The Japanese market

JAPAN IS CRASHING

Business Insider,

12 June, 2013

KAPOW.

Japan is crashing again.

Earlier the Nikkei was down 5%. Now it's down over 6%.

USDJPY (the dollar against the yen) is down to 95, which indicates significant yen strengthening.

Not only is this a remarkable turn events for the Japanese market, but the long Nikkei/short yen trade has been one of THE trades of 2013 so far, so this is a brutal kick in the ass for hedge funds and speculators.

And it's clear the bloom is coming off the rose for Abenomics (to some extent) the monetary stimulus shock treatment designed to get Japan out of the doldrums.

Here's a chart of the Nikkei so far.

Abenomics has bond traders frenzied, hedge funds counting on Japan crash as public debt swells

Until a couple of months ago, Takashi Yamada had one of the most genteel jobs in Japan. Now, his days are so harried he doesn't have time to eat lunch.

readingeagle.com,

12 June, 2013

Yamada, 45, is a government-bond trader at major brokerage Daiwa Securities Co.

Shock-and-Awe monetary policies, announced in April, have sent Japanese government bonds, this nation's equivalent of U.S. Treasurys, into a whirl of volatility.

"Our job is about interest rates, and that's supposed to be like rice in a meal, not steak, something basic but needed," Yamada said, looking weary and a bit out of breath, after nonstop juggling of bond selling and buying on several monitors at his desk. "No one expected this."

The sudden frenzy of his job underlines the growing fears about Japan's surging public debt. Bonds were long stable, which meant the adjustments to bond trades or "positions" Yamada had to do were routine and predictable. Not anymore.

The yield, or interest rate, on benchmark 10-year bonds shot up to 1 percent for the first time in a year late last month, although it later headed down. In the bond market, yields go up when prices drop so even tiny moves in those rates can translate into lots of yen made or lost.

The lavish Japan revival policies of Prime Minister Shinzo Abe, including the Bank of Japan's doubling the money supply in two years, are designed to wrest the nation out of deflation, or continually sinking prices that hurt growth, and two decades of economic doldrums.

But at the heart of "Abenomics" is a contradiction: Japan may not be able to afford the inflation that Abe's grand ambition hopes to ignite.

After years of deficits financed by sales of government bonds, public debt is already twice the size of the economy and interest payments consume a quarter of government spending. It is an unassailable reality that if inflation goes up so must interest rates and so must pressure on the bloated finances of a government atop the world's third-largest economy.

Although Abenomics has generally lifted Tokyo stocks and lowered the yen, a boon for the giant exporters of Japan Inc., the bond market that keeps Japan's government afloat is growing ever nervous.

The sell-off in bonds last month was one sign of the panicky mood and occurred despite the Bank of Japan's constant presence in the market, buying up more than half of government bonds for the next two years.

A handful of overseas hedge funds are seeking to make a killing on the gloomiest scenario for Abenomics. Experts say their methods involve futures trading, which allows betting on bonds you don't own.

They are counting on what they see as an inevitable catastrophe. If bond prices crash, their owners, mostly Japanese financial situations, will lose a major chunk of their assets overnight. It would freeze up the market that funds the government's mammoth deficits, shattering Japan's credibility as an economic power and send shockwaves rippling around the world.

"My assessment of the situation is that nothing can be done from this point forward to avoid a full bond crisis," said J. Kyle Bass, managing partner at Dallas-based Hayman Capital Management. "I think it is not only possible. It is probable."

His hedge fund invests in conventional ways, too, such as stocks, although none in Japanese equities, and currencies, including investing in a cheaper yen. But he has made positions that will allow his hedge fund to come out ahead if Japanese bond prices plunge. He declined to give details of how he hedges, citing policy.

Investors such as Bass are sometimes criticized as seeking to make money off a crisis or even helping to engineer one. The way Bass sees it, his hedge fund is carrying out an investment strategy that's prepared for the obvious risks.

"The better way to ask the question is: How do you hedge yourself against this eventuality?" Bass said in a recent interview in Tokyo.

He may be on to something.

The risks for investing in bonds tend to be minimal compared with stocks and currencies. But the rewards for betting on a bond crash can be great - although that's a big "if."

