modest slowing of QE in the US. Could it be the beginning of the end?

I think the central bankers may not be sleeping so well now.

Source:  detlevschlichter.com

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Japan Follows US Lead In Crushing Rights As System Breaks Down

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Japan under Prime Minister Shinzo Abe is following the US in drafting plans which will attempt to remove peoples rights and impose duties along with beefing up police powers to maintain public order. Abe is drafting changes to the Constitution and specifically aiming to change Article 9 which would looses restrictions on the military. Its a worrying time as Obama recently signed into law the NDAA Act which enables US citizens to be arrested indefinitely without charge or trial and now Japan is making similar moves. The breakdown of the global monetary system is clearly worring the elities.

Reported from ZeroHedge:

If there was ever a clear sign that the leadership of Japan is fully aware that the country is about enter a terminal economic catastrophe this is it. Using the cover of currency devaluation and a rising stock market, Japan’s Prime Minister, Shinzo Abe, is attempting to make it easier to change the country’s constitution so that they can eliminate freedom of speech and set the stage for a military dictatorship.  Reuters reports that:

The draft deletes a guarantee of basic human rights and prescribes duties, such as submission to an undefined “public interest and public order.” The military would be empowered to maintain that “public order.”

…….

 

RIGHTS VS DUTIES

Critics see Abe’s plan to ease requirements for revising the charter and then seek to change Article 9 as a “stealth” strategy that keeps his deeper aims off the public radar.

“The real concern is that a couple of years later, we move to a redefinition of a ‘new Japan’ as an authoritarian, nationalist order,” said Yale University law professor Bruce Ackerman.

The LDP draft, approved by the party last year, would negate the basic concept of universal human rights, which Japanese conservatives argue is a Western notion ill-suited to Japan’s traditional culture and values, constitutional scholars say.

“The current constitution … provides protection for a long list of fundamental rights – freedom of expression, freedom of religion,” said Meiji University professor Lawrence Repeta. “It’s clear the leaders of the LDP and certain other politicians in Japan … are passionately against a system that protects individual rights to that degree.”

The draft deletes a guarantee of basic human rights and prescribes duties, such as submission to an undefined “public interest and public order”. The military would be empowered to maintain that “public order.”

One proposal would ban anyone from “improperly” acquiring or using information about individuals – a clause experts say could limit freedom of speech. A reference to respect for the “family” as the basic social unit hints, say critics, at a revival of a patriarchal system that gave women few rights.

“The constitution is there to tie the hands of government, not put duties on the people,” said Taro Kono, an LDP lawmaker often at odds with his party on policies. “There are some in both houses (of parliament) who don’t really understand the role of a modern constitution.”

ZeroHedge sums it up in one line

Let’s see, print money, make the stock market go up and keep people servile as you destroy the country and rip up the Constitution.  Sound familiar?

 

Source: ZeroHedge, Reuters

Worlds Biggest Pension Funds Looking to Sell Its Japanese Bonds

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Much has been written already of the impending collapse in the bond market this year but when a big fish makes a move, nobody wants to be left behind. Japan’s biggest pension fund (Government Pension Investment Fund) is looking to move away from it large holding of JGBs. Many more will sure to follow suit.

Japan’s public pension fund, the world’s biggest manager of retirement savings, is considering the first change to its asset balance as a new government’s policies could erode the value of $747 billion in local bonds.

Managers of the Government Pension Investment Fund, which oversees about 108 trillion yen ($1.16 trillion) in assets, will begin talks in April about reducing its 67 percent target allocation to domestic bonds, President Takahiro Mitani said in a Feb. 1 interview in Tokyo. The fund may increase holdings in emerging market stocks and start buying alternative assets.

The GPIF, created in 2006, didn’t alter the structure of its holdings during the worst global financial crisis in 80 years or in response to the 2011 earthquake and nuclear disaster. Prime Minister Shinzo Abe and the Bank of Japan (8301) have pledged to restore economic growth and spur inflation, which will mean higher interest rates, Mitani said.

“If we think about the future and if interest rates go up, then 67 percent in bonds does look harsh,” Mitani, who was appointed in 2010 after serving as an executive director at the Bank of Japan, said. “We will review this soon. We will begin discussions for this in April-to-May. Any changes to our portfolio could begin at the end of the next fiscal year.”

