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Abenomics: Japan's economic revolution will rock our world. BOJ blows big bubble say experts.; Japanese people have a bubble every 50 years. Once Japan does have a bubble they do it really big.
Topic Started: 22 Jan 2013, 12:01 PM (13,758 Views)
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The JGB market narrowly missed a trading halt in the 5y today, Looks like the BOJ came in buying.

Inflation expectations are rising, a quadrillion yen are looking for a new home.

The Nikkei 225 is starting to look Zimbabwe. Interesting times!



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Catweasel
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Enjoy The Ride
14 May 2013, 06:38 PM


The Nikkei 225 is starting to look Zimbabwe. Interesting times!



Catweasel say a Nikkei look like the bubble of a all the proportion.

So mouse best to steer well the clear.

Even the risk taker feel the risky now.

But was master, expert and mouse speaking of bubble in a 1987-89?

Not at a all. Japanese business models was all a rage in a Harvard,

So who the know?

If it had told a story about a Nikkei in a early 2012 down at a pub, its mates would spill its mojitos all over goatee and beer belly.

And it would be labelled mad as batshit.

Imagine if it invest its the mouse house deposit in a Gung-Ho Entertainment?

It would make more than small tribe of white shoes could the dream of.
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miw
14 May 2013, 02:28 PM
Interesting developments in the US. The 10-year treasury made a run at 2% and dropped back. This has happened before, but what is new is that the futures market is pricing in a 50bp increase in the fed funds rate by 2015. (Shadow's definition of "by 2015", by the way. i.e. before 2016.)
I thought the article that Peter Fraser posted a few days back on the Washington whale pretty much crushed the idea that sovereign debt is a free market. I don't think it matters what the futures market is pricing in as long as Ben can print and buy. Commercial paper and junk on the other hand will probably get a lot more interesting in the next 6-12 months.
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miw
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genX
14 May 2013, 08:29 PM
I thought the article that Peter Fraser posted a few days back on the Washington whale pretty much crushed the idea that sovereign debt is a free market. I don't think it matters what the futures market is pricing in as long as Ben can print and buy. Commercial paper and junk on the other hand will probably get a lot more interesting in the next 6-12 months.
It matters a huge amount what the futures say because the book value of a whole swathe of financial companies is being affected. Commercial paper has already taken a couple of legs down. Junk is still richer than it should be though.

This is because people are expecting the Fed to start unwinding sooner rather than later. The Hilsenrath article has people thinking about how it will play out.
Edited by miw, 14 May 2013, 09:27 PM.
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miw
14 May 2013, 09:22 PM
It matters a huge amount what the futures say because the book value of a whole swathe of financial companies is being affected.
Marked to market, sure. Does it affect cashflows? Does it affect spreads? (Genuinely curious, not rhetorical.)
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Commercial paper has already taken a couple of legs down. Junk is still richer than it should be though.

I think that bifurcation will continue as the market prices in counterparty/economic risk (I personally don't believe it is because of speculation about the Fed tightening).
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This is because people are expecting the Fed to start unwinding sooner rather than later. The Hilsenrath article has people thinking about how it will play out.

I personally think expecting the Fed to unwind at all is foolish. The US economy is barely limping along. Any tightening would tip it back into deflationary recession. The general principal is: don't listen to what people say, watch what they do.
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miw
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genX
14 May 2013, 10:04 PM
Marked to market, sure. Does it affect cashflows? Does it affect spreads? (Genuinely curious, not rhetorical.)
Have a look at how Mortgage REITs have been trading over the past few days.

Are spreads and cashflow affected? Good question. Probably not in the past couple of days because nobody has had to roll anything over yet. But, to take an example I am aware of, the book value of mortgage securities has dropped in come cases by nearly 10% since January simply because people are thinking it will be better to hold onto cash and buy a higher-yielding mortgage security in sme months time - despite the fact that the Fed is buying $40B in mortgage securities per month. Also, if your business is doing carry trades you will have your spreads compressed as rates rise and expanded as rates fall. Naturally the share price of carry trade players has dropped in the expectation that spreads will be worse in the future and dividends will drop.

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I think that bifurcation will continue as the market prices in counterparty/economic risk (I personally don't believe it is because of speculation about the Fed tightening).

I personally think expecting the Fed to unwind at all is foolish. The US economy is barely limping along. Any tightening would tip it back into deflationary recession. The general principal is: don't listen to what people say, watch what they do.