After Abe took office late last year, the Bank of Japan set a 2 percent inflation target and the government promised structural reforms such as opening up trade, promoting women in the work place and boosting people's income. The government is pumping 8 trillion yen ($80 billion) into public spending, focused on infrastructure, to jump-start the economy.

The economy grew a healthy 4.1 percent in the last quarter, and hopes are high revival will continue - a reversal that would be remarkable, following years of contraction and shaky growth.

It's too much to believe for some.

The recent gyrations in bonds may have been "something closer to a realization that for all the brouhaha of Abenomics ... the Japanese financial authorities are losing the plot," said Jonathan Rogers, a senior credit analyst for bond investing bible IFR Asia in a recent column.

He said it may have been better for Japan to continue to muddle along. A rapidly aging society is shrinking tax revenue while lifting pension, health care and other social costs in coming years. Yet until the advent of Abenomics, the Japanese bond market had been stable with virtually no fear of a sell-off.

Unlike other countries, the bonds are almost all owned by Japanese, mostly megabanks and other major financial institutions. Only 8.7 percent is held by overseas investors, according to the Bank of Japan.

As a result, fears about a bond collapse have long been brushed off as overblown.

Some analysts insist it will never happen. They say it's impossible for confidence in Japan to be shaken, which is what a bond collapse would signify.

The government is planning to raise sales taxes to boost revenue. Japan could start growing robustly again, solving its problem once and for all.

Defenders of Japan's strengths also point to its giant foreign currency reserves, much of them held as U.S. Treasurys, and its long record of trade and investment surpluses with the rest of the world. Those strengths have weakened recently as Japan's trade balance has sunk into the red.

Takuya Kanda, analyst at Tokyo research institute Gaitame.Com, believes the recent bond jitters were set off because only a tiny proportion of bonds are actively traded and so a slight reaction to Abenomics has major impact.

"It's the old whale-in-the-pond phenomenon," he said.

Mainstream Japanese investors share an understanding that they must hang on to their bond savings "out of patriotism," Kanda said.

But he noted Japan may be borrowing beyond what common sense would dictate as normal.

"No one can say it's 100 percent safe," said Kanda. Stocks may be safer than bonds these days, he said.

Doomsayers, like Takeshi Fujimaki, a consultant and former Morgan trader, have been warning about a bond nose-dive for years.

He said he dreads the day he might be vindicated and hopes his warnings will be heeded.

The argument goes like this: Inflation proves a plus only for debtors. Rising prices, by definition, will bring down the value of debts. The biggest debtor of all is no one but the government. Yet solving its debt problem through inflation wreaks havoc on the banks and pension funds that bought government bonds. And if inflation spiraled out of control in what Fujimaki calls "hyperinflation," skyrocketing prices would send many people into instant poverty.

Fujimaki, who has written books on his fears, including his latest titled "Helpless Japan," advises everyone to turn their assets into dollars.

"It can come any day, even tomorrow. The balloon of bad debt is already inflated to its limit," he said.

Japanese buy up gold

Japanese consumers are poised to become net buyers of gold for the first time in eight years

Japanese Seek Refuge in Bullion as Yen Slumps, Inflation Looms

Japanese consumers are poised to become net buyers of gold for the first time in eight years as the yen’s decline and looming inflation drive them to seek refuge in bullion, according to Standard Bank Plc.

Bloomberg,

26 April, 2013

Net sales of gold bars and coins by Japanese individuals shrank to 10.1 metric tons in 2012, the smallest amount since 2005, data from the World Gold Council show. A surge in purchases this month and the chance to buy after bullion slumped into a bear market foreshadow a turnaround in 2013, said Bruce Ikemizu, Standard Bank’s head of commodities trading in Tokyo.

The currency has depreciated 13 percent against the dollar this year and is trading near a four-year low after the central bank’s pursuit of unprecedented monetary easing to end deflation was unopposed by Group of 20 nations. Inflation may rise above 1 percent in the 12 months starting April 2014 and approach a 2 percent target as early as that year, Bank of Japan (8301) policy board member Ryuzo Miyao said April 18.

