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Japan Is Perhaps the Most Important Risk in the World

January 17, 2023

Japan Is Perhaps the Most Important Risk in the World

Speculation is mounting that the Bank of Japan is losing control of the bond market. Jim Grant, editor of «Grant’s Interest Rate Observer», believes this could trigger a shock to the global financial system. He also explains why he expects further surges in inflation and why gold should be part of your portfolio.

The news caught markets off guard: On December 20th, the Bank of Japan surprisingly extended the target range for the yield on ten-year government bonds to plus/minus 0.5%. A move that not a single economist had expected.

This week, the Bank of Japan could announce a major policy shift amid rising government bond yields and a strengthening yen. Although barely a month has passed since the BoJ’s last meeting, the bond market is already testing the new upper limit of the yield curve control regime.

«To us, Japanese interest rate policy resembles the Berlin Wall of the late Cold War era, a stale anachronism that must sooner or later fall,» says Jim Grant. For the editor of the iconic investment bulletin «Grants’ Interest Rate Observer,» recent developments in Japan pose an underestimated risk to global financial markets. Not least because virtually no one is talking about it.

In an in-depth interview with The Market NZZ, which has been slightly edited for clarity, Mr. Grant explains what it means for financial markets if the Bank of Japan is forced to scrap its yield curve control policy. But first, he says why he doesn’t believe inflation will end soon, why bonds may be at the start of a long bear market, and why he believes gold is the best choice as a store of value.

«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.

«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.

…click on the above link to read the rest…

Japan Embraced Debt As a Way Out of Its Budget Crisis. It’s Not Working.

October 16, 2020

JAPAN EMBRACED DEBT AS A WAY OUT OF ITS BUDGET CRISIS. IT’S NOT WORKING.

The sudden resignation of Japans Prime Minister Shinzo Abe has led to evaluations of his so-called Abenomics. Many have praised Abe’s aggressive monetary policy because the long shopping list of the Bank of Japan (government bonds, corporate bonds, ETFs and real estate investment trusts) has inflated stock and real estate prices (Shirai 2020; Financial Times 2020). Concerns remain on the fiscal side since Abe’s consumption tax hikes from 5 percent to 8 percent in 2014 and to 10 percent in 2019 are widely seen as a failure (The Economist 2020). Indeed, Abe resolved Japan’s deep-seated fiscal problems only superficially.

Figure 1: Tax Revenues of Japan’s Central Government

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Source: Ministry of Finance, Japan.

The core of the problem is cheap money issued by the Bank of Japan, which had caused a stock and real estate bubble in the second half of the 1980s. While the bubble had inflated tax revenues, its bursting was followed by an unprecedented economic slump during which the corporate and income tax revenues collapsed from 43 trillion yen (approx. 390 billion dollars) in 1990 to 23 trillion yen (approx. 185 billion dollars) in 2012 (Figure 1), when Abe took office.

Figure 2: Social Security Expenditure and Local Allocation Tax as Share of Total Tax Revenues

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Source: Ministry of Finance, Japan. Central Government.

At the same time Japan’s aging population ballooned the government contributions to the public pension and health insurance system, from 12 trillion yen (approx. 110 billion dollars) in 1990 to 36 trillion yen (approx. 327 billion dollars) in 2019. In addition, the so-called local allocation tax grants of around 16 trillion yen per year (approx. 145 billion dollars) to the economically exhausted Japanese periphery continued to constitute a heavy burden for the central government. In the wake of the global financial crisis, both together had increased far beyond the central governments’ tax revenues (Figure 2).

…click on the above link to read the rest of the article…

The U.S. Dollar Collapse Is Greatly Exaggerated

September 1, 2020

The U.S. Dollar Collapse Is Greatly Exaggerated

The US Dollar Index has lost 10% from its March highs and many press comments have started to speculate about the likely collapse of the US Dollar as world reserve currency due to this weakness.

These wild speculations need to be debunked.

