The Tokyo Whale is hungry again!

by Shaun Richards

A new week has started with something which we will find awfully familiar although not everyone will as I will explain. But first let me give you something of a counterpoint and indeed irony to the news.

SINGAPORE (Reuters) – Oil prices fell on Monday on signs that worldwide oil storage is filling rapidly, raising concerns that production cuts will not come fast enough to fully offset the collapse in demand from the coronavirus pandemic.

U.S. oil futures led losses, falling by more than $2 a barrel on fears that storage at Cushing, Oklahoma, could reach full capacity soon. U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017. [EIA/S]

In ordinary times this would be a case of let’s get this party started in Japan. This is because it is a large energy importer and thus it would be getting both and balance of payments and manufacturing boost. In itself it would have been extremely welcome because you may recall that its economy had seen a reverse before the present pandemic.

The contraction of Japan’s 4Q 2019 GDP was worse than expected, coming in at -1.8% q/q (- 7.1% annualized rate) versus the first estimate of -1.6% q/q (-6.3% annualized rate) as the contraction in business spending was deeper than what was first reported in February, ( FXStreet )

So the land of the rising sun or Nihon was already in what Taylor Swift would call “trouble, trouble,trouble”, The raising of the Consumption Tax ( what we call VAT) had in an unfortunate coincidence combined with the 2019 trade war. The former was rather like 2014 as we mull all the promises it would not be. Also let me give you a real undercut, Japan acted to improve its fiscal position just in time for it to be considered much less important.

The Tokyo Whale

Let me open with something which for newer readers may come as a shock.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

Yes the Bank of Japan is buying equities and has just suggested it will double its annual purchases of them. Those who follow me will be aware it has been buying more as for example it is now buying around 120 billion Yen on the days it buys ( nine so far in April) as opposed to the previous 70 billion or so having bought over 200 billion when equity markets were hit hard. The detail is that it buys via Exchange Traded Funds ( ETFs) to avoid the embarrassment of having to vote at AGMs and the like.

Oh and in another familiar theme upper limits are not always upper limits.

With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions.

Also the ,you may note that the limit for commercial property purchases has been doubled too. I do sometimes wonder why they bother with the commercial property buys although now we have an extra factor which is that in so many places around the world commercial property looks under a lot of pressure. For example if there is more working from home as seems likely.

The Precious! The Precious!

Japan has an official interest-rate of -0.1% but not for quite everybody.

(3) apply a positive interest rate of 0.1 percent to the outstanding balances of current accounts held by financial institutions at the Bank that correspond to the amounts outstanding of loans provided through this
operation.

For whom?

Twice as much as the amounts outstanding of the loans will continue to be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank.

Yes the banks and as you can see they will be a “double-bubble” gain from lending under the new Bank of Japan scheme. I wonder if the Japanese taxpayer has noted that extension of operations to the private debt sphere as well?

expand the range of eligible collateral to private debt in general, including household debt (from about 8
trillion yen to about 23 trillion yen as of end-March 2020),

Corporate Bonds and Commercial Paper

I have highlighted another risk being taken on behalf of the Japanese taxpayer.

The Bank decided, by a unanimous vote, to significantly increase the maximum amount
of additional purchases of CP and corporate bonds and conduct purchases with the upper
limit of the amount outstanding of about 20 trillion yen in total. In addition, the maximum amounts outstanding of a single issuer’s CP and corporate bonds to be purchased will be raised substantially.

Should there be a default there might be trouble.

The Bank will increase the maximum share of the Bank’s holdings of CP and corporate
bonds within the total amount outstanding of issuance by a single issuer from the current
25 percent to 50 percent and 30 percent, respectively.

Surely at any sign of trouble everyone will simply sell to the Bank of Japan which will then be a buyer of more like first than last resort.

Who will provide the grand design?
What is yours and what is mine?
‘Cause there is no more new frontier
We have got to make it here ( The Eagles )

Japanese Government Bonds

This is something we have been expecting and just as a reminder the previous target was between 70 and 80 trillion Yen a year.

The Bank will purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

It is hard to get too worked up about that as we have been expecting it to be along. In theory the plan remains the same, although there is a slight shuffle as in the past they have indicated a range between 0% and -0.1%.

Comment

The first issue is that the Japanese economy is doing extremely badly. It already had problems and the PMI business survey suggested a GDP decline of the order of 10%. With its “face” culture that is likely to be an underestimate. In response there has been this.

The Japanese government has outlined details of its plan to hand out 100,000 yen, or more than 900 dollars, in cash to all residents as part of its economic response to the coronavirus outbreak.

The cash handouts will go to every person listed on Japan’s Basic Resident Register, regardless of nationality. ( NHK)

They tried something like this back in the 90s and I remember calculating it as £142 as compared to £752 this time. As to adjusting for inflation well in the Lost Decade era Japan has seen so little of that.

So we see that the Bank of Japan is underwriting the spending plans of the Japanese government which of course is the same Japanese government which underwrites the bond buying of the Bank of Japan! It seems set to make sure that the Japanese government can borrow for free in terms of yield as I note this.

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

In fact just like a parent speaking to a child you can indulge in the JGB market but only if you play nicely.

While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

You will find many cheering “Yield Curve Control” although more than a few of those will be hoping that there claims that the Bank of Japan will need to intervene less have been forgotten. Actually there have been phases where it has kept yields up rather than down.

In the future will the Bank of Japan own everything?

The Express

I have done some interviews for it recently and here is one on the benefits of lower oil prices

www.express.co.uk/finance/city/1272278/coronavirus-news-oil-prices-negative-inflation-uk-wages-spt

Podcast on central bank equity purchases