“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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“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.”
How sick is this? This is contradictory to everything thy teach students in economics, or this failure monetary chapter will go in history books as “Kurodas theory”.
” 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. ”
Just throwing good money after bad. It won’t increase any individual stock/company revenue or profit. As you know, as soon as the music ends the stocks will go right back down and quickly. It is not an investment in CapEx or anything meaningful.
Just like the stupid stupid ( and corrupt ) FED.
And the stupid stupid companies doing sharebuybacks.
They buy back the shares at the peak, most have lost 10 % – 30 % from buying back shares already. They go into debt to buy back the shares. And soon they will have to sell the shares at a low to raise funds to pay the debt.
But as you stated: ” After me the deluge! “.
For some reason, I still can’t see how the whole thing turns to tears. What’s the mechanism that will force this to happen? The average voter does not even know about these things. Isn’t the only way for it to be a crisis is if Japan Inc turns outside for financing? But it looks like the BoJ may actually reduce the Debt to GDP ratio soon enough.
Another way for a crisis to happen is presumably if there’s a corporate revolt because their deposit is yielding a negative rate. But isn’t it true that the whole Japan Inc is a big collusion among big businesses and government (Ministry of Finance, Trade, etc)?
Maybe this is just the Modern Monetary Theory in action :)
“For some reason, I still can’t see how the whole thing turns to tears. What’s the mechanism that will force this to happen?”
The whole thing turns to tears when the real economy becomes unable to service the debts imposed on it by the financial economy. It is not possible to know when that will happen because the related data are so heavily obfuscated. They want it to be a surprise, you see.
It is also not possible to anticipate how each actor that has power in the real economy will react. Some will cave, others rebel, but probably not successfully: the banking cartels are pursuing a goal of global domination and have planned for it for a very long time, and have the means and the will to succeed.
Magic is loose in the world, and anything is possible, at least in the scope of a few years out. Plausible long-term scenarios all involve an abyssally deep despair.
At some point the combination of: national debts dwarfing their respective GDPs, negative interest rates for savers, borrowers and lenders, Central Bank monetary expansion and Wall Street/global banking cartels sitting on trillions (choose a fiat currency) in reserves has to explode!
Will we see hyperinflation? Will we see nation states default on their debts? Will we see a stock market crash that makes 1929 look tame? Readers, your guess is as good as mine. What do Yellen and company see in the future, and are their guesses any better than ours?
Upon further reflection, it occurs to me that the end game is being reached. The object of the game was, and is, to use Central Bank monetary expansion to funnel cash directly to the Wall Street/global banking cartel.
” …and thus make a guaranteed profit on the difference.”
Mission a-freakin ccomplished!
China still has over $3 trillion to burn…you bet they’ll spend it before risking civil unrest..
yes, but it is recommended, by the IMF, that the minimum level needed to maintain the economy (confidence) equates to about $2.7 trillion. Not far off, below that people start getting nervous.
Yes, but… a good part of it is illiquid and can’t be spent.
Government-mandated negative real yields are nothing more than theft from those who produce more than they consume, and over time destroy real per capita GDP growth. Real capital investment will continue to drop, and eventually the citizens will flee (at least financially), and the currency will crater.
In the short run, with governments everywhere destroying one “market” after another, yen carry trade unwinds may reek havoc on those shorting the yen. But the BOJ will eventually win the war on deflation, and the yen will find its inherent value of zero.
This entire new phase of the financial crisis is rapidly putting the brakes on consumerism, a primary cause for 99% of the concern over global warming. What a great mechanism for stopping it in it’s tracks, climatologists are rejoicing over the unfolding economic decay, think of how clean the air in Beijing is bound become!
This is the end game, but I have a positive suggestion.
Why doesn’t Japan do and all out, war-like, total nation effort on stopping the effing Fukishima radiation leak?
If that fails, then they can quietly commit Seppuku and leave the rest of us out of it. By then it won’t matter.
The frozen wall will go a long way toward containing the radiation leak they caused through recklessness but very expensive to maintain.
Hello , your Federal Reserve will raise interest much more than he admits publicly . It is the only option to save the dollar.
The crisis is upon us will be very destructive .
I warn my blog almost a year ago.
I’ve heard these warnings all my life, it’s getting old. The dollar remains the safe haven benchmark and is up smartly vs currencies of other even more corrupt and bankrupt societies such as China or Brazil among the many.
Besides, when the FED lifts rates, the $US will become even stronger and many people will become squashed by it’s strength due to demand.
Exactly…there are no alternatives to King Dollar. Long may he reign! :)
The dollar is only strong relative to other currencies racing to debase themselves with neg. interest rates and demand for dollars to settle dollar based debt. The world is sick of the dollar and the abuse of its “exhorbitant privilege” and is rapidly moving away from it for trade settlement. Watch oil increasingly settled in yuan and other currencies. The world’s reserve currency dies with the petrodollar.
“For now, the effect of negative interest rates is very strong, so we’d like to steadily proceed with this policy,”
So that’s what happened to Baghdad Bob! He became governor of the BOJ.
The dollar is only strong in relation to the other piles of dog crap currencies around the world. The FED will only raise if their hand is forced. Lifting rates is going to have a negative effect on servicing the debt.
Time to buy real assets that won’t be confiscated. The elites worked this out several years ago. Look at fine art, old cars, very high end real estate. I would guess inflation in such assets has been running at 20%+ since QE began.