“The time has come for Japanese to buy gold with the government trying to engineer inflation,” Ikemizu, who has traded commodities for almost three decades, said in an interview in Tokyo yesterday. “Retail investors are turning from sellers to buyers of bullion.”

Japanese households have 1,547 trillion yen ($15.6 trillion) in financial assets, according BOJ data. They purchased 22.9 tons of gold last year from Tanaka Kikinzoku Kogyo K.K., Japan’s largest gold retailer, and sold 28.6 tons to the company, at an average price of 4,321 yen a gram.

Tocom Gold

Yen-denominated gold futures on the Tokyo Commodity Exchange climbed to a record 5,081 yen a gram on Feb. 7, before slumping along with dollar-priced bullion this month. The retail price of gold bars in Japan advanced to the highest level since 1980 on April 10, according to Tanaka Kikinzoku.

Tocom gold futures fell 0.3 percent to 4,553 yen a gram at 9:04 a.m. in Tokyo. Gold for immediate delivery posted the biggest decline since 1983 on April 15, and slid to $1,321.95 on April 16, the lowest level since January 2011. It was down 0.3 percent at $1,422.48 at 9:04 a.m.

Gold for delivery in Tokyo was offered at $1 to $1.50 an ounce higher than the metal for delivery in London last week, as gold stockpiled by Japanese bullion houses was depleted because of surging demand from consumers, Ikemizu said.

Every one-yen depreciation in the Japanese currency against the dollar can boost bullion prices in Japan by 50 yen a gram, assuming the international market is unchanged, Masahiro Arai, general manager at Tokuriki Honten Co., the nation’s second- largest bullion retailer, said on April 16.

Purchases from Japan will partially absorb metal flowing out of exchange-traded funds such as SPDR (GLD) Gold Trust and give support to the international market, according to Ikemizu.

India, China

In India and China, the biggest gold-consuming nations, shoppers last week lined up in bazaars from Mumbai to Shanghai to buy the metal for brides, babies and strongboxes after prices fell. Indian consumers bought a net 312.2 tons of gold bars and coins in 2012, while purchases by individuals in China reached 265.5 tons, according to the World Gold Council.

Ending deflation would pave the way for Japanese Prime Minister Shinzo Abe to go ahead with a plan to double sales tax to 10 percent by October 2015 to reduce the nation’s fiscal deficit. The prospect of higher taxes has also spurred consumers to buy gold, Kate Harada, general manager at the precious metals department of Tanaka Kikinzoku, said in an interview in Tokyo on April 16.

“As Japanese begin paying more for fuel and some foods because of a weakening yen, they’re wondering how to hedge the risk of rising prices,” she said. “Gold is sought to protect against inflation and the yen’s debasement.”

The destruction of Japan

Kyle Bass: "Japanese Retirees Will Lose Up To Half Of Their Life Savings"

While Kyle Bass notably remarks that pinpointing the end of a 70-year debt super-cycle is naive, the combination of the resurgence of nationalism (impacting trade with China) and the dreadful impact of the earthquake/tsunami (drastically changing Japan's supply chain) has secularly shifted Japan's trade balance for the worst at a time when the current account is already negative. "They are all in denial,"Bass notes as the government has failed to deal with its problems over the last 20 years.

Simply put, Japan needs a Schumpeterian 'creative destruction' moment instead of the constant rolling of debts and expanding of government balance sheets to paper over the cracks. The 'moment' feels like it is now, he notes, expanding that "JPY could hit 200," as they lose control; following two decades of volatility-smoothing, the chance of a disorderly collapse are high.

Critically, he fears, "the social fabric of Japan will tear," as with one-third of the nations at retirement age, the fallout from the policies of Abe-Kuroda could cause them to "lose 30-50% of their life savings." What is perhaps even more concerning, he adds, "you are starting to see the central banks not trust each other."

At a certain point in time, "nationalist interest takes over the global [G7] kumbaya," and that is occurring now.

"When your debts are 24-times your government tax revenue, you have a secular decline in population, and all of the things are finally catching up to you, what happens when you have a debt crisis?"