GPIF, one of the biggest buyers of Japanese government bonds, held 69.3 trillion yen, or 64 percent of total assets, in domestic debt at the end of September, according to its latest quarterly financial statement. That compares with 12 trillion yen, or 11 percent, in Japanese stocks; 9.6 trillion yen, or 9 percent, in foreign bonds; and 12.6 trillion yen, or 12 percent, in overseas stocks.

……..

The yield on Japan’s 10-year government bond climbed 3 basis points to 0.795 percent as of 12:33 p.m. in Tokyo today. By comparison, the projected dividend yield for the Topix Index (TPX), the country’s broadest measure of equity performance, is 2.05 percent. The Topix added 1.1 percent today.

Japan’s bonds handed investors a 1.8 percent return in 2012, according to a Bank of America Merrill Lynch Index, compared with the 18 percent surge in the Topix.

Even as shares jumped amid optimism surrounding Abe’s stimulus plans, benchmark Japanese government bond yields have remained below their five-year average yield of 1.18 percent. Benchmark 10-year yields are the lowest in the world after Switzerland and are less than half the level in the U.S.

“JGBs were how we made money over the past 10 years,” Mitani said. “The BOJ said that they are increasing buying bonds, but they’re also putting power into lowering interest rates. If the economy gets better, then long-term interest rates like a 10-year yield at less than 1 percent are unlikely.”

The five-year JGB rate touched a record low 0.14 percent last month amid speculation the Bank of Japan will expand bond purchases as part of the monetary easing advocated by Abe.

The comments by Mitani show the pension manager needs to consider higher-risk, higher-yield assets to help fund retirements of the world’s oldest population. About 26 percent of the nation is older than 65, according to data compiled by Bloomberg.

Under Mitani’s leadership, the GPIF began buying emerging- market assets in September 2011 and started purchasing shares in countries included in the MSCI Emerging Market Index (MXEF) last year. Mitani said in July 2012 that the fund was selling JGBs to pay for people’s entitlements and might consider alternative investments as it seeks better returns.

Source : Bloomberg

 

Japan Back In Recession

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Japan has sunk back into recession and the solution according to opposition leader Abe is to call for even more stimulus through unlimited monetary easing according to Bloomberg. That is not a good sign when its open-ended, as it demonstrates a lack of a clear plan as to when the economy will recover. A strong yen, weak demand from Europe and a spat with China have all combined to weaken Japan’s economy. The auto industry is factoring in a sharp contraction in sales next year  driven by a dramatic decrease in demand from China.

Japan’s economy sank into recession in the second and third quarters, fueling opposition leader Shinzo Abe’s calls for more stimulus and highlighting the risk that weak growth will derail a planned sales-tax rise.

Gross domestic product shrank an annualized 3.5 percent in the three months through September, the Cabinet Office’s second estimate showed in Tokyo today, matching a preliminary reading. The government revised the previous quarter to a 0.1 percent contraction, meeting the textbook definition of a recession.

Abe, whose Liberal Democratic Party is leading in polls to win elections on Dec. 16, has called for more fiscal stimulus and “unlimited” monetary easing, and has said that economic conditions next year will determine whether the sales tax rise goes ahead. Banks including Citigroup Inc. forecast another contraction this quarter as exports fall and domestic demand stays weak.

“It’s likely that Japan’s economy hit bottom in the last quarter,” said Shuichi Obata, senior economist at Nomura Securities in Tokyo. “The new government will aim to have solid growth by the middle of next year as they have to decide whether to raise the sales tax or not.”

……..

Japanese manufacturers such as Sharp Corp. (6753) and Honda Motor Co. (7267) are grappling with weaker earnings after a strong yen, slow European demand and anti-Japanese demonstrations in China hurt exports.

Nissan Motor Co. (7201) and Honda cut their profit forecasts for the year ending March 2013 by about 20 percent, citing a slump in China sales.

The sales tax bill raises the levy to 8 percent in April 2014 and to 10 percent in 2015, and a clause allows for implementation to be canceled based on an assessment of economic conditions. The last sales tax increase in 1997 contributed to pushing the economy into a 20-month recession, costing then- premier Ryutaro Hashimoto his job.

From the previous quarter, the economy shrank 0.9 percent in the July-September period, unchanged from the government’s initial forecast, today’s report showed.

