Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Friday, November 23, 2012
Shinzo Abe campaign pledges - note promises related to allegedly revitalizing the economy and strengthening the Military..... North Korea set to test an extended range missile again , perhaps the end of November ? Fukushima and Japan contamination and radiation sickness news items
The JPY dropped 1.3% against the USD this week for a greater-than-6% drop since its late-September highs as it appears the market is content pricing Abe's dream of a higher inflation-expectation through the currency devaluation route (and not - for now - through nominal bond yields - implicitly signaling 'real' deflationary expectations). In a 'normal' environment, Barclays quantified the impact of a 1 ppt shift in inflation expectations from 1% to 2% will create a 'permanent inflation tax' of around 18% (which will be shared between JPY and JGB channels). However, as we discussed in detail in March (and Kyle Bass confirmed and extended recently), the current 'Rubicon-crossing' nature of Japan's trade balance and debt-load (interest-expense-constraint) mean things could become highly unstable and contagious in a hurry. When the upside of your policy plans is an 18% loss of global purchasing power, we hope Abe knows what he is doing (but suspect not).
Barclays: How low can the yen go?
A revision of the BoJ inflation target could pose a greater downside risk to the value of the JPY than most market participants think. The LDP, which is likely to lead the new government after the Japanese elections, has argued that it would revise the inflation target to 2% from the still unmet target of 1%. Discussions are likely to remain lively until a new government is confronted with the actual perils of reality, but we and many market participants believe politicians patience with the central bank may be running out.
The timing of the more aggressive stance to target higher inflation is likely to depend on global factors as well, but the stars appear to be aligning for the changes to take place in the early part of 2013.The pursuit of higher inflation targets may have a destabilizing effect on domestic yield curves. The added volatility that may be introduced in the curve may well delay the initiative, if it were to occur. For these reasons, we expect the process to be gradual and to occur once global risks for markets begin to dissipate.
That being said, a window of opportunity may open up as early as the first half of 2013, with a diminishing of fiscal cliff risks in the US and an initiation of the OMT program in Europe. Then, the question remains:how much can the JPY depreciate in response to the new inflation-targeting regime.
The inflation tax
A back-of-the-envelope calculation suggests the upward move in USD/JPY can be surprisingly steep in response to higher inflation expectations. The Japan sovereign linkers curve goes up to 2018, six years into the future, and liquidity is rather scarce, which means the information on inflation expectations conveyed by the implied breakeven curve is rather poor. Still, 6y breakeven inflation implied by linkers is currently at around 60bp.
Instead, let us assume that inflation expectations are actually already running at about 1%, and that the government will manage to implement changes to force the central bank to successfully target 2% inflation. To be conservative in our estimates, we would measure success as the public fully buying into the 2% target, from a prevailing, de facto 1% inflation target. We note that this represents a lower bound in the size of the shift, since current inflation expectations are running lower than 1%.
An estimate of the theoretical impact 1% permanent shock to inflation expectations can be computed by discounting the government's expected revenues from seniorage on each yen outstanding (the right to tax those holding yen). Assuming seniorage is already 1% a year, we estimate the difference in government revenues for permanently raising the inflation tax to 2%. Revenues are 1% in the first year, and then 1% of the leftover value of the yen two years from now, equivalent to 98 cents in real terms (given the 2 percent inflation tax), and then 1% of the remaining value by the third year, equivalent to 0.98*0.98 =0.98^2 and so on.
Following this logic, we then discount all these government cash flows by using the actual government yield curve (as a proxy for a discount rate at different maturities, Figure 1).
The NPV of all these cash flows give us a difference in fiscal revenues between a 2% and a 1% permanent inflation tax equal to 18%.
JPY on the move?
This NPV reduction would affect market prices of both JGBs and the JPY. There are potentially two limiting cases that can be considered for the impact of the policy change.
In the first one, JGBs price in the higher inflation expectations entirely through an upward shift of the curve. In this case, real interest rates remain where they are and the JPY is largely unaffected by the impact of the higher inflation target, which is then compensated by higher nominal yields (perfectly netting the tax off). In this case, the JPY remains unchanged and nominal bond prices in domestic currency drop in value, depending on duration, to accommodate the 100bp uniform selloff in nominal rates (Figure 1).
And the other limiting case is one in which all of the burden of adjustment is borne by the JPY. This would happen if the central bank aims to bolster growth by pushing real rates lower and achieves this by keeping JGBs from selling off by using tools such as increased asset purchases. In this case, where the term structure of nominal interest rates remains unchanged, the JPY should then depreciate by 18% in response to a permanent change of 1% in inflation expectations to 2% from 1%.
Likely, the final burden of higher inflation expectations will be shared by bond prices and the JPY. While initially the central bank may attempt to keep the nominal yield curve steady, eventually we expect activity and inflation expectations to react, as a cheaper JPY helps economic activity. How much is shared by bonds and by the currency will ultimately depend on how fast activity reacts. The slower the reaction, the bigger the burden that will fall on the JPY.
We would expect considerable uncertainty around the channel through which the higher inflation target is priced. For the time being, it appears that the market is content selling the JPY and buying JGBs – suggesting that the JPY weakness may be the primary outcome of the policy move. The longer-term impact is somewhat clearer cut, higher inflation should put downward pressure on the value of the JPY versus all other currencies.
