Wednesday, January 22, 2014

Japan financial sphere watch January 22 , 2014 ....BOJ Approaches Limit Of Its Existing Bond Buys, As Doubts Spread It Will Boost QE

Japanese Tapering Whispers Define Overnight Session: Yen Soars, Dollar Slides, Futures Droop

Tyler Durden's picture

Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.
Additional USD weakness in the overnight session came when the EURUSD soared by 100 pips following stronger than expected PMI data first out of France, and then Germany, which modestly closed the France-Germany manufacturing gap, even if there is still a ways to go.
Elsewhere in Europe, Spain's unrecovery continued when Q4 unemployment was reported at 26.03%, higher than the Q3 25.98%, and more than expected.
FX markets have been a key focus with EUR the notable outperformer due to strong PMIs and better French data, helping GBP/USD move above the key 1.6600 level, printing the highest reading since Aug 2011. EUR and GBP strength weighed on the USD Index (down 0.5%) which pushed commodities markets higher with gold  gaining further upward momentum after India's congress leader asked for a relaxation of gold import rules, freeing pent-up demand in the country. Elsewhere, CHF has strengthened amid the SNB looking to curb back on mortgage lending, with domestic banks shrinking their balance sheets and shedding foreign assets.
European equities trade mixed following on from the Asia-Pacific session which saw disappointing Chinese PMI Manufacturing and mixed pre-market earnings. Temporary support was seen following impressive PMI readings pushing bunds and T-notes to session lows which have since recovered. Notable equity specific moves in the Stoxx 600, Delhaize (+7.7%) are the outperformer following the Co.'s pre-market update, whilst Pearson (-7.5%) are the laggard after their CEO said trading conditions remain challenging.


BOJ Approaches Limit Of Its Existing Bond Buys, As Doubts Spread It Will Boost QE

Tyler Durden's picture

One of the conventionally accepted "truths" (as wrong as they may end up in retrospect) for 2014 is that in addition to the ECB eventually commencing Fed-style QE (and if it doesn't, anyone holding peripheral bonds at these idiotic levels - watch out), the BOJ will launch an expanded dose of bond monetization as soon as April (certainly not last night, despite what some were expecting) maybe because so far Abenomics has failed to boost wages for 18 consecutive month, maybe because the coming sales tax hike is sure to crush any fleeting nominal economic gains, or maybe energy import prices just aren't stratospheric enough yet and those record monthly trade deficits could be... record-er. So yes: a new QE may or may not happen, but in the meantime, a new development is emerging: Japan is near the limit for the bond buys it can do under its current mandate.
As Japan Times explains, the BOJ bought ¥6.8 trillion worth of sovereign notes in December, the least since it boosted the program to more than ¥7 trillion a month in April, data compiled by Totan Research Co. show. The buys may slow further to avoid exceeding the average annual target of a ¥50 trillion increase in the BOJ’s holdings for the year, said Tokai Tokyo Securities Co. and Totan, a Tokyo-based research unit of money-market broker Tokyo Tanshi Co. The holdings swelled by ¥50.3 trillion in the nine months that ended Dec. 31.
Looks like the BOJ was in such a hurry to boost the Nikkei and crush the Yen, it already surpassed its annual monetization quota!
So what happens if we do get a slowdown?
Well, the JPY, which since early November has been selling off by the boatload, pricing in expectations of at least one more QE in April will soar. And then the verbal diarrhea will really begun as Kuroda "could signal to the market that a slowdown does not represent a scaling back of his accommodative policy or he could raise the holdings ceiling, according to Sumitomo Mitsui Banking Corp." In other words, forward guidance is about to come to Japan. Alas, forward guidance does not work, and should the last dynamo of real unsterilized monetary injection, Japan, flicker then die, all bets would be off.
The BOJ’s monthly purchases will decline to about ¥6.4 trillion,” Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities, told reporters and institutional investors Wednesday. “I don’t think the decreases would have a large impact on the market, considering investors paid little attention to the decline that we saw in December.
Well, now that you pointed it out, investors - which these days are mostly clueless algos programmed by 19 year old math PhD's will be paying very close attention.
In the meantime, everyone is hoping and praying that any slowdown in purchases resulting in a market drop, would be met with a prompt pick up:
The BOJ will boost stimulus by the end of September, 80 percent of the 35 economists polled last month estimated.

“The amount the BOJ needs to buy this year is about ¥6.5 trillion a month” after taking into account its bond holdings that come due, Izuru Kato, the president of Totan, wrote in a research note on Jan. 9. “The BOJ is more likely to boost purchases should the decrease destabilize bond yields.”

“Investors think the BOJ is just taking a break and will increase buying when the effect of the sales tax hike comes in,” said Tadashi Matsukawa, the head of fixed-income investment at PineBridge Investments Japan Co. “Japan’s yields are staying at these levels because of this assumption.”
Well, maybe not. In a note released overnight, Bloomberg is reporting what we have said all along: epic QE in Japan may not be driving up the right inflation - namely wages - but it sure is sending the bad kind of inflation higher, that of import prices for food and energy, and other commodities. Which is why for the first time, many are refuting the rumor first launched in early November that a BOJ expansion in QE is just around the corner, and may instead be delayed.
From Bloomberg:
Accelerating inflation is prompting analysts from HSBC Holdings Plc. to Daiwa Securities Co. to push back forecasts for when the Bank of Japan may add to record monetary easing.