Source: Bloomberg

 

 

Japan GDP Goes Into Full Reverse

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As the FT writes of Japan approaching its 15 recession in 15 years MISH takes a look at how Japan’s GDP has fallen by 3.5% over the last year as ongoing problems with China has severely hit car sales when Japan least needs it.

Japan’s economy shrank an annualised 3.5 per cent between July and September, the steepest decline since the earthquake-hit first quarter of 2011, as exporters suffered big falls in shipments to key markets such as China and Europe.

Prime Minister Yoshihiko Noda described the gross domestic product figures as “severe”, while Seiji Maehara, economy minister, said Japan had possibly entered a “recessionary phase”.

In a speech on Monday, Masaaki Shirakawa, Bank of Japan governor, said there was “no question that the [central bank] should exert every effort to enhance its easing effects as much as possible”. He said domestic demand was “unlikely to increase at a pace that will outperform the weakness in exports”.

The Japanese government’s monthly survey of “economy watchers” – which includes barbers, hoteliers, car dealers and others who deal with consumers – has recorded six falls in a row since April. Last month the index stood at a level little better than that of April 2011, in the immediate aftermath of the quake.

Japanese manufacturers from Nissan to Shiseido have reported steep falls in sales of their products in China, following a wave of demonstrations against Tokyo’s nationalisation of some of the islands in mid-September.

Japan’s top seven automakers have cut their projections for Chinese sales by a fifth, for the fiscal year to March, according to calculations by the Nikkei newspaper.

Relations with China has soured over the desputed islands but this has had a devasting affect on trade.
Exports to China fell 8.2 percent to 5,921.1 billion yen in the first half and slid 14.1 percent to 953.8 billion yen in September, sharper than the 9.9 percent fall in August. It was the fourth consecutive month of deficit as various products, ranging from auto and auto parts to steel and semiconductors, declined notably.

The balance showed Japan suffered the biggest September deficit with China of 329.5 billion yen, as imports gained 3.8 percent to 1,283.3 billion yen.

Resentment in China has accelerated since the Japanese government decided last month to nationalize part of an island group in the East China Sea, also claimed by Beijing and Taiwan.

Japan’s high debt levels were sustainable once upon a time when it had the ability in better times to trade its way through, but that is looking less likely.
The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP. Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component. You can now kiss that surplus goodbye because Japan Current Account Turns Negative

……….
As long as the current account surplus remains, economists say, Japan is in little danger of a Greek-style crisis, since its debt is largely being funded by household savings.

While that remains the case, Japan reported Thursday that the seasonally adjusted current-account was in deficit in September—for the first time in more than 30 years. The sudden surprise drop has some economists warning that Japan’s ability to generate wealth is eroding faster than expected, and its fiscal situation could be more fragile than many had thought.

The Finance Ministry says Japan won’t slip into a structural current-account deficit very easily, since deficits in the trade of goods and services will be offset by huge surpluses in what the country earns on investments in overseas assets such as U.S. Treasury bonds.

But the Japan Center for Economic Research argues a structural deficit in could be as close 2017, noting fuel-import levels are likely to stay high if most nuclear plants stay off.

The Japan Research Institute, another think tank, says a structural deficit could start in 2022 if crude oil prices keep rising. Hideki Matsumura, an economist with the institute, said it could come earlier if the current strong-yen trend, which hurts Japan’s ability to sell overseas, continues.

“Many countries are catching up with Japan in the manufacturing field,” he said. “If they can produce similar products for a cost 20% to 30% less than Japanese do, Japan will soon find no demand for its products.”

…but can Japan make it that far?
Japan has extremely serious issues already, it’s just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.

Global imbalances are mounting. I suspect within the next coupl eof years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency war with all its trading partners to force down the value of the yen.

Japan To Shaft Its Bondholders? Looks that Way.

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Who would have thought that the Japanese Department of Finance would announce formally on its website that holders of Japanese bonds have to join the queue to get repaid when the time comes. A carefully worded response in its FAQ by the MoF, gave no clear indication that bonds would be definitely repaid when they mature rather that they would “redeem them responsibly”.