And the alternate - non-normal 'rational' world view that in fact is more likely to occur should be read here, and why rates cannot be allowed to rise...
And just to show the sensitivity of the world's most indebted nation to interest rates, here again is Andy:
Even though the yield on 10-year Japanese Government Bonds (JGB) is only 1 percent, the interest expense is expected to top 22.3 trillion yen in the fiscal year that begins next month. This is one-quarter of the general account budget. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.
Yup: a mere "surge" in interest rates to a whopping 2.00% will destroy the Japanese economy.
LDP leader Shinzo Abe unveils his party's election manifesto in Tokyo on Wednesday.AFP
TOKYO —
Former Prime Minister Shinzo Abe said Wednesday that he will spearhead economic recovery and strengthen Japan’s military if his party wins the Dec 16 elections.
“We will take back Japan,” Abe said as he issued his campaign platform at a news conference at his party headquarters in Tokyo. “We will rebuild the economy.”
“This is our campaign pledge and we only listed things we can achieve,” he said, criticising the ruling Democratic Party’s failure to meet its pledges during three years in power.
Abe promised to achieve 3% nominal economic growth through intensive reform programs over the next five years. He also set a 2% inflation target, promising to use bold monetary policy to get the country out of deflation and revitalize the economy.
The biggest issues in the election are reviving a stagnant economy, rebuilding after the crippling March 2011 earthquake and tsunami, and determining Japan’s energy policy in the wake of the Fukushima nuclear crisis.
As head of the opposition Liberal-Democratic Party, which is leading in opinion polls, Abe is likely to replace Noda following the elections.
Abe said he will take new economic measures to fight deflation and correct the strong yen, which is hurting Japanese manufacturers and exporters.
He said he will compile a large-scale budget that would allow flexible and continuous measures to would create more jobs, promote investment and make Japanese manufacturers more globally competitive.
Abe proposed strengthening political influence over Japan’s central bank, possibly by revising a law that guarantees the bank’s independence.
Akira Amari, the LDP’s policy chief briefing reporters alongside Abe, said the party would ensure that BOJ independence was preserved, seeking to allay concerns that law changes would expose it to political interference.
Abe also said that he did not want the central bank to directly underwrite government debt, which is how markets interpreted his earlier call for the BOJ to buy construction bonds issued to fund infrastructure spending.
“What I have been saying all along is that we’d like the BOJ to buy construction bonds from the market, not directly from the government,” Abe said.
The hawkish Abe also introduced a plan to set up a national security council at the prime minister’s office to beef up Japan’s defense and security amid an escalating territorial spat with China over some islands in the East China Sea. He said the LDP will strengthen the coast guard around the disputed islands that Japan calls Senkaku and China calls Diaoyu.
Abe, a staunch supporter of the Japan-U.S. security alliance, renewed his call for a revision to Japan’s war-renouncing constitution to allow Japanese troops to defend American troops in case of foreign attacks on Japan.
He claimed he would fix a Japan-U.S. alliance that Noda damaged and would strengthen Japan’s diplomacy “to protect the people’s lives, territory and the beautiful sea.”
Reflecting the party’s generally pro-nuclear power stance more than 18 months after the Fukushima nuclear disaster, Abe said the LDP would make a decision within three years about whether to restart idled nuclear power plants.
Abe resigned as prime minister in 2007 after a year in office due to a stomach ailment that he says is no longer an issue.
Noda’s DPJ has lost support largely because of its handling of the nuclear crisis and its doubling of the sales tax.
Polls indicate the LDP will win the most seats but will have to form a coalition to govern. Official campaigning starts Dec 4.
Polls show nearly half the voters are undecided and emerging “third force” groups, including one led by outspoken nationalist former Tokyo Gov Shintaro Ishihara, are expected to affect post-election groupings.
If Noda’s centrist party loses, the economically sputtering country will get its seventh prime minister in six and a half years.
On 11/22/2012, US government reported to the governments of Japan and South Korea that North korea is possibly preparing to launch extended range ballistic missile.
According to the governmental staff of US, Japan and South Korea, possible missile parts were transfered from the arms factory in Pyongyang to the assembly facility of the missile launching site in Pyeonganbuk-do and Tongch’ang-ri in early November.
The observed parts look like the extended range ballistic missile which North Korea launched last April.
In April, they took 20 days to launch after transferring. It’s presumed they will be ready to launch by the end of November.
On 11/15/2012, North Korea had a speech in the United Nations General Assembly to state that they were going to launch application satellite like they did one month before the last attempt of launching the missile.
The cause of the leak seems to be elementary (yet again). They had a plug in the drain line, so the contaminated water that should have gone to the drain line went up and out of the vent line instead.
What has happened to "attention to detail" which has been a hallmark of Japanese processes? (Or "was" a hallmark?)
Fukushima I Nuke Plant is entering the second winter since the nuclear accident, and many, many more winters to come until the plant is decommissioned. Well beyond the attention span of most Japanese.
Submitted by Tyler Durden on 11/23/2012 17:53 -0500
LDP leader Shinzo Abe unveils his party's election manifesto in Tokyo on Wednesday.AFP
LDP leader Shinzo Abe unveils his party's election manifesto in Tokyo on Wednesday.AFP
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