The US Dollar year-to-date (August 2020) has strengthened relative to 96 out of 146 currencies in the Bloomberg universe. In fact, the U.S. Fed Trade-Weighted Broad Dollar Index has strengthened by 2.3% in the same period, according to data compiled by Bloomberg.

The speculation about countries abandoning the U.S. Dollar as reserve currency is easily denied. The Bank Of International Settlements reports in its June 2020 report that global US-dollar denominated debt is at a decade-high. In fact, US-dollar denominated debt issuances year-to-date from emerging markets have reached a new record.

China’s dollar-denominated debt has risen as well in 2020. Since 2015, it has increased 35% while foreign exchange reserves fell 10%.

The US Dollar Index (DXY) shows that the United States currency has only really weakened relative to the yen and the euro, and this is based on optimistic expectations of European and Japanese economic recovery. The Federal Reserve’s dovish announcements may be seen as a cause of the dollar decline, but the evidence shows that the European Central Bank (BOJ) and the Bank Of Japan (BOJ) conduct much more aggressive policies than the U.S. while economic recovery stalls. Recent purchasing manager index (PMI) declines have shown that hopes of a rapid recovery in Europe and Japan are widely exaggerated, and the Daily Activity Index published by Bloomberg confirms it. Furthermore, the balance sheet of the ECB is at the end of August more than 54% of the eurozone GDP and the BOJ´s is 123% versus the Federal Reserve’s 33%.

…click on the above link to read the rest of the article…

The Fed’s Couldn’t Even Stomach a 10% Drop in Stocks… It’s Officially in the Bubble Business

June 18, 2020

The Fed’s Couldn’t Even Stomach a 10% Drop in Stocks… It’s Officially in the Bubble Business

The Fed will soon be buying stocks.

Earlier this week, the Fed announced that it will begin buying corporate bonds from individual companies. Before this announcement, the Fed was already involved in the:

  • The Treasury markets (US sovereign debt)
  • The municipal bond markets (debt issued by states and cities)
  • The corporate bond markets by index (debt issued by corporations)
  • The commercial paper markets (short-term corporate debt market)
  • And the asset-backed security markets (everything from student loans to certificates of deposit and more).

With the introduction of individual corporate bonds, the Fed is now one step closer to buying stocks outright.

Indeed, the Fed has made ZERO references to stopping its monetary madness. Just yesterday Fed Chair Jerome Powell emphasized to Congress that the Fed is “years away from halting its assets monetization scheme.” 

Again, the Fed is explicitly telling us that it plans on buying assets (Treasuries, municipal bonds, corporate bonds, etc.) for years to come.

The next step will be for the Fed to buy stocks.

It won’t be the first central bank to do so…

The central bank of Switzerland, called the Swiss National Bank has been buying stocks for years. Yes. It literally prints money and buys stocks in the U.S. stock markets.

Then there’s Japan’s central bank, called the Bank of Japan. It also prints money and buys stocks outright. As of March 2019, it owned 80% of Japan’s ETFs.

Yes, 80%.

The BoJ is also a top-10 shareholder in over 50% of the companies that trade on the Japanese stock market.

If you think this can’t happen in the US, think again. The Fed told us in 2019 that it would be forced to engage in EXTREME monetary policies during the next downturn.

…click on the above link to read the rest of the article…

Here Is The Stunning Chart That Blows Up All Of Modern Central Banking

June 1, 2020

Here Is The Stunning Chart That Blows Up All Of Modern Central Banking

Several years ago, when conventional wisdom dictated that to push inflation higher and jumpstart lethargic economies, central banks have to push rates so low as to make saving punitive and force consumers to go out and spend their hard earned savings, several central banks including the ECB, SNB and BOJ crossed into the monetary twilight zone by lowering overnight rates negative.

Then, year after year, we would hear from the likes of Kuroda and Draghi how the BOJ and ECB will continue and even extend their insane monetary policy, which now includes the purchase of 80% of all Japanese ETFs…

… until the central banks hit their inflation targets of 2%.