I tend to agree with you on the second point. The Hilsenrath article tells us nothing we didn't know before. It think it is just the fed putting a bit of a pin out there to say "the punchbowl *will* get taken away. Are you ready for it when it happens?" It says nothing about timing at all.

On the first point, so many things are dependent as much on the expectation as on the current reality. A small change in expectation can cause large moves in the pricing of assets, especially now when such small moves in rates have such big consequences.

Here's some charts showing some of the things happening in the market over the past few days. SPY is the ETF that matches the S&P500. TLT is a fund of 20+year treasuries, and AGNC is a mortgage REIT that deals in agency mortgages. (i.e. essentially 0% default risk, so all risk is prepayment risk or extension risk or convexity risk.)

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From the WSJ on much the same topic:

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Beware Bond-Market Mood Swings
By RICHARD BARLEY

From hero to zero in just 10 days: May's selloff has seen year-to-date gains for holders of U.S. Treasurys, German bunds and U.K. gilts wiped out and turned to losses. Some are asking if this is a definitive turning point for the bond market after its 30-year bull run. It isn't clear yet that global yields have hit bottom—but it is clear that bonds are becoming hypersensitive to the smallest twists and turns in the economy.

The turn in mood has been sharp. On May 2, after the European Central Bank cut rates and hinted that it might yet push the rate on its deposit facility into negative territory, 10-year German yields hit a record low around 1.15%; U.S. yields were at a low for the year of 1.63%. But since then, a better-than-expected U.S. jobs report, some encouraging German industrial data and a brewing debate about how and when the U.S. Federal Reserve might wind down its bond-purchase program have pushed yields sharply higher, to 1.36% in Germany and 1.92% in the U.S. Gilt yields have broadly tracked Treasurys.

But none of the data yet suggest an economy that is standing on firm ground: U.S. payrolls growth of 165,000 in April was better than expected, but hardly stellar, albeit prior months were also revised upward. Better data for Germany is welcome, but is unlikely to pull the euro zone as a whole out of its extended slump. Other indicators continue to suggest a soft patch. Most significantly, key measures of inflation have been falling, which should be bond-friendly: In the U.S., the core Personal Consumption Expenditure measure, the Fed's favored inflation gauge, has dropped to 1.1%, while euro-zone inflation is estimated at 1.2% in April, down from 1.7% in March. And since the start of May, the ECB, the Danish central bank, the Reserve Bank of Australia, the Reserve Bank of India, the National Bank of Poland and the Bank of Korea have all cut rates—between them accounting for some 23% of world GDP, notes Deutsche Bank DBK.XE -0.80% .

Further falls in inflation may yet scotch talk of tapering bond purchases in the U.S. In the euro zone, the ECB may yet become more dovish. And the full effects of the Bank of Japan's new activism have yet to be seen—although Japanese net purchases of foreign bonds have now turned positive, another potential support for U.S. and European markets.

Still, the violence of May's selloff suggests that with yields at such low levels, investors are very sensitive to any data that goes against expectations and are very quick to try to judge what that means for central-bank policy. That means more volatility lies ahead. Investors should watch out.
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Edited by miw, 14 May 2013, 11:53 PM.
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Andrew Judd
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miw
14 May 2013, 09:22 PM
It matters a huge amount what the futures say because the book value of a whole swathe of financial companies is being affected. Commercial paper has already taken a couple of legs down. Junk is still richer than it should be though.

This is because people are expecting the Fed to start unwinding sooner rather than later. The Hilsenrath article has people thinking about how it will play out.
The fed funds futures were predicting rates to be about half a percent in November of this year about one year ago. So it seems to be all happening later rather than sooner. People have been thinking how it will be ending since almost since it started.

Edited by Andrew Judd, 15 May 2013, 05:31 AM.
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miw
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Andrew Judd
15 May 2013, 05:22 AM
The fed funds futures were predicting rates to be about half a percent in November of this year about one year ago. So it seems to be all happening later rather than sooner. People have been thinking how it will be ending since almost since it started.
Indeed. But I was talking about the violence of the move. Expectations for Jan 2016 fed funds have been drifting down for 12 months or more, but they have kicked up violently in the past week or two and the trend continues. They are still below the expectation for the beginning of this year.

It is normal for futures to move towards spot as time goes by. This is a kick away from spot that is steep and sustained. It's having a wide impact in the market.
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Japan's "Abenomics" detractors brace for "I told you so" moment

By Tomasz Janowski and Chikako Mogi
TOKYO, April 30 | Mon Apr 29, 2013 5:01pm EDT

(Reuters) - In the shadows of Prime Minister Shinzo Abe's formidable PR machine, a small, tenacious group of "Abenomics" detractors is battling to be heard and waiting for their "I told you so" moment.