Also, if you can’t beat them join them, take on as much non-recourse debt as you can. You can always walk.
i’d rather be here than there, but i’d like to say i’m rooting for them.
on the other hand, it seems the ancient regime is slowly grinding into inertia meets gravity, with both having been outlawed.
The Kamikaze is made of equal parts vodka, triple sec and lime juice. According to the International Bartenders Association, it is served straight up in a cocktail glass. Garnish is typically a wedge or twist of lime.
Bonzai Uncle Frank
“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.”
What happened to the “Don’t fight the BOJ”?
Perhaps profits/earnings do matter after all.
The US created the Japanese economy after WWll. Before that “made in Japan” meant crap. The same as made in China means now. The homogeneous ethnicity is something we are not used to. The “save face” at all cost is becoming their downfall. The horrific Fukushima debacle is the worst example of this.
They can easily be replaced by the S. Koreans for creativity and manufacturing. China just copies and steals….but manufactures for cheap because their population is an unlimited hungry replaceable widget.
Anecdotal observation by half Japanese friend in SF and frequent traveler to Hawaii….the Japanese “Shop Girls” in both locations have all been replaced with Chinese women.
Japan is in slow death mode.
“Japan is in slow death mode.”
So are we, we just started later.
So Japan is stealthily nationalizing its companies through inflationary share buys, in other words (buying shares through etf with printed currency). This needn’t be all bad: contrary to how often or loud conservatives yell it, nationalization and government control of enterprises by responsible government can be very beneficial. Chinese planned growth congress to mind. Governments can go after long term strategic goals whereas private companies often only plan one quarter ahead.
But what Japan should do more than anything imo is to revitalize its culture so people have more kids. I think losing ww2 has shamed them on a subconscious level, it’s time to move on before they are a country of geezers and the Chinese eat them alive. Too bad their young people’s culture accepts having no kids aD though there we’re no consequences. If it’s not changed soon natural selection will takecare of it, but it’s still sad to watch in the meantime. Every person represents 4 billion unbroken years of cells/animals growing to adulthood and having kids.
“Those who do not learn from history are doomed to repeat it”.
In the late 20’s, after the fiscally conservative and “isolationist” Japanese prime minister, Count Kato Takaaki, died of a sudden illness, aggressive Nationalists steadily gained control over Japanese politics, which ultimately lead to the breakout of the Second Sino-Japanese War in 1937, a foretaste of WWII.
Takaaki had been backed by the the Big Four, the four gigantic zaibatsu born during the Meiji Era: Yasuda (later renamed Fuyo), Sumitomo, Mitsubishi and Mitsui, with Mitsubishi proving an extremely generous financial backer for Takaaki’s party.
Contrary to what post-WWII propaganda said, the Big Four were not crazed Imperialists. They had been around for long enough and had developed sufficient analytical capabilities to understand it was one thing to sell freighters and ammunition to nations fighting in far-away Europe (like they did during WWI) and quite another to set Asia on fire, an event that may lead to superpowers such as the United States and the Soviet Union intervening directly.
The so called “Army Hotheads” which were gaining increasing power in Japan understood perfectly well the Big Four were too concerned about their own well-being and survival to be truly useful allies. They knew the Big Four would perform tenko (literally “public conversion”) and grab what they could from government contracts while at the same time avoid to expose themselves too much directly.
Mitsubishi, due to their backing for Takaaki, was singled out for special treatment: this led to the Tokyo zaibatsu forming strong links with the Imperial Navy to have some measure of political protection and keep on getting large government contracts. Army leaders swore they would not buy as much as a single bullet from Mitsubishi and usually kept their word. If you want to know why only the Imperial Navy flew the fearsome Zero fighter (designed and built by Mitsubishi) during WWII, there’s your answer.
This left open the question of who would manufacture the immense quantities of materials needed for the rapidly expanding Imperial Army.
This opened the door to the shin (new) zaibatsu, a catch-all term for conglomerates formed after WWI, usually during the boom which ended in tears in 1929. These companies were usually in shaky financial shape due to poor leadership and lack of experience and gladly hopped on board the Imperialist boat.
This meant large government contracts and, after the General Mobilization Law was passed in 1936, ample financing on a no-questions asked basis as long as supplies deemed useful by the Army were produced.
When the Allies occupied Japan in 1945, they proved tough on the Big Four but also recognized they had not been overtly enthusiastic supporters for grandiose Imperialist schemes and they survived. That’s why Fuyo, Sumitomo, Mitsubishi and Mitsui went on to be such a big part of Japan’s post WWII economic miracle.
But who has heard of the Suzuki (no relationship to the car manufacturer), Nezu or Mori zaibatsu after 1945? The full wrath of the victorious and vindictive Allies fell upon them.
Morale: Kuroda had better grab a history book and read whom he is attempting getting along with his little schemes which, like the Imperialists’, will end on the very wrong side of history.
Real estate and other hard asstes cannot be confiscated huh? After looking at my property tax bill and homeowners insurance which just doubled last year İ beg to differ
Well for all the noise about negative interest rates ‘paid’ by the BOJ, the only real negative interest rates are in the bond market.
With all that being said, the yen is now under 110 per US$. I never thought that with all the bad news coming out of Japan, foreigners selling shares, and outflow of funds that it would trade that high.
The huge fall in the price of resources, especially energy, along with the restart of nuclear reactors in Japan has had a huge impact on imports and costs.
If Abenomics is to ‘succeed’ the yen would have to be around the 150 or greater area now.
Lee its all about dollar weakness NOT yen strength Even the Turkish lira has gained vs the dollar in 2016