And yet, year after year, the BOJ would not only not hit its inflation target but appeared to drift ever lower, as did the ECB, SNB and any other bank that had gone NIRP, confounding all economists and central bankers: why was this happened if rates were negative? Why were consumers not taking their money out of the bank and spending it, pushing inflation higher?

Nobody had an answer, until in late 2015, we offered a glimpse into what was structurally flawed with this “model”: using a report by Bank of America, we showed that not only had household savings rates not declined in countries with negative rates, they had in fact risen. There was a simple reason for this, as the BIS had highlighted: ultra low rates may perversely be driving a greater propensity for consumers to save as  retirement income becomes more uncertain.

What logically followed from this is that inflation would also track rates lower, resulting in a crushing blow to economic orthodoxy where the only weapon central banks had left to spark an economic – read inflationary – recovery was to ease monetary conditions even more in hopes that eventually they would drop low enough to spark the long-awaited recovery.

…click on the above link to read the rest of the article…

Bank Of Japan Buys Record Amount Of ETFs, Admits ‘Paper Losses’, Plans Program Expansion

March 10, 2020

Bank Of Japan Buys Record Amount Of ETFs, Admits ‘Paper Losses’, Plans Program Expansion

Having blown over two trillion yen since October in purchasing stocks (ETFs) in the open market to “support Japan’s economy,” markets are rife with speculation the Band of Japan (BoJ) could pledge next week to buy ETFs at a faster pace than the current commitment to do so by roughly 6 trillion yen ($58.12 billion) per year.

Following pressure from Japanese Prime Minister Shinzo Abe,

“Markets are making nervous movements amid uncertainty over the global economic outlook. Based on agreements made among G7 and G20 nations, the government will work closely with the BOJ and authorities of other countries to respond appropriately,” Abe said in a meeting with ruling party executives on Tuesday.

Reuters  reports that such a step is among options the central bank may consider if it approaches the ceiling as a result of aggressive purchases, according to sources familiar with the BOJ’s thinking.

In a somewhat surprising moment of transparency for the Japanese central bank, BOJ Governor Haruhiko Kuroda told parliament the BoJ had bought a cumulative 2.04 trillion yen worth of ETFs since October last year.

Kuroda also revealed the BoJ’s own estimate showed its holdings of ETFs may incur paper losses once Tokyo’s Nikkei stock average falls below 19,000 – 19,500. The Nikkei stood around 19,665 on Tuesday after briefly slipping below 19,000 in morning trade.

…click on the above link to read the rest of the article…

Gold Tumbles – Is The BoJ Back In The Market?

February 28, 2020

Gold Tumbles – Is The BoJ Back In The Market?

Gold prices are down around $25 this morning, despite a collapse in stocks and bond yields – and generally weak trend lower in the dollar.

The question is why? Or more appropriately, who?

We may have an answer to this outlier move. Last week we asked (rhetorically): “Are The Japanese Losing Faith? Yen Crashes Near Record Lows Against Gold?“

Noting that JPY and gold had massively decoupled, seemingly breaking out of their unofficial peg. 

Perhaps this week’s crisis was enough to force the BIS or Bank of Japan back into the precious metals market to stabilize faith in fiat as the chart above shows a series of high volume dumps pressuring gold lower, and the chart below shows a huge roundtrip back into the ‘peg’ for yen against gold…

So did Kuroda and his pals step in?

“free markets” eh?

Ex-BOJ Chief Regrets Not Hiking, Hated QE, Says Sub-1% Interest Rates Don’t Work

November 29, 2019

Ex-BOJ Chief Regrets Not Hiking, Hated QE, Says Sub-1% Interest Rates Don’t Work

Things are going from bad to worse in Japan: 7 years after BOJ chief Kuroda launched QQE (subsequently with yield curve control) while monetizing tens of billions in ETFs, the central banks has failed to boost either Japan’s economy or its inflation, both a dismal byproduct of Japan’s record debt load. So now that the BOJ has failed to remedy what was the consequence of massive debt loads, Japan has a cunning plan: unleash another tsunami of debt.

