In case you were still thinking the Fed can reflate...

If you still believe that the Fed can reflate the current bust... or that treasuries are going to fall on default/hyperinflation concerns, let me guide you to my crystal ball. No need to look into the future, just look at the past! Find a history book describing factually happened during the past 20 years in Japan and the BoJ's actions.

Keynesian and Monetarist bouffons will keep on saying that the BoJ and the Japanese governments have not done enough. Interest rates have been pushed to zero for almost 20 years. Deficits are staggeringly high, and are now at 250% of GDP.

Yet, the Yen is stronger than ever — bouncing back from being highly oversold for almost a decade, this might keep on going for quite some time — and yields on Japanese gov bonds close to zero. Surprising considering the dire states of Japan's finances.

Now, the BoJ is buying ETFs, Real Estate trusts, and junk bonds.

Yet, you'll find economists ready to state that the "BoJ is totally behind the curve" and "hesitant to be proactive". And you find government ignorants urge the central bank to stem deflation.

Insanity is the only word that can come to my mind.
Oct. 29 (Bloomberg) -- The Bank of Japan’s inflation forecast shows it won’t meet its own guidelines for price stability, a prediction that signals policy makers haven’t pumped enough cash into the economy.

Governor Masaaki Shirakawa and his board yesterday left the size of an asset-purchase fund at 5 trillion yen ($61 billion) even after its introduction failed to stem gains in the yen. At the same time, policy makers predicted consumer prices will rise 0.6 percent in fiscal 2012, little more than half the 1 percent median definition of price stability of board members.
“The BOJ is still hesitant to be proactive considering the size of long-term bond purchases,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who used to work at the central bank. “The BOJ is totally behind the curve.”

The size of the fund, a portion of which goes to buying government bonds, amounts to 1 percent of gross domestic product, less than the 9 percent injection to base money enacted by Shirakawa’s two predecessors, according to Morgan Stanley. The BOJ said it will meet again next week, on the heels of a Federal Reserve meeting that could see the U.S. central bank pledge to pump an amount equivalent to 3.4 percent into its economy.
Japanese government bonds also rallied yesterday after the BOJ brought forward the date of its meeting more than a week, to Nov. 4-5, a shift that gives scope to respond to any Fed easing, according to Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former BOJ official. Ten-year yields dropped 5 basis points to 0.905 percent.
The BOJ also said yesterday it will buy corporate debt with lower credit ratings than it previously purchased, including BBB rated corporate bonds and a-2 commercial paper. The fund will purchase 1.5 trillion yen of government debt, 450 billion yen in ETFs and 50 billion yen of REITs, the bank said.
“The BOJ’s latest easing measures are just a reaction to the yen’s appreciation and politicians’ criticism that the bank isn’t serious about beating out deflation,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “The BOJ’s latest monetary easing measures alone aren’t sufficient to beat out Japan’s prolonging deflation.”

Prime Minister Naoto Kan has repeatedly urged the central bank to act to stem deflation in the past year, including a call for an inflation target of as high as 2 percent.

Prices responded to the BOJ’s last episode of so-called quantitative easing, according to Robert Feldman, head of economic research at Morgan Stanley in Tokyo. Base money, or notes and coins plus the deposits banks hold at the central bank, surged 58 percent from 2001 to 2003. The headline CPI rose in 2004 for the first time since deflation got entrenched in 1998.

Base money peaked in January 2006, and has since shrunk 14 percent.

Central banks have turned to asset-purchase programs once they’ve reduced their benchmark interest rates -- as in the case of Japan and the U.S. -- to near zero.

Shirakawa has said that the bank needs to maintain its self-imposed limit of keeping its Japanese government bond holdings below the amount of bank notes in circulation to help avoid any image that it’s financing the government’s budget deficits.

Prime Minister Naoto Kan’s Cabinet has approved a 5.1 trillion yen stimulus aimed at helping local governments and small businesses cope with the strengthening currency.

For Japanese companies, around 90 yen is “the limit to stay profitable,” Eiji Hayashida, chairman of the Japan Iron and Steel Federation and president of JFE Steel Corp., said this week. Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said this week the automaker plans to revise its expected exchange rate for the second half of this fiscal year to reflect a stronger yen.

Government reports today may show that consumer prices fell further in September, industrial production dropped and household spending growth slowed, according to the median forecasts in surveys of economists by Bloomberg News.

“It’s crucial for the bank to provide long-sustaining money to the economy, and therefore it’s necessary to buy long- term government bonds aggressively,” said Adachi at Deutsche Securities.

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