Central Banks will demand even more powers in response to this crisis

by Shaun Richards

Yesterday was quite something with the extraordinary oil price decline topped off by a more than 2000 point fall in the Dow Jones Industrial Average in the United States. I know that it is an outdated and flawed index but nonetheless it felt symbolic. So far today things are quieter with some bounce back in equity markets and the reverse in bond markets. But we have some familiar themes at play so let us get straight to them.

Japan

The Bank of Japan has been at the outer limit of monetary policy for some time now as The Mainichi pointed out earlier today.

The BOJ already owns around 50 percent of outstanding Japanese government bonds of about 1,000 trillion yen ($9.73 trillion), while pledging to buy 80 trillion yen of them per year. It has also bought nearly exchange traded funds.

Further cuts in the negative interest rate of minus 0.1 percent, which have pushed down longer-term interest rates for years, are expected to snap the profitability of the banking sector and hurt returns for insurers and pensions of private companies.

They have got a little excited on the issue of equity purchases as I am not sure what a nearly exchange traded fund is? Let me help out by pointing out that the Bank of Japan purchased some 101.4 billion Yen of equity ETFs both yesterday and today. Today’s purchases have a different perspective because the market closed higher, this is because the Bank of Japan has established a principle of only buying on down days. In this present crisis it has abandoned that twice so far. In addition its “clip size” has risen from 70.4 billion Yen to 101.4 billion. So far in March it has bought around 410 billion Ten of equities.

So Andrea True Connection continues to be playing from its loudspeakers.

More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it

It also buys commercial property ETFs although it is much less enthusiatic about this and has only bought 3.6 billlion Yen of them this month. Frankly I am not sure what these particular purchases are to achieve but they continue.

Fiscal Policy

I regularly point out that fiscal policy has been oiled and facilitated by the low level of bond yields. As The Mainichi points out above The Tokyo Whale has purchased half the Japanese bond market meaning that at many maturities Japan is being paid to borrow and even the thirty-year yield is a mere 0.3%. Thus it helps this.

President Donald Trump on Monday said he will be taking “major” steps to gird the U.S. economy against the impact of the spreading coronavirus outbreak, while Japan’s government plans to spend more than $4 billion in a second package of steps to cope with fallout from the virus. ( Reuters)

If we stay with Japan for now I note that as I looked this up there were references to a US $122 billion stimulus as recently as December. This is a problem as Japan keeps needing more fiscal stimuli and it is a particular issue right now. This is because last year’s rise in the Consumption Tax was supposed to improve the fiscal position whereas all we have seen since is stimuli or moves in the opposite direction.

READ  China sets up Central Bank international crypto-currency swapping deal with some other countries

This is a recurring theme in Japan as we mull the consequences of such extreme monetary action. Let me give you another example of a backwash for the control agenda. The policy of Yield Curve Control because it aims at a specific yield target for Japanese Government Bonds has been keeping yields up and not down in recent times.

The Euro area

It was only last week that I suggested the ECB could become the next major central bank to buy equities and thus I noted this overnight from a former Vice-President.

Should the central banks’ mandate be extended to explicitly include financial stability, giving them more instruments to try to contain asset prices booms instead of just “mopping-up after the crash”. Policy reviews are ongoing and everything must be on the table this time.

That is Vitor Constancio saying “everything must be on the table this time”.

I doubt he meant this but something has turned up today that will require ECB support.

ROME (Reuters) – Payments on mortgages will be suspended across the whole of Italy after the coronavirus outbreak, Italy’s deputy economy minister said on Tuesday.

“Yes, that will be the case, for individuals and households,” Laura Castelli said in an interview with Radio Anch’io, when asked about the possibility.

Italy’s banking lobby ABI said on Monday lenders representing 90% of total banking assets would offer debt moratoriums to small firms and households grappling with the economic fallout from Italy’s coronavirus outbreak.

Yesterday we noted that businesses were going to get a debt payment moratorium and today we see mortgages will also be on the list. This will immediately lead to trouble for the banks and of course the Italian banks were in enough trouble as it is. Even the bank considered the strongest Unicredit has a share price 23% lower than a year ago and of course there are all the zombies.

This also impacts at a time when Italian bond yields have risen albeit to a mere 1.3% for the ten-year benchmark. But even that leads to worries as Reuters point out.

Despite the introduction of tougher banking regulation and oversight in the wake of the euro zone debt crisis a decade ago, the doom loop remains.

Italian banks held 388.22 billion euros of Italian government bonds in their portfolios at the end of January, around a sixth of the country’s public debt.

“The feedback loop between the sovereign and banks in Italy is alive and well, and both sovereign and bank debt should trade in lock-step,” said Antoine Bouvet, senior rates strategist at ING.

Mentions of something that was in danger of being forgotten are on the rise so let me point out this from the ECB website.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

There are other issues here as plainly Italy is about to blast through the Stability and Growth Pact or Maastricht fiscal rules. Also I note that the European Stability Mechanism would be involved as why put things on balance sheet when you can tuck them away in a Special Purpose Vehicle or SPV? But the ECB will be busy and let me throw a snack into the debate, might it support bank shares?

READ  MCDONALD’S RESPONSE TO MINIMUM WAGE HIKES TOTALLY UNDERCUTS THE ‘FIGHT FOR $15,’ NEW STUDY SHOWS:

Comment

There is quite a bit to consider here and the news keeps coming on this front.

#JAPAN SEEN MULLING EXPANSION OF ETF BUYING PROGRAM, KYODO SAYS – BBG ( @C.Barraud )

On and on it goes with so few ever questioning why it is always more needed? At some point you need an audit of progress so far and successes and failures. Whereas obvious failures get swept under the carpet. Let me give you an example of this from a Sweden which had negative interest-rates for several years but has now climbed back to the giddy heights of 0%. Yet Sweden Statistics reports this.

In recent years, households have made large net deposits in bank accounts despite low interest rates.

Then there is this as well.

Households’ net purchases of new tenant-own apartments amounted to SEK 21 billion in the fourth quarter of 2019, which is the highest value ever in a single quarter.

This returns us to the side-effects of such policies which is where we came in looking at Japan which has loads of them.

But ever quick to use a crisis to expand their powers the central bankers will be greedily using this crisis to do so. So we can expect more mortgage moratorium’s which of course will require even more help for “The Precious”.

Just as I was posting this it seems to be happening already.

BREAKING: RBS confirms it will give a three-month mortgage payment holiday to homeowners impacted by coronavirus. Follows Italy saying mortgage payments will be suspended. ( @gordonrayner )

I wonder if the Bank of England has been moving behind the scenes? Meanwhile it too moved on yesterday as one of the bonds it purchased in its Operation Twist QE purchases was at a negative yield.

 

52 views

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.