According to the Japan Times, Japan is set to “re-embrace the power of public spending” – because apparently the country with the world record setting 250% debt/GDP somehow did not embrace public spending before – with one of its biggest ever stimulus packages. Pointing to slowing global growth, a higher sales tax and a string of natural disasters, policymakers in Tokyo are the latest to join the worldwide shift toward a double-barreled approach of supporting the economy through fiscal measures and ultraloose monetary policy, which as we have noted before is a preamble to MMT and full-blown debt monetization by the government.

That’s good news for the Bank of Japan, which has “appeared” (but only appeared, because it now owns so many of Japan’s ETFs it has to start lending them out to prevent a market freeze) reluctant to ramp up its own massive stimulus program, as it strains at the limits of effectiveness.

As a result, in less than a month, expectations in Japan for a “modest” stimulus package with a face value of ¥5 trillion ($46 billion) have quadrupled to ¥20 trillion, despite having the developed world’s largest public debt load. And there is much more to come.

…click on the above link to read the rest of the article…

Analysts Stunned After Lagarde Demands “Key Role” For The ECB In Climate Change

November 28, 2019

Analysts Stunned After Lagarde Demands “Key Role” For The ECB In Climate Change

Having failed miserably to “trickle down” stock market wealth for a decade as was their intention, something Ben Bernanke made clear in his Nov 4, 2010 WaPo op-ed, central banks have moved on to more noble causes.

Over the weekend Minneapolis Fed chair Neil Kashkari suggested it was time to allow central banks to directly decide how to redistribute wealth, stating unironically that “monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials”, apparently failing to realize that the Fed is not made up of elected officials but unelected technocrats who serve the bidding of the Fed’s commercial bank owners.

Failing to decide how is poor and who is rich, central bankers are happy to settle with merely fixing the climate.

Overnight, Bank of Japan Governor Haruhiko Kuroda joined his European central banking peers by endorsing government plans to compile a fiscal spending package for disaster relief and measures to help the economy stave off heightening global risks. Kuroda said that natural disasters, such as the strong typhoon that struck Japan in October, may erode asset and collateral value, and the associated risk may pose a significant challenge for financial institutions, Kuroda said.

In short, it’s time for central banks to target global warming climate change:

“Climate-related risk differs from other risks in that its relatively long-term impact means that the effects will last longer than other financial risks, and the impact is far less predictable,” he said. “It is therefore necessary to thoroughly investigate and analyse the impact of climate-related risk.”

…click on the above link to read the rest of the article…

FIAT CURRENCY ENDGAME: You Will Not Like This ONE BIT!

September 12, 2019

FIAT CURRENCY ENDGAME: You Will Not Like This ONE BIT!

No One Comes Back From This Uninjured. In one word, the devaluation is set to ESCALATE.

In fact, I term it Competitive Devaluation. There are several countries that will be the pioneers of it, but it will eventually reach the United States of America. In Europe and in Japan, we are closer to seeing it happening; in the next 2-5 years, you’ll hear about governments’ first official plans to do this.

They will NOT alert the media to notify the public to own gold and silver. They haven’t thus far (and they won’t going forward, either), and meanwhile they’ve been accumulating them at the fastest pace in more than half a century.

The central banks want to buy gold, uninterrupted. Since they do not buy silver, the mania that will ensue in that niche market will be huge.

Not just gold and silver stand to gain from devaluation; companies that are able to increase prices and not lose consumers will be great winners as well. These are the world-dominators with pricing power, and I will profile my top-5 holdings for the Endgame Decade (2020-2029) in a Special Report due to be published by September 30th.

Real estate prices in metropolitan areas will also continue to rise; these are hard assets that are difficult to increase in supply, but my analysis is that of the three – world-class companies, precious metals, and real estate, silver will be the BEST PERFORMER.

