New Japanese Prime Minister Shinzo Abe has only been in office for one month and he is already being attacked by die-hard, but nonetheless prominent, proponents of the British economist, John Maynard Keynes.
Abe has been outspoken in his defence of the “Abenomics” plan he set in place during his campaign which calls for the curbing of the power of central banks and a need for them to assist governments erase their deficits in order to revitalise the world economy.
The new PM has won a fair amount of praise from certain areas of the financial community, but it seems there are most definitely limits to Mr Abe’s plans.
Although the Bank of Japan (BOJ) agreed to buy up bonds and other assets, which injected trillions of yen into the monetary base and also set a 2 percent inflation mark, the central bank did not do so without a fight.
From the minutes of the BOJ meetings it would be very difficult to glean any optimism that the inflation target is at all reachable. Not any more than the previous goal of 1 percent anyway. There have only ever been half-hearted comments over the time it will take to reach this highly unlikely target also, with phrases like “as quickly as possible” being bandied around in the last few months. Most of the onus seems to be on Abe’s administration to reach the inflation goal, with the BOJ acting as a mildly disinterested junior partner in the dream.
Indeed, none of the banks major forecasts have changed a significant amount since the new government came to power.
The BOJ are due to start their open ended asset buy up next year, and have not made any clear announcement that they feel this, and other monetary easing techniques, will help kick start Japan’s stagnant economy. They even went as far as attempting to tone down the idea that fiscal stimulus is the solution to Japan’s economic quagmire.
Some reports, like that released by trading company Sinolink Japan, have shown that even when the monetary base is strengthened, the amounts being considered are so small that they are unlikely to have any effect on growth.
These reports, and similar data, are welcome ammunition for those dyed in the wool Keynesians who believe it is up to governments to spend more, and lower taxes to spur consumer spending and achieve economic development.
Friday, 1 February 2013
Thursday, 31 January 2013
Fed corners nearly one third of the Treasury market
Trying to get a handle on Ben Bernanke's holdings can be difficult at the best of times as the central bank continues to buy $50 billion in Treasury securities across the spectrum every month.
A relatively easy way to keep track of the Fed chair’s consolidated, risk-adjusted totals is to break down his balance sheet, which now stands at around $4 trillion, and to visualize it as ten-year equivalents, of which nearly half of the total is in the form of Treasuries.
The Fed must hold a certain amount of 10-year notes if they are to eject the same amount of interest from the market as it is holding. This is a “ten-year equivalent” and it allows for a streamlined viewpoint that does away with the time variation along the curve.
When looked at from this vantage point, the Fed actually have around one third of the total marketable ten-year equivalents in play in the whole of the American bond system. The total is 28 percent to be exact. This figure might come as a shock to many analysts.
“The Fed has basically doubled the amount of ten-year equivalents it held at the same point 3-years ago. Not many economists saw that coming,” said Elliot Parker, Head of mergers and acquisitions at Sinolink Japan in a phone interview for Bloomberg. “They now have around a third of the total bond market and that could rise in the near future if Bernanke sticks to his general strategy.”
Most forecasts put Bernanke’s total bond holdings at around 40 percent in 12-months time and that figure could have been much higher were it not for the fact Bernanke is working hard to monetize.
The U.S. Treasury is also keeping up with the printing, and pumping it into the TSY market in order to balance the Fed’s holdings and maintain a constant flow from the central bank to peripheral institutions.
The need for liquidity is forcing the Fed to keep only those maturities that are the risk equivalent of a ZIRP, that is, 3-years or higher. Bernanke has almost nothing that is lower than that, which makes sense because those papers would explode the yield curve and put the central bank over the statutory limit for Cusips, which is set at 70 percent.
A relatively easy way to keep track of the Fed chair’s consolidated, risk-adjusted totals is to break down his balance sheet, which now stands at around $4 trillion, and to visualize it as ten-year equivalents, of which nearly half of the total is in the form of Treasuries.
The Fed must hold a certain amount of 10-year notes if they are to eject the same amount of interest from the market as it is holding. This is a “ten-year equivalent” and it allows for a streamlined viewpoint that does away with the time variation along the curve.
When looked at from this vantage point, the Fed actually have around one third of the total marketable ten-year equivalents in play in the whole of the American bond system. The total is 28 percent to be exact. This figure might come as a shock to many analysts.
“The Fed has basically doubled the amount of ten-year equivalents it held at the same point 3-years ago. Not many economists saw that coming,” said Elliot Parker, Head of mergers and acquisitions at Sinolink Japan in a phone interview for Bloomberg. “They now have around a third of the total bond market and that could rise in the near future if Bernanke sticks to his general strategy.”