Central Banks believe "Devaluation is 'supposedly' the way to freedom"

3:00 - Japan's tearing social fabric

4:30 - G7 Kumbaya unwind

6:00 - "There is no way out" for Japan - it's a matter of when not if. And "if there is no way out for them, there is no way out for the rest of us - unless we change the way we operate."

6:30 - "If there is no consequence to the US profligacy [rates not moving against them] well then they will keep spending."  -  "Central banks are enabling the spending"

7:15 - "The Modus Operandi of the west is running deficits; and what that has meant in the past is runaway cost-push inflation - and I think that is what we are going to see"

8:00 - "Investors are too complacent" - this is the single-most riskiest time to be complacent in our generation - "investing with the typical endowment model... is not going to work"

9:00 - "The insidious nature of a runaway inflation is that it bankrupts the middle class... the poor stay poor, the middle class (with savings in the banks) get wiped out, the wealthy (with productive assets) do the best"

9:40 - ... which leads to social unrest globally - and that is a problem...

The Japanese yen

Japan Is On The Verge Of A Watershed Moment In Central Banking, And The Yen Is Getting Massacred

Business Insider, 

26 December, 2012

Really big story unfolding in currency markets: The decline of the yen.

Today is Shinzo Abe's first day in office as new Japanese Prime Minister, and it's filled with fresh headlines about what he wants to do to the Bank of Japan in terms of much more aggressive easing.

Economist Tim Duy argues that everyone is missing the big story in Japan, which is Abe's desire for the BOJ to engage in outright monetization of the national debt, i.e. bond purchases for the express purchase of funding stimulus. This is a much bigger deal, he notes, than the 2% inflation guidance, which probably won't work, seeing as the BOJ is already missing its 1% inflation goal.

Says Duy:

I don't have much faith that renaming the "goal" a "target" and increasing it to 2 percent will be like waving a magic wand.  But something much more significant is afoot - the possibility of explicit cooperation, albeit perhaps forced cooperation, between fiscal and monetary authorities.  The loss of the Bank of Japan's independence to force the direct monetization of deficit spending is the real story.

The Bank of Japan is on the verge of totally losing its independence, a watershed change for a national central bank.

So the yen is taking it on the chin.

Here's USDJPY surging.

Japan economy nosedives

Japan Plunges into deep recession

GDP Shrinks 3.5% Annualized; Japan Current Account Turns Negative First Time in 30 Years; Watch the Yen

 

Mish's Global Economic Analysis,

12 November, 2012

The global economy took another turn for the worse as Japan plunged into recession following two consecutive quarters of growth.

Please consider Japan’s economy shrinks annualized 3.5%.

 Japan’s economy shrank an annualised 3.5 per cent between July and September, the steepest decline since the earthquake-hit first quarter of 2011, as exporters suffered big falls in shipments to key markets such as China and Europe.

Prime Minister Yoshihiko Noda described the gross domestic product figures as “severe”, while Seiji Maehara, economy minister, said Japan had possibly entered a “recessionary phase”. 

In a speech on Monday, Masaaki Shirakawa, Bank of Japan governor, said there was “no question that the [central bank] should exert every effort to enhance its easing effects as much as possible”. He said domestic demand was “unlikely to increase at a pace that will outperform the weakness in exports”.

The Japanese government’s monthly survey of “economy watchers” – which includes barbers, hoteliers, car dealers and others who deal with consumers – has recorded six falls in a row since April. Last month the index stood at a level little better than that of April 2011, in the immediate aftermath of the quake.

Japanese manufacturers from Nissan to Shiseido have reported steep falls in sales of their products in China, following a wave of demonstrations against Tokyo’s nationalisation of some of the islands in mid-September.

Japan’s top seven automakers have cut their projections for Chinese sales by a fifth, for the fiscal year to March, according to calculations by the Nikkei newspaper.

Japan Trade Deficit Largest in History

As Japan spirals out of control, please recall Japan trade deficit hits record as relations with China poisoned. 

 Japan registered its biggest-ever trade deficit for a half of a fiscal year, in a sign that the sovereign debt crisis in Europe and the strained relationship with China over a territorial dispute have eroded Japanese exports, government data showed today.