Courtesy: U.S. Global Investors

Central banks are not able to inflate the real debt levels away. The most extreme case of this is Japan, whose central bank has done ALMOST everything under the sun to relieve the country of its deflationary spiral and has failed miserably. 

 …click on the above link to read the rest of the article…

End Game

July 28, 2019

End Game

Well, here we are. All roads have led to here. The combustion case outlined in April, the technical target zone outlined in January of 2018. Trade wars, 20% correction in between, Fed capitulation in response, slowing growth data, inverted yield curves, political volatility, deficit and debt expansion, buybacks. All the big themes that have dominated the landscape in recent memory, they all have led us to here: Record market highs and high complacency into a historic Fed meeting where once again a new easing cycle begins.

Like flies drawn to a light investors have ignored everything that may be construed as negative as the market’s primary price discovery mechanism, central banks, are once again embarking on a global easing cycle from the lowest bound tightening cycle ever. By far. Many central banks such as the BOJ and ECB have never normalized, the Fed barely raising rates before capitulating once again to macro and market reality:

What’s the end game here? I have to ask given the larger backdrop:

✔

Central banks 2009-2018:
We will print $20 trillion & cut rates to nothing & that will reach our inflation goals.

Central banks 2019: Ok, none of that worked so let’s print more & cut rates again. Trust us we know what we’re doing.

What has all this produced? For one the slowest recovery on record, but also the longest expansion. But this expansion has come at a very steep price as artificial low rates have led to massive record debt expansion, $250 trillion in global debt:

The world is sitting on over $13 trillion in negative yielding debt, corporate debt ballooned to all time highs is keeping zombie companies afloat, the desperate search for yield is forcing pension funds into riskier assets, 100 year bonds, BBB rated credit is the largest component of debt markets, everything is distorted and the desperate search for yield has produced another market bubble.

 …click on the above link to read the rest of the article…

Bank of Japan & the Bond Crisis

April 26, 2019

Bank of Japan & the Bond Crisis 

BoJ Statement 4-24-2019

The Great Financial Unknown is now upon us. After 10 years of Quantitative Easing, the European Central Bank (ECB) in Europe owns 40% of the national debts in the EU and it can neither sell them nor stop buying without creating a Panic in Interest Rates. Likewise, the Bank of Japan (BoJ) owns between 70% and 80% of the ETF bond market in Japan. The Bank of Japan confirmed it is ending free market determination of interest rates for the municipal level and that they “will not require any procedures such as auction as the method of determining lending conditions.”  today it may introduce a lending facility for its exchange-traded fund buying program, which would allow it to temporarily lend ETFs to market participants.

4. Introduction of Exchange-Traded Fund (ETF) Lending Facility
The Bank will consider the introduction of ETF Lending Facility, which will make it possible
to temporarily lend ETFs that the Bank holds to market participants.

The statement at the end of the announcement on the last page on its monetary policy has left traders in shock. This appears that the BoJ realizes that it now effectively has destroyed its bond market and realizes that there is not only the end of a free market, but there is a contagion of surrounding lack of liquidity.

We have never before in the history of human society ever witnessed such a major financial crisis. The BoJ makes it clear it will continue its policy of Quantitative Easing. It stated plainly:

The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with
Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is
necessary for maintaining that target in a stable manner.

 …click on the above link to read the rest of the article…

Nevertheless, he persisted

April 7, 2019

Nevertheless, he persisted

Today, the Nikkei Asian Review reports that Nomura Holdings, Inc. (8604 on the Tokyo Stock Exchange) expects to close over 30 of its 156 domestic retail branches, “previously considered a sacred cow by the group.” In addition, Nomura will eliminate roughly half of its 11 administrative departments and “revisit its policy of maintaining hubs in Japan, the U.S. and Europe.” That comes after the investment bank reported a ¥101.2 billion ($911 million) loss for the nine months ended Dec. 31, its worst such showing since 2008. 