The percentage of economists predicting an expansion of already unprecedented stimulus between April and June fell to 33 percent from 56 percent three months ago in a Bloomberg News survey of 36 economists conducted Jan. 10-15.

With the BOJ’s preferred benchmark gauge showing inflation at more than half of its target 2 percent pace, the central bank may wait to assess trends in wages and the effects of a sales-tax increase in April before deciding on any extra stimulus. Governor Haruhiko Kuroda and his board will keep policy on hold when a two-day meeting ends today, according to all economists in the survey.

“The speed of inflation is the main reason for pushing back my forecast,” said Maiko Noguchi, senior economist at Daiwa Securities and a former central bank official. “The BOJ can take a breath and watch developments in prices and the impact of the sales-tax increase.”

Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year.
Needless to say, a delay in QE would crush Abenomics, as it would mean a surge in the Yen, a plunge in the Nikkei - really his only accomplishments so far - even as wages never rose, pushing the economy back in the deflationary limbo from whence it came as everyone rushes to sell financial assets.
What happens then? Well... "The BOJ’s total assets have climbed to ¥229 trillion, or 48 percent of the nation’s nominal gross domestic product. The central bank aims to increase its balance sheet further to ¥290 trillion by the end of this year."
Richard Koo adds, "It may be too late to prevent long-term rates doing something crazy” should the BOJ hold off on tapering before inflation reaches the target, said Richard Koo, the chief economist in Tokyo at Nomura Research Institute Ltd. The stimulus is leaving Japan at risk of falling into a quantitative-easing “trap” of being unable to taper without a surge in long-term rates and subsequent damage to the recovery, according to Koo, a former Federal Reserve economist."
Good luck Japan. You will need it very soon.

BOJ maintains ultraeasy monetary policy, FY 2015 price outlook

TOKYO (Kyodo) -- The Bank of Japan decided Wednesday to maintain its ultraeasy monetary policy and kept unchanged its consumer price outlook for fiscal 2015 at 1.9 percent, with Governor Haruhiko Kuroda expressing his hope for wage hikes to help the bank achieve its goal of 2 percent inflation.
The nine-member Policy Board unanimously decided that the central bank will continue with its large-scale monetary easing policy introduced in April, centering on doubling the monetary base and boosting the purchase of government bonds, in its bid to beat deflation.
On the prospects of its easing policy, Kuroda told a news conference that the prices "have been basically moving on the path expected" by the BOJ and that it will continue with the current monetary easing policy unless risks to prices become evident.
To achieve the bank's 2 percent inflation target, Kuroda said an increase in wages is "very important," as it will work positively toward lifting income and consumption, though it is the not only factor that influences the inflation rate.
After reviewing its semiannual economic outlook issued in October, the BOJ slightly revised down its estimate for the nation's growth in fiscal 2014 to 1.4 percent from the 1.5 percent forecast, while keeping intact its growth estimates for this fiscal year at 2.7 percent and fiscal 2015 at 1.5 percent.
The bank retained its price outlook for the year ending March and fiscal 2014, expecting core consumer prices excluding fresh foods to rise 0.7 percent and 1.3 percent, respectively. The fiscal 2014 projection excludes the impact of three-percentage-point sales tax hike scheduled for next April.
The move comes after the consumer price index excluding fresh foods climbed 1.2 percent in November from a year earlier.
The BOJ left unchanged its assessment of the domestic economy for the fourth straight month, saying in a statement that it has continued to "recover moderately," while noting an increase in demand has been observed recently ahead of the consumption tax hike.
The bank adopted a brighter view on overseas economies, saying that advanced economies are starting to recover, reflecting improvement in the United States and Europe, although a lackluster performance is still seen in part.
"As the trend of recovery in developed countries like the United States and in Europe becomes clearer, we see that risks have been receding in the global economy as a whole," Kuroda said.
On the outlook, the BOJ said the domestic economy is "expected to continue a moderate recovery as a trend, while it will be affected by the front-loaded increase and subsequent decline in demand prior to and after the consumption tax hike."
It said the year-on-year rate of increase in the consumer price index is likely to be around 1.25 percent for some time.
Regarding risks to the outlook, the bank assumed a more optimistic stance as it deleted its previous description that "there remains a high degree of uncertainty concerning Japan's economy." The BOJ only said risks include developments in the emerging economies and the prospects for the European debt problem.
On the current state of the economy, the central bank said "housing investment has continued to increase and private consumption has remained resilient," with effects of the demand growth ahead of the tax hike seen in these areas. The bank also noted improvement in the employment and income situation.
To overcome deflation, the BOJ will continue with its current monetary easing, "aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner," the bank said.
The BOJ will make "adjustments as appropriate" by examining both the upside and downside risks to economic activity and prices, it added.
Under its ultraloose monetary policy, the central bank is conducting market operations to increase the monetary base at an annual pace of about 60 trillion to 70 trillion yen, and the country's monetary base at the end of December stood at 201.85 trillion yen, the highest level ever and topping the central bank's 200 trillion yen target for the end of 2013.
January 22, 2014(Mainichi Japan)