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The Bank of Japan could face a problem if it wants to expand its already massive monetary stimulus: a shortage of new bonds to buy. Even at the current rate of purchases, the policy could hit trouble after over two years.
As a result, says former BOJ board member Atushi Mizuno, the bank may hold off from loosening policy further until late next year, which would give it time to assess the impact of a hike in sales tax in April as well.
The BOJ could also stop buying Japanese government bonds every month and instead only do so when long-term rates rise above a certain level.
“It is necessary to break the rules of game that prevailed in the deflation equilibrium,'” BOJ governor Haruhiko Kuroda said Wednesday, in his year-end speech.
Kuroda — who sees the CPI remaining slightly above 1% in H1 2014 — says Japan must avoid the self-perpetuating deflationary spiral that can occur if companies and individuals stop spending money in anticipation of lower prices in the future.
Separately, Prime Minister Shinzo Abe indicated that he is determined to prevent a planned sales tax hike from jeopardizing Japan's economic recovery.
Japan's government has adopted a record ¥95.88T ($921B) budget for the fiscal year starting in April, which will include increased spending on social security, defense and public works.
However, the government is also trying to limit further growth of its massive debt, and it will reduce the issuance of new revenue bonds to ¥41.25T from ¥42.9T this year.
Economist Yoshimasa Maruyama is not convinced. "The government needs to show that it’s moving in the right direction on fiscal discipline but this budget lacks punch," Maruyama says. "The government must cut spending to reach the planned target of a surplus in 2020."
The budget also forecasts that real GDP will grow 1.4% and nominal GDP 3.3%.
As expected, the Bank of Japan has left its key interest rate at 0.1%, and maintained its program of expanding the monetary base by ¥60-70T a year.
The BOJ expects the annual rate of core CPI to rise "for the time being" and maintained its view that the economy will continue recovering moderately. However, the bank believes that demand will increase before a rise in sales tax in April and then fall after the hike is implemented.
The Nikkei is +0.1% following a sharp rise yesterday and ahead of a three-day weekend, while the yen has fallen against the dollar, with the USD-JPY +0.2% to ¥104.43. (BOJ Statement)
The sentiment index for small non-manufacturers turned positive for the first time in 21 years with an increase to 4, while the reading for small manufacturers was 1, the first positive number for six years.
However, large Japanese companies have scaled back their capex projections, expecting to increase FY 2014 spending by 4.6% vs a forecast of 5.1% three months ago.
"We still don’t find any evidence that corporates are really starting to get confident about the sustainability of the recovery and actually ramping up domestic investment," says HSBC economist Izumi Devalier. "And that remains a worry in an environment where consumption is going to weaken next year."
As expected, Japanese machinery orders rose 0.6% in October vs -2.1% in September.
On year, bookings +17.8% vs +11.4% previously and consensus of +15%.
The figures "should ease concerns that the fledgling recovery in business...(investment) has already come to an end," says Economist Marcel Thieliant. Q3 GDP was revised down earlier this week, partly due to lower-than-expected business expenditure.
Core orders topped ¥800B for the third consecutive month for the first time since 2008. The trend "points to a renewed rise in capital spending" in Q4, says Thieliant.
The Nikkei is -0.6%, while the USD-JPY is -0.2% at ¥102.60. (PR)
Bank lending +2.2% in November vs +2% in October. (PR)
Current account deficit ¥127.9B ($1.24B) in October vs surplus of ¥587.3B in September and consensus of ¥153B. (PR)
"A downward revision in capital expenditure was what weighed on the revised figures," says RBS Securities Japan chief economist Junko Nishioka. However, the figures mark the bottom of the capex cycle, Nishioka says. "I expect capital spending to return to a recovery trend in the October-December quarter," she predicts.
The Nikkei is +2.3% and the USD-JPY is +0.2% at ¥103.05, with the stock index and the dollar boosted by the strong U.S. jobs report on Friday.
"This is just the beginning. It's not the real move," says Kyle Bass (speaking to Steven Drobny) of the move down in the yen (FXY +0.6%) this year. "The real move happens when it runs away from the authorities and they lose control." On the record as saying dollar/yen goes to ¥200, Bass says if he's right about Japan, it will go much further than that. ¥500? No, but once currencies get moving in a certain direction, they often swing way too far.
Wake me when dollar/yen goes to ¥350, says Bass when asked at what point he becomes a buyer in Japan.
The heat over the islands dispute in the East China Sea has been turned up further, with China sending fighter jets and an early warning aircraft into an area that the country last week designated as an Air Defense Identification Zone.
China's action follows the U.S., Japan and South Korea sending military planes into the region without telling Beijing first, in defiance of the latter's directives that they should provide prior notification.
However, China also played down the threat of the military action it had threatened against aircraft that hadn't informed it of their intentions.
China and Japan lay claim to the islands, which are known as Senkaku in the latter country and Diaoyu in China. The last flare-up a year ago caused much damage to trade between the nations.