Most forecasts put Bernanke’s total bond holdings at around 40 percent in 12-months time and that figure could have been much higher were it not for the fact Bernanke is working hard to monetize.
The U.S. Treasury is also keeping up with the printing, and pumping it into the TSY market in order to balance the Fed’s holdings and maintain a constant flow from the central bank to peripheral institutions.
The need for liquidity is forcing the Fed to keep only those maturities that are the risk equivalent of a ZIRP, that is, 3-years or higher. Bernanke has almost nothing that is lower than that, which makes sense because those papers would explode the yield curve and put the central bank over the statutory limit for Cusips, which is set at 70 percent.
Monday, 21 January 2013
BOJ plans further stimulus
In an effort to rid the country of the rampant deflation that has hobbled the economy for almost twenty years, the Bank of Japan (BOJ) has unveiled plans to buy up long-term bonds in order to increase the monetary base.
Newly arrived BOJ Governor Haruhiko Kuroda said there would be a “new era of stimulus and easing” for the world’s second largest economy as they attempt to fall in with the government’s target of 2 percent inflation.
“It’s impossible to solve the issue of deflation with traditional methods,” said Mr. Kuroda. “We need to use a more direct approach.”
Should the current plan fail to bump Japan’s prices sufficiently, there is the potential for the BOJ to accelerate the strategy in the coming years, although Mr. Kuroda said that was unlikely.
“For the inflation target to be reached in the next few years the action we are taking now should be enough,” he said.
There were significant market movements after the news broke, with over a 2 percent rise in the Nikkei 225 on closing. 10-year bond yields took a nosedive to 0.447 per cent, almost a 20 percent fall, the biggest drop for a decade. The yen hit a fortnightly low, falling from 92.91 versus the greenback to 95.21.
The plan revealed the BOJ will purchase long-term bonds which will bump the average maturity of its holdings from three to seven years. This will help to keep yields low all across the spectrum. The influx of cash into the system is likely to double the overall monetary base.
According to analysts at investment and trading firm Sinolink Japan, the BOJ will need to develop its balance sheet by 2 percent of GDP month by month. In comparison, the U.S. Fed program called for a 0.5 percent of GDP balance sheet expansion.
Head finance analyst at Westpac Singapore, Jonathan Cavenagh, said the strategy was “very bold” and commented that “no-one was really expecting such drastic measures.”
The change in tactic marks a redirection in the BOJ’s asset purchasing. Its previous forays into the market have almost always been with the single minded goal of keep interest rates at rock bottom. The current plan is simply to increase the monetary base by as much as possible.
In order to double the monetary base, the BOJ would have to buy enough bonds to take the figures from 140 trillion yen to 280 trillion.
Newly arrived BOJ Governor Haruhiko Kuroda said there would be a “new era of stimulus and easing” for the world’s second largest economy as they attempt to fall in with the government’s target of 2 percent inflation.
“It’s impossible to solve the issue of deflation with traditional methods,” said Mr. Kuroda. “We need to use a more direct approach.”
Should the current plan fail to bump Japan’s prices sufficiently, there is the potential for the BOJ to accelerate the strategy in the coming years, although Mr. Kuroda said that was unlikely.
“For the inflation target to be reached in the next few years the action we are taking now should be enough,” he said.
There were significant market movements after the news broke, with over a 2 percent rise in the Nikkei 225 on closing. 10-year bond yields took a nosedive to 0.447 per cent, almost a 20 percent fall, the biggest drop for a decade. The yen hit a fortnightly low, falling from 92.91 versus the greenback to 95.21.
The plan revealed the BOJ will purchase long-term bonds which will bump the average maturity of its holdings from three to seven years. This will help to keep yields low all across the spectrum. The influx of cash into the system is likely to double the overall monetary base.
According to analysts at investment and trading firm Sinolink Japan, the BOJ will need to develop its balance sheet by 2 percent of GDP month by month. In comparison, the U.S. Fed program called for a 0.5 percent of GDP balance sheet expansion.
Head finance analyst at Westpac Singapore, Jonathan Cavenagh, said the strategy was “very bold” and commented that “no-one was really expecting such drastic measures.”
The change in tactic marks a redirection in the BOJ’s asset purchasing. Its previous forays into the market have almost always been with the single minded goal of keep interest rates at rock bottom. The current plan is simply to increase the monetary base by as much as possible.
In order to double the monetary base, the BOJ would have to buy enough bonds to take the figures from 140 trillion yen to 280 trillion.
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