JGB Yields Nearing Record Lows
Not that anyone cares much in today's QE infested world, but Japan's economy continues to "temporarily" disappoint, in spite of his Arrowship's efforts. Apparently, the real economy is being subjected to a rather stubborn soft patch, and there is at least one market that seems to believe it is going to continue. Unfortunately, said market is the JGB market, which isn't exactly free of manipulation these days, so that the signals it is sending are not truly reliable. In fact, it continues to be one of the strangest major asset markets in the world - and it is only a touch away from hitting new all-time highs (new all-time lows in yields). In fact, on a weekly closing basis, the 10-year JGB futures contract ended last week at a new all-time high.
Trading volume has collapsed due to the BoJ entering the market as a massive buyer, and prices continue to drift higher. The real return of the 10-year JGB at the current official inflation rate is a deeply negative minus 3.16% per year - in other words, this market sports a completely unwarranted negative price premium, and obviously no risk premium whatsoever. This simply makes no sense.
While the 10-year JGB yields just a little over 50 basis points, the annualized rate of change of Japan's CPI has accelerated further from 3.4% in April to 3.7% in March.
At the very least, it can be stated that the BoJ has managed to completely falsify interest rate signals across the yield curve, and is thereby obviously vitiating economic calculation in Japan.
Economic Data Continue to Slump
Below is a look at the most recent disappointing data release. It has been hoped that there would be an investment renaissance in Japan on the back of rising prices and falling real incomes (yes, it makes no sense, but that is the theory of modern central banking in action). These hopes seem increasingly misplaced, although economists only want to completely abandon them once the data for June come in:
"Japan's machinery orders tumbled by a record margin in May, dashing hopes for a bounce and casting doubt over a scenario of investment-led recovery in the world's third-largest economy.
The data are highly volatile, but serve as an indicator of capital spending in six to nine months and May's shocking 19.5 percent slump raised questions about the economy's ability to tide over a dent in consumption caused by an April 1 sales tax hike. Economists polled by Reuters had expected a modest 0.7 percent rise.
"This shows the huge spike in capital spending in January-March was just an aberration," said Yasutoshi Nagai, chief economist at Daiwa Securities. "Some people have said capital spending could lead economic growth but unless you have rising demand, you can't expect capital spending to grow." Officials at the Cabinet Office that released the data on Thursday said there were no special factors behind the May slump, noting they had not heard companies blaming the sales tax increase for a fall in orders.
Corporate investment is one of the essential and so far missing ingredients of Prime Minister Shinzo Abe's recipe for economic revival. Now in its second year and commonly referred to as "Abenomics" it promises to lift Japan from nearly two decades of stagnation and deflation with a combination of massive monetary stimulus, budget spending and growth-friendly reforms.
The slump in May, led by the electric machinery, chemicals, transportation and financial sectors, follows a 9.1 percent fall in April and suggests a negative figure for April-June, which would be the first quarterly decline in five quarters.
Compared with a year earlier, core machinery orders, which exclude ships and electric power utilities, fell 14.3 percent in May, against an expected 9.5 percent gain.
The numbers are likely to disappoint central bank officials, who will review monetary policy next week and are expected to keep intact its massive stimulus programme and consider cutting its economic forecast for the current fiscal year. But economists, noting the volatility of the data, are not abandoning just yet their base scenario that the economy will rebound after a temporary tax-related hit and expect the BOJ to do the same.
Economists said, however, that June data, which will also include companies' quarterly forecasts, would be crucial for the outlook and assessment of "Abenomics" performance.
"If machinery orders continued to be weak in June, that would be worrisome and it could force the Bank of Japan to alter its scenario that capital spending would offset weakening consumption," said Takeshi Minami, chief economist at Norinchukin Research Institute.
In an encouraging signal for the outlook of domestic demand, the Cabinet Office said on Thursday that consumer confidence edged up in June, and raised its assessment on consumer confidence, saying it is picking up. But some economists noted that continued weakness in Japan's exports might be a greater concern than any lingering effects of the April 1 tax hike.