For the first half of fiscal 2012 through September, Japan logged about USD 40.6 billion (3,219 billion yen) in goods trade deficit, up 90.1 percent from a year earlier and the biggest since the Finance Ministry began recording in 1979.

In September alone, the deficit stood at 558.6 billion yen, the third straight month of red ink and the largest for the month of September, the ministry said in a preliminary report, augmenting fears that violent anti-Japan rallies and boycotting of Japanese products in China have weighed on the exports to the biggest trading partner.

Exports to China fell 8.2 percent to 5,921.1 billion yen in the first half and slid 14.1 percent to 953.8 billion yen in September, sharper than the 9.9 percent fall in August. It was the fourth consecutive month of deficit as various products, ranging from auto and auto parts to steel and semiconductors, declined notably.

The balance showed Japan suffered the biggest September deficit with China of 329.5 billion yen, as imports gained 3.8 percent to 1,283.3 billion yen.

Resentment in China has accelerated since the Japanese government decided last month to nationalize part of an island group in the East China Sea, also claimed by Beijing and Taiwan.

Japan Current Account Turns Negative

The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP.

Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component.

You can now kiss that surplus goodbye because Japan Current Account Turns Negative

 The world's third-largest economy has run a surplus in its current account, a measure of trade in goods, services and investments, for several decades—meaning it's earning more from exports and investments abroad than it spends at home. In fact, Japan the world's biggest creditor nation.

The surplus has been in the spotlight recently, since Japan also has the developed world's biggest debt load, now nearing a quadrillion yen ($12.5 trillion)—more than double its gross domestic product. As long as the current account surplus remains, economists say, Japan is in little danger of a Greek-style crisis, since its debt is largely being funded by household savings.

While that remains the case, Japan reported Thursday that the seasonally adjusted current-account was in deficit in September—for the first time in more than 30 years. The sudden surprise drop has some economists warning that Japan's ability to generate wealth is eroding faster than expected, and its fiscal situation could be more fragile than many had thought.

The Finance Ministry says Japan won't slip into a structural current-account deficit very easily, since deficits in the trade of goods and services will be offset by huge surpluses in what the country earns on investments in overseas assets such as U.S. Treasury bonds.

But the Japan Center for Economic Research argues a structural deficit in could be as close 2017, noting fuel-import levels are likely to stay high if most nuclear plants stay off.

The Japan Research Institute, another think tank, says a structural deficit could start in 2022 if crude oil prices keep rising. Hideki Matsumura, an economist with the institute, said it could come earlier if the current strong-yen trend, which hurts Japan's ability to sell overseas, continues.

"Many countries are catching up with Japan in the manufacturing field," he said. "If they can produce similar products for a cost 20% to 30% less than Japanese do, Japan will soon find no demand for its products."

 

Bug in Search of Windshield

 

As my friend John Mauldin suggests, Japan is a bug in search of a windshield. I highly doubt Japan can make it to 2022 or even 2017 before it runs into serious issues.

Actually, Japan has extremely serious issues already, it's just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.

Global imbalances are mounting. I suspect within the next couple of years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency war with all its trading partners to force down the value of the yen.

Japan

Forget China; Japan Is 'Taking Over' The World Again

Zero Hedge.

16 October, 2012

The Japanese Yen has been one of the strongest currencies among the developed nations of the world since the end of LTRO (up 6%).

This strength (repatriation flows and or carry unwind?) combined with a dismal domestic economic growth environment appears to have pushed Japanese firms to spend spend spend for growth. 

The latest and greatest Softbank/Sprint deal will shift this year's Japanese corporate acquisition of foreign companies to near-record levels. As Bloomberg Briefs notes, this will be the country's largest overseas acquisition on record - exceeding Japan Tobacco's $19bn acquisition of the UK's Gallaher Group in 2007. 

However, this growth-buying-spree does not come cheap as ratings are under pressure and while LBO-style financing might make the deal 'cheap' at first, at some point the cycle will re-emerge; but for now - it appears the BoJ (who we are sure are watching intently) should maybe leave intervention off the table until Japan owns it all again and becomes even more too-bigger-to-fail.