 

This has got to be the icing on the Japanese cake. The otherwise bland website of the Japanese Ministry of Finance, more specifically the FAQ page on government bonds, has been catapulted to stardom on Facebook and Twitter. Not in a good way. As you flip through the MoF’s website, page after page, you will mostly see zero Facebook likes and zero tweets. Social media and the MoF ignore each other.

But go to the FAQ page, skip down past the categories of Budget, Taxation, and Tariffs to item 4, Government bonds. Under the second group, skip past Tax questions for individuals, Miscellaneous (Is it a crime if I make a copy?), Price and yield questions, and Coupons to the infamous question 5: “In case Japan becomes insolvent, what will happen to government bonds?

Tweeted 1,645 times, liked on Facebook 3,733 times!

The MoF website isn’t some blog to be ignored (at your own risk) but the official voice of the most important ministry of the most indebted country in the world, whose debt will reach 240% of GDP by the end of this fiscal year. The country borrows over 50% of every yen it spends, and it spends more every year. With no solution in sight. Other than more borrowing. Certainly not cutting the budget, which would be too painful. It wouldn’t be enough anyway. Even cutting the budget in half would leave a deficit. And the recently passed consumption tax increase? It will raise the tax from its current 5% to 8% in 2014 and to 10% in 2015, way too little to deal with the gigantic problem, and years too late. Yet it won’t kick in unless GDP grows at least 2% per year—which has practically no chance of happening.

No, there is no longer a good solution. And everyone knows it.

About 95% of Japan’s debt is held within Japan by government-owned institutions, the Bank of Japan, banks, companies, pension funds, and directly or indirectly by individuals. Hence the question—”In case Japan becomes insolvent, what will happen to government bonds?”—is of primordial importance to just about all Japanese adults.

The question and its answer weren’t decided by some underling. Each word was carefully weighed by experts in the highly hierarchical bureaucracy of the MoF. As these words were polished and examined for every nuance, they were passed up the ladder until they landed on the desk of an official at the very top who approved not only the wording, but also whether or not that question should even be on the website. And the official answer is:

 “Rest assured that the Japanese government will redeem the bonds responsibly.”

“Rest assured!” How bondholders can possibly rest assured under these circumstances remains a mystery, in particular since the MoF then proceeds to tell them exactly how they will get kicked in the groin: bonds will be redeemed “responsibly.”

Not when they mature, but responsibly.

Thus, we have the MoF’s official action plan for the moment when the big S hits the fan, the moment when Japan with its declining wages and shrinking working-age population can no longer save enough to mop up all the government bonds necessary to keep the government afloat [read…. Japan’s Slow-Motion Tsunami].

A selective default. Bonds will retain their “value,” but the government won’t redeem them when they mature. It will redeem them in bits and pieces, stretched into all eternity, as it sees fit. You’ll die before you’ll see your money.

This is THE answer, the official answer we’ve been looking for all along, and now we find it on the MoF website where it would have remained hidden in plain sight had not some enraged Japanese spread the word via Twitter and Facebook.

When the legendary savings of the Japanese are drying up, as they’re in the process of doing, the word responsibly will take on a new meaning within the context of one of the greatest recent acts of governmental irresponsibility: creating that debt monster in the first place.

 

Source: TestosteronePit

Japan In worse Shape Than Greece

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Originally reported by Bloomberg is the admission by an official at the Ministry of Finance that Japan is in worse shape than Greece. More disturbing is the line about Japan being extremely vulnerable to energy price rises. I think we all know where they are going when you look at the prospect of war in Syria and Iran this year.

In a stunning turn of events, a Japanese Ministry of Finance official admits to Richard Koo’s worst nightmare “Japan is fiscally worse than Greece“. Bloomberg is reporting that, at a conference in Tokyo, Yasushi Kinoshita says Japan’s 2011 fiscal deficit was up to 10% of GDP and its debt-to-GDP has soared to over 230%. What is more concerning is the Kyle-Bass- / Hugh-Hendry-recognized concentration risk that Kinoshita admits to also – with a large amount of JGBs held domestically, the Japanese financial system is much more vulnerable to fiscal shocks (cough energy price cough) than Europe. Of course, the market is catatonic in its reaction to this – mesmerized by the possibility of buybacks and hypnotized at big-banks-passing-stress-tests – though we do note the small reverse stronger in USDJPY has reversed as this news broke and the USD pushes modestly higher.

Source: ZeroHedge

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