"It's the external sector that is showing signs of deteriorating and that is something that needs to be addressed in terms of the BOJ's outlook that we get next week," said Robert Rennie, chief currency strategist at Westpac Bank."
With core machinery orders plummeting 14.3% y/y, compared to expectations of a 9.5% gain, there really is not much more than hope left at this juncture. The slump in exports suggests two things: 1. the economies of Japan's major trading partners aren't doing very well either, and 2. the alleged gains from devaluing the yen have evaporated.
The BoJ is, of course, not only buying JGBs - it is also buying equities, which may explain why there was no follow-through after what appeared to be an increasingly weak technical condition developed in April-May. The stock market was unfazed by recent economic data releases, and lately even seems to be in the process of decoupling from the trends of both the yen and the US T-note yield (it is normally strongly negatively correlated with the former and positively correlated with the latter).
The Nikkei is lately ignoring everything that used to exert an influence on its performance in the past.
The yen still looks like it could soon break out to the upside.
Whether these divergences can continue to persist is likely to be known soon, given increasing signs of technical strength in the yen.
More Monetary Pumping Please
Evidently, the Abe government doesn't want to take any chances. The monetary pumping "arrow" needs some reinforcement, according to economics minister Akira Amari. He may be "economics minister", but that doesn't keep him from being a fount of economic ignorance.
"Japanese Economics Minister Akira Amari warned that it would be premature for the Bank of Japan to consider an exit strategy from its massive stimulus program, voicing hope instead for further monetary easing if achievement of its inflation goal falls behind schedule.
Amari also said that while Japan appears to be emerging from years of persistent price declines, it was too early to formally declare a sustained end to deflation with the economic recovery still vulnerable to external shocks.
"The BOJ has expressed strong determination that it won't hesitate to take further action if (the timing for meeting the inflation target) is not on schedule," Amari said in an interview at a Reuters Newsmaker event on Friday. "If the BOJ judges that it's not on schedule, I think the central bank will decide on its own (to act)," he said.
Amari said Japan was no longer suffering from price declines, with inflation steadily accelerating. But he warned against complacency, saying he wanted more evidence that the economic recovery is strong enough to sustainably push up prices.
Here is a quick check list of his errors:
1. Falling prices ("deflation") are bad. How so? Corporate profits depend on the spreads between input costs and the prices of the products these inputs produce, not on monetary debasement. That falling prices are an unalloyed boon for consumers should be blindingly obvious even to the densest bureaucrat.
2. Monetary pumping creates economic growth. How? Not a single iota of real wealth can be created by printing money. All it can achieve is a redistribution of real wealth from the losers (the majority) to the winners (a small minority) of inflation. Since the government is one of those winners (at least up to a point, namely as long as interest rates can be successfully suppressed), one may be forgiven for harboring doubts about the true motives of the policy.
3. "Economic recovery pushes up prices". Only in the Keynesian inflation-forever universe, but nowhere else. A simple thought experiment shows why. What is the essence of economic growth? The economy is growing when more goods and services are produced (and/or goods and services of better quality, but "more" is usually a major characteristic). Why would prices rise when there are more goods and services supplied than previously? This would only be true if the laws of supply and demand were somehow magically suspended - the only alternative is that monetary pumping is so heavy that it exceeds the economy's productivity growth by a noticeable margin. Economic growth has absolutely nothing to do with "rising prices".
We conclude that after a quarter of a century of post-bubble malaise, Japan's policymakers have yet to learn a single thing. It is essentially the same song and dance over and over and over again. In line with Einstein's well-known definition, one must suspect that these people are simply insane.
Below is a weekly chart of the 10-year JGB's yield (the inverse of the price chart above). We take it Amari is seriously suggesting that this interest rate needs to be manipulated even further if the long-awaited bliss of Abenomics (= same hoary inflationism as ever) is to finally arrive.
The 10-year JGB's yield is currently less than 55 basis points. At the current annualized rate of CPI, it is a negative 3.16%.
The only consolation is probably that this yield is so close to zero and so far removed from anything resembling reality that the harm that can be done by manipulating it further seems, at this stage, limited.
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