Nomura’s misadventures are no outlier. In early March, Mizuho Financial Group, Inc. was forced to take a ¥680 billion write down that included ¥150 billion worth of losses related to its portfolio of overseas bonds (Almost Daily Grant’s, March 7). More broadly, the Tokyo Stock Exchange Bank Index has seen its return on equity decline in each of the last five years, to 5.33% in 2018 from 9.77% in 2013. The index trades at a paltry 0.47 times book value, worse than even the EURO Stoxx Bank Index’s similarly-depressed 0.62 price-to-book ratio and far below the 1.18 times book valuation commanded by the U.S. KBW Bank Index. 

Of course, much like Europe, Japan’s macro-economic backdrop features negative interest rates and aggressive central bank asset purchases. The BoJ has accumulated ¥557 trillion in assets, equivalent to 101% of 2018 nominal GDP (that compares to about 39% in Europe and 19% in the U.S.), as policymakers continue to up the ante in their quest to achieve a 2% measured rate of inflation.  

With its gargantuan portfolio, the BoJ wields substantial control of the country’s capital markets. As noted by the Financial Times on Sunday, the central bank now holds close to 80% of outstanding ETF assets, equating to approximately 5% of Japan’s total market capitalization, while data from Bloomberg pegs the BoJ ownership of the Japanese Government Bond Market at 43%.  

 …click on the above link to read the rest of the article…

The Bank Of Japan Bought 5.6 Trillion Yen In Stocks Last Year

April 5, 2019

The Bank Of Japan Bought 5.6 Trillion Yen In Stocks Last Year

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.  

                – Ludwig von Mises, Human Action

In recent years, thanks to central bank intervention in virtually every asset class, writing about capital markets in the context of some valuation or fundamental analysis framework has become a laughable, surreal, and self-defeating exercise, and here is a perfect example why.

For one reason or another, overseas investors dumped Japanese stocks by the largest margin in 31 years in the fiscal year ended Sunday, according to official market data: specifically, market participants abroad unloaded about 5.63 trillion yen ($50 billion) worth of shares on a net basis, the Tokyo Stock Exchange reported Thursday, for a second straight year of net selling and the highest sell-off since 1987.

And yet this barely caused a ripple in asset prices for one simple reason: the Bank of Japan’s asset purchases absorbed all the bleeding, exposing the central bank’s outsize role in the market. Indeed, as the Nikkei adds, this near-record liquidation was matched nearly yen for yen by the BOJ’s pumping of money into the economy through asset purchases, with the central bank buying 5.65 trillion yen worth of equity!

Of course, there were legitimate reasons why foreign investors felt the urge to liquidate Japanese holdings: international investors unloaded Japanese shares as they became alarmed by concerns about a global slowdown. With many Japanese manufacturers reliant on exports, overseas analysts cut their recommendations for those stocks amid China’s decelerating economy and Beijing’s trade war with the US.

 …click on the above link to read the rest of the article…

We Are Entering The “Quantitative Failure” Narrative

January 10, 2019

We Are Entering The “Quantitative Failure” Narrative

For a decade, the world brushed off any concerns about soaring global debt under the rug for a simple reason: between the Fed, the ECB and the BOJ, there was always a buyer of last resort, providing an implicit or, increasingly explicit backstop to bond prices, in the process creating the biggest asset bubble in history as investors seeking return were forced to buy first fixed income securities and then equities and other, even riskier securities.

However, as BofA’s Barnaby Martin is the latest to point out, “early 2019 will be uncharted territory for the market” because after years of central bank purchases crowding investors into risky assets, this dynamic will now reverse. As Zero Hedge readers have observed on countless occasions, the yearly growth of central bank balance sheets is now turning negative as shown in the following chart.

The upshot of this, in Martin’s view, is that markets will continue to experience more “corrections” than normal, leading to bigger and fatter trading ranges for credit spreads in Europe this year.

…click on the above link to read the rest of the article…

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