Being a contrarian in a society that values consensus and conformity is hard enough, but it is even harder for academics, commentators and investors who are attacking Abe's economic revival plan as misguided and potentially dangerous.

The plan relies so much on changing attitudes formed during years of decline that critical voices are more than just part of the political debate. Criticism could undermine Abe's efforts and there are many sceptics reluctant to openly challenge policies that are giving Japan long-forgotten optimism and hope.

Business and consumer sentiment surveys are pointing up, stocks are on a six-month bull run, the yen is in retreat, boosting exporters' profits and Abe's support ratings exceed 70 percent. But that is what gets some detractors worried.

"Since ancient Greece and Rome, most policies that excited people ended in failure," says Kaoru Yosano, who served as finance minister in past Japanese administrations. He was in the cabinet in 2007 when Abe had his first stint as prime minister.

"The fact that people are pleased and in a festive mood seems to prove this policy won't work," the veteran policymaker told Reuters in a recent interview.

So far, Abe's remedy for two decades of economic under achievement - a mixture of fiscal pump-priming, "shock and awe" monetary stimulus and a promise of pro-growth reforms - has an impressive, and growing, list of endorsements.

Most come with a caveat that tackling Japan's deep-rooted structural problems and a credible plan to contain the nation's runaway public debt are paramount. Yet the message from global institutions, including the International Monetary Fund, prominent economists, market gurus and business leaders is that "Abenomics" is a welcome experiment, even "Japan's last chance."

Unlike sceptics who reserve their judgement until Abe's growth strategy due in June, the detractors dismiss it as a mere distraction: old ideas, such as state backing for "growth industries" and some minor deregulation, sold under a new brand.

So instead, they focus on what is in plain view: the Bank of Japan's assault on deflation backed by a 2 percent inflation target that its new chief, Haruhiko Kuroda, vows to reach in two years with a massive burst of stimulus amounting to $1.4 trillion.

The detractors question the focus on "creating inflation," the 2 percent goal and talk of a lack of a credible path to get there.

They fear that blind faith in the central bank's firepower replaced a cool-headed assessment of economic reality and doubt a monetary shock can shift Japan into higher gear.

They add the BOJ's buying spree of government bonds could backfire dramatically if Abe fails to come up with a credible budget reform plan and investors lose faith in Tokyo's ability to manage its finances - it already has the heaviest public debt burden among leading economies - without central bank help.

A resulting spike in bond yields and a yen selloff would wreak havoc in Japan's financial sector, they say.

Critics, such as Seki Obata, Keio University business school professor who in January published a book "Reflation is Dangerous," argue that "Abenomics" is exposing Japan to such risk without any clear sense of what it can accomplish.

That is also the concern of Ryutaro Kono, Paribas BNP chief Japan economist, who was nominated last year to join the BOJ board only to be rejected by lawmakers as too cautious.

INFLATION, JOBS AND REALITY

Detractors question the plan's central premise that ending a downward creep in prices will help spur economic growth and that the benefits now felt by stock market investors and exporters will spread to broader economy.

"The 2 percent inflation is an inappropriate target. I can't see how a rate of inflation can be the goal of an economic policy," says Yukio Noguchi, an economics professor who this month published a book titled "Japan Will Collapse Under Monetary Easing."

They cite Britain as a case in point. It is skirting with recession, yet has inflation of close to 3 percent.

Noguchi says the BOJ has not explained how pumping more money into an economy that has the world's biggest stash of household and corporate savings is meant to spur investment and lead to higher prices and wages.

In general, Abenomics dissenters side with Kuroda's predecessor Masaaki Shirakawa, who saw deflation more as a symptom than a cause of Japan's headaches.

"If there was a single thing that would have cleared the fog and solved all problems, Japan wouldn't have been in this situation for 15 years," he said on March 19, his last day in office.

As expected of former governors, the No.1 enemy of the "reflationist" camp has since kept a low profile, but a group of like-minded critics keeps chipping away at a strategy they say badly needs a reality check.

For example, Obata says there is no way incomes can rise across the entire economy because the baby boomers in fast-ageing Japan are now retiring to be replaced by young workers with entry-level wages. Japan's overall consumer spending power will therefore fall, rather than rise as Abe hopes.

"Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages," says Obata. "On the contrary, that amount will shrink."

Critics also warn a weakened yen is much more of a mixed blessing today, when Japan is running trade deficits instead of big surpluses. It may help exporters, but others feel the pain of more expensive imports as illustrated last week when Japanese squid fishermen stopped work for a couple of days in protest at high fuel costs.

Right now Abe looks unstoppable. Helped by a steady flow of well-timed policy announcements he is on course to consolidate power won in the December lower house landslide with a win in an upper house election in July.

One reason is that no one is proposing a clear alternative, a point made by Yuuki Sakurai, who runs the $16 billion Fukoku Capital Management and is critical of Abenomics, comparing BOJ actions to "shooting a sparrow with a cannon."

The bottom line, detractors say, is that there are no simple solutions or shortcuts.

"For the Japanese economy to truly improve, we will need to make the same kind of efforts as in the past," former finance minister Yosano says. "That is work hard, create new technologies and try to sell goods abroad."

Read more: http://www.reuters.com/article/2013/04/29/japan-economy-detractors-idUSL3N0DE04G20130429
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Why Abenomics breaks the golden rule

David Li - Financial Times
3 hours ago

Abenomics, the name given to Japan’s experiment with monetary and fiscal stimulus, is designed to end chronic deflation, according to Shinzo Abe, the country’s prime minister. But there is yet little evidence of inflation. The world has merely seen a sharp devaluation of the yen. This devaluation is both unfair on other countries and unsustainable.

Since December the yen has lost about 25 per cent of its value against the US dollar and even more against the Chinese renminbi and the South Korean won. As a result Japan’s exports have accelerated and were responsible for almost half of its annualised 3.5 per cent growth in gross domestic product in the last quarter. The faster rate of exports has driven up expected earnings of large companies and, accordingly, the index of the Japanese stock market by 50 per cent. But core consumer prices remain lower than they did a year ago. Rather than raise expectations of inflation, Abenomics has simply generated expectations of further devaluation.

This type of recovery is unfair since it comes at the expense of Japan’s trading partners. In South Korea, Hyun Oh-seok, finance minister, last month said the won’s appreciation against the yen is a larger issue than whether North Korea launches a nuclear missile.

China has become the de facto shock absorber for Abenomics. For the past three years China’s trade surplus has been steadily decreasing as a share of its GDP, from more than 5 per cent to about 2 per cent. In terms of absolute value, the surplus has come down from about $300 billion to nearer $200 billion. Meanwhile, the nominal exchange rate of the renminbi against the dollar has appreciated by about 20 per cent since July 2010. Chinese inflation has been about 2 per cent higher than the US over the period, so the real exchange rate is appreciating faster.

Chinese exporters do not need a devaluation of the yen. Many Chinese products are in strong competition with Japanese equivalents – think of cameras and televisions. The yen devaluation is hurting producers of these goods. This is at a time when Japanese exports to China are rising because of relative quiet in the dispute over islands in the East China Sea.

A Japanese recovery based on a devaluation cannot last. The most important reason for this is geopolitics. Against the backdrop of quantitative easing by several central banks including Japan’s, China, Taiwan and South Korea are all facing the problem of currency appreciation. The falling yen is salt rubbed into their wounds. Nationalistic sentiments against Abe are high. Strong economic policy reactions from Japan’s neighbours are almost inevitable.

If the yen devaluation continues, China and South Korea may well have to interfere in the foreign exchange markets to stop the appreciation of their currencies. Trade disputes may emerge against certain Japanese exports. Finally, Japanese investments will be placed under increasing scrutiny.

Japan needs to return to the fundamental values of economics. Specifically, it should try to increase asset values through enhancing domestic economic activities. The most important element is higher capital expenditure by companies, which is missing despite the current boom in exports. This is an indication that Japan’s corporate executives do not believe that its currency appreciation is sustainable.

Most importantly, the Japanese government needs to implement its long overdue liberalisation of various regulations to allow businesses to invest freely. It needs to liberalise the labour market to allow companies to hire more workers; to enhance competition; and to encourage investment by small businesses via increased access to credit. Without this hard work, real economic activities cannot recover quickly and deflation will continue – despite the huge amount of money printed. This is a lesson the world has learnt through various financial crises and the ensuing hard-earned recovery. Japan must learn it too.

The writer is Mansfield Freeman professor of economics at Tsinghua University

Read more: http://www.businessspectator.com.au/article/2013/5/22/asian-economy/why-abenomics-breaks-golden-rule
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