“Negative interest expense” or some such absurdity yet to be coined.
“For now, the effect of negative interest rates is very strong, so we’d like to steadily proceed with this policy,” Bank of Japan Governor Haruhiko Kuroda told parliament today, to reassure the nervous politicians that the economy was on the right track under his fearless and wise leadership.
Alas, the BOJ’s “tankan” survey, released on Friday, showed that confidence plunged among manufacturers to the lowest point since 2013, while inflation expectations weakened further. The economy in the January-March quarter is likely to shrink again, after having already shrunk in the prior quarter, to form another technical recession. Despite government and BOJ exhortations, wage increases remain elusive, now an imperceptibly small 0.4% from a year ago.
But just in case the BOJ’s scorched-earth policies of negative interest rates and asset purchases – mostly Japanese Government Bonds, Japanese REITs, and equity ETFs – haven’t accomplished the desired miracles yet, the BOJ would be willing to accelerate the same failed policies, such as pushing interest rates deeper into the negative, and try some new things too, such as diving into riskier assets, he said.
But it won’t be predictable. The BOJ could mix and match the next policy steps, depending on the economy, prices, and “market moves, particularly those in Japan,” he said. At least, he’s admitting that the BOJ is slave to the financial markets.
“We won’t necessarily choose a rate cut just because it’s easier to do so,” he said. It could be anything.
Turns out, Japan Inc., which has been coddled and favored by Abenomics even more so than by prior administrations, is not investing enough in Japan despite tax incentives for investments, but instead is focusing capital investments on its projects in other countries. Capital expenditures in Japan, which would boost the economy, are lagging.
So the BOJ has kicked off yet another way to coddle and favor Japan Inc. with a special incentive: another stock market pump-up scheme that is now coming to fruition.
Back in December it promised to buy shares of ETFs that would have to be created for just this purpose. They would incorporate shares of companies that follow the BOJ’s dictum: boost wages, employment, and capital spending.
So Daiwa Asset Management in partnership with index provider MSCI will develop a special stock index for these anointed companies. Nomura Asset Management and other firms in the Nomura group plan to put their own index together. It’s up to them to decide which companies are doing what the BOJ wants them to do to the extent that they deserve being included. And the special ETFs will track those indices.
Nomura Asset Management and Daiwa Asset Management have now completed setting up their ETFs that fit this mold. On April 1, both asset managers filed applications with the Tokyo Stock Exchange for listing these ETFs. They’re expected to make their debut on the TSE in mid-May. Nikko Asset Management, DIAM, and Mitsubishi UFJ Kokusai Asset Management are also working on ETFs to that effect.
Once they start trading, the BOJ will buy shares of these newfangled ETFs at a rate of ¥300 billion ($2.7 billion) a year with the explicit goal of driving up the stock prices of the companies in the ETF. If it works out that way, which is doubtful since practically nothing in the Japanese stock market has worked the way the BOJ had planned, it would be the reward for those companies that asset managers deem obedient to the BOJ’s wishes.
So just how helpful is all this?
Stocks tanked, again. There’s a reason why the Japanese stock market has become a hedge-fund hotel, and why Japanese retail investors try to stay away from it. The Nikkei dropped 2.4% today to 15,733. It has plunged 24.6% from its recent peak in June and is sinking deeper into its bear-market mire.
One thing is clear: While the BOJ has failed in propping up stocks, it has totally succeeded in suffocating the once vast Japanese Government Bond market by buying up every JGB that isn’t nailed down. It’s a marvel, actually. The BOJ’s primary dealers buy the JGBs when the government issues them at a negative yield, knowing that they will soon sell them to the BOJ at an even greater negative yield and thus make a guaranteed profit on the difference.
The 10-year JGB yield is -0.07%. Pension funds, insurance companies, banks, and money managers have begun to unload their JGB holdings. Only he BOJ is buying.
It seems that the BOJ will not stop until it owns most of the JGBs out there. It’s paying the government the negative yield, actually paying the government to borrow money to fund its gargantuan deficits. If this farce continues long enough and more of the older JGBs are rolled over, interest expense in the Japanese budget will turn to income, called “negative interest expense” or some such absurdity yet to be coined. Someday this is going to end in tears. But not tomorrow. Kuroda knows this, hoping that the “after tomorrow” won’t be under his watch. After me the deluge!
All 11 Japanese asset managers that offer money market funds are planning to scuttle them after returning their remaining assets to investors. This marks another big accomplishment of negative interest rates. And the bitter irony? Read… NIRP Kills Off All Money Market Funds in Japan
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