You Can't Have it All
The cunning plan to "create inflation" in Japan, a country that needs inflation about as urgently as a hole in the head, not surprisingly is beginning to have unintended consequences (eventually, there will be nothing but unintended consequences).
One obvious problem of the monetary pumping exercise is that to the extent that it succeeds in attaining its objective, interest rates cannot remain at record lows at the same time. Funny enough, people are now exercised over an increase in mortgage rates in Japan by one – yes, a single one – basis point.
"Bank of Japan Governor Haruhiko Kuroda's stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.
While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ, according to Mizuho Securities Co. Federal Reserve Chairman Ben S. Bernanke's monetary easing almost halved 30-year U.S. mortgage rates since 2008 to 3.35 percent on May 2."
If Kuroda does "succeed", then it will of course be the first basis point of many. However, as e.g. Edward Hugh argues here, it is by no means certain that he will succeed. Edward bases his argument on the demographic problems of Japan – and indeed, assuming that the BoJ does not alter its modus operandi, it is difficult to see where the credit demand is going to come from that will inflate the money supply. Commercial banks in Japan are almost continually reducing their outstanding credit, so that in spite of the expansive BoJ policy, the money supply barely grows. In addition, as we have repeatedly argued, there is actually no pro-inflation constituency in Japan – there are only countless institutions and people who would be severely hurt by inflation.
Financial Morphine Addicts
Several Japanese analysts are quoted in the Bloomberg article with critical assessments of the current situation:
"It makes little economic sense for rates to decline when the BOJ says it will raise consumer prices," said Toru Suehiro, a market economist in Tokyo at Mizuho, one of the 24 primary dealers obliged to bid at government debt auctions. "Yields are higher than before the monetary easing to reflect the volatility risk, and lending rates have risen because they are set based on bond yields."
Volatility, as measured by the gap between the 10-year yield's daily high and low, jumped to 30 1/2 basis points on April 5, the most since July 2003, after Kuroda unveiled a plan to buy more than 7 trillion yen ($70.7 billion) of Japanese government bonds a month, accounting for more than half of the total amount that the government plans to sell in the market this fiscal year.
"the BOJ's buying is reducing the liquidity of government bonds, preventing market participants from finding appropriate yield levels," said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan's second-largest financial group by market value. "that situation will make the market dependent on the BOJ's purchases just like a morphine addict."
The latter observation can these days be extended to financial asset markets around the world: they have all become like "morphine addicts" requiring constant "fixes" from the printing presses of the world's central banks. Lately Mario Draghi quite frequently talks about the ECB "taking more action" as well – and as one analyst remarked, this should sooner or later also involve further balance sheet expansion:
"In a speech in Rome, ECB President Mario Draghi said the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.
"For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But It will likely consider such a step," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ."
If that happens, we will have all of the major central banks engaged in monetary pumping on an unprecedented scale. It is already one of the biggest "all in" bets by monetary bureaucrats in modern times and evidently, massive asset bubbles are well underway.
Curiously, many people argue this would be a good time to abandon gold. We don't think so – we rather think that faith in central banks will eventually crumble, and then it will be well and truly "game over" for these perpetual bubble machines. As a friend of ours frequently remarks: at that point the question of how to price gold will be akin to asking what the last functioning parachute on an airplane that is going down should be worth.
The Nikkei keeps rallying for what are probably the wrong reasons … via BigCharts.