What to do with a problem like Japan?

by Shaun Richards

Next week on Thursday we will get the latest policy announcement from the Bank of Japan and it may well be a live meeting. With other central banks acting – and by this I mean easing policy again – there will be pressure on the Bank of Japan to maintain its relative position. But yesterday provided a catch which at the time of writing is in fact a version of Catch-22. This is because financial markets did the opposite of what Mario Draghi and the ECB wanted. At first markets went the right way and let me highlight bond markets as they digested these words from Mario Draghi at the press conference.

First of all let me start from one thing about which there was unanimous consensus, unanimity, namely that fiscal policy should become the main instrument.

This curious statement which is way beyond any central banking mandate even came with an official denial of its purpose.

they are packages not meant to finance Government deficits,

But my point is that the market move then U-Turned and bond yields rose. So for example the German bond market future fell by over 2 points from its peak. The ten-year yield rose and is now -0.51%. Next the Euro fell but then rose strongly and is now 1.108 versus the US Dollar.

Such developments will be watched closely in Tokyo with the concept of more easing leading to a stronger currency being something that would make Governor Kuroda want something a bit stronger than his morning espresso. Actually even something which is good news may have him chuntering as it reminds him of the demographics issue that Japan faces. From NHK news this morning.

Japan now has more than 70,000 centenarians, according to the health ministry. A new high has been reached every year for 49 years in a row.

The ministry says 71,238 people will be 100 or older as of September 15. That’s 1,453 more than last year………

There were only 153 centenarians when the ministry conducted its first survey in 1963. The figure surpassed 10,000 in 1998 and 50,000 in 2012.

Officials attribute the rapid rise to medical advances and campaigns to stay fit.

The ministry says it will provide support to enable elderly people to maintain their well being.

In this area economics lives up or rather down to its reputation as the dismal science as the good news above reminds us of Japan’s shrinking and ageing population.

The Banks

We rarely here these mentioned as of course the Japanese banks passed into the zombie zone some years and indeed decades ago. But The Japan Times is on the case today.

Since negative rates were introduced in 2016, Japanese bank shares have languished as their lending profitability dwindles. Nishihara estimates another rate reduction could wipe out as much as ¥500 billion ($4.6 billion) of bank profits, though lenders could make up ¥300 billion if they charge ¥1,000 per account annually.

They do not specify but they seem to be assuming Japan will match the ECB ( and its last move) and cut interest-rates from -0.1% to -0.2%. As to the making money from fees this would be especially awkward in Japan for this reason.

Such levies could help to address Japan’s unusually high number of accounts, easing costs for banks, then-central bank Deputy Gov. Hiroshi Nakaso said in 2017. There are about seven accounts per adult in Japan, the most in the world, according to International Monetary Fund figures.

I mean who cares about the people when The Precious is a factor?

Smaller Banks

These are a case of “trouble,trouble,trouble” as Taylor Swift would say.

Troubled regional banks are plunging into riskier corners of the credit markets, in a battle to survive ultralow interest rates and an industry shakeout.

A clear backfire from the QE or as we are in Japan QQE era. If you are wondering why QE became QQE in Japan think of how the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield. I am just trying to remember if it was 13 or 19 versions of QE before the name change but I imagine you get the idea either way.

As to the smaller banks.

The latest case came last week. Local lenders were among the buyers of samurai bonds — those denominated in yen and issued by non-Japanese companies — sold by Export-Import Bank of India with a BBB+ rating, just three steps away from junk, that may have dissuaded the financial firms in the past. In another unconventional move last month, a few regional banks also put their money in the first negative-yielding note issued by a Japanese agency.

The title of “samurai bonds” is worrying enough in itself. Then moving into negative yielding bonds, what could go wrong?

I do enjoy the description of Japan’s face culture as “taking a more lenient view”.

Even Japan’s two major rating firms, which have tended to take a more lenient view, are sounding alarms. Downgrades and outlook cuts of regional lenders have increased to 13 so far this year at Japan Credit Rating Agency and Rating & Investment Information, the most for similar periods in data compiled by Bloomberg going back to 2010.

Oh and please remember when you read the quote below that the third arrow of Abenomics was supposed to be economic reform.

The government also said earlier this year that legislation will be submitted to the Diet in 2020 that will exempt regional banks from the anti-monopoly law for 10 years to facilitate mergers.

Banks are banks

It would seem that banking behaviour is the same wherever we look.

Japan Post Bank improperly sold investment trust products to elderly customers in violation of its rules in a total of some 20,000 cases, according to informed sources.

An investigation by the Japan Post Holdings Co. unit newly discovered some 2,000 cases of improper investment trust sales at 200 post offices, the sources said. Most contracts were conducted in fiscal 2018, which ended March 31.

Bank of Japan

There is often a lot of hot air about private ownership of central banks but as today’s Bank of Japan Annual Review points out, well you can see for yourself.

The Bank is capitalized at 100 million yen in accordance
with Article 8, paragraph 1 of the Act. As of the end of
March 2019, 55,008,000 yen is subscribed by the
government, and the rest by the private sector.

Some food for thought is provided by the word gearing. Why? Well the Bank of Japan has 486,523,186,968,000 Yen of Japanese Government Securities alone on its books.

Life Insurers

A problem for Japan’s life insurers is that they cannot get any interest or yield in Japan without rocketing up the risk scale. So according to Brad Setser they have been doing this.

But that changes when insurers cannot get the returns they want (or need) at home, and they start investing abroad in a quest for yield. Japanese life insurers (and for that matter Post Bank and Nochu) have looked abroad because yields at home are zero, and Japanese firms (in aggregate) don’t need to borrow.

Ah Post Bank again. How much?

For Japan, the data above shows a broader set of institutions—but the life insurers hold around $1.6 trillion, a sum that is around a third of GDP.

Comment

As you can see there are lots of questions about the financial system in Japan. That may move the Bank of Japan to copy the ECB as it notes that shares in The Precious have risen ( Deutsche Bank if up 0.25 Euros at 7.59).

Moving to the real economy it has not had such a bad 2019 so far. Whilst economic growth was revised down from 1.8% to 1.3% in annualised terms in the second quarter that is still better than I though it would be. For Japan these days an annual GDP growth rate of 1% is about par for the course and is better in individual terms due to the shrinking population. But as we look ahead we see a Pacific Region which is in trouble economically and of course a Consumption Tax rise ( which impacted so heavily in 2014) is due soon. So over to you Governor Kuroda.

Oh and something I have not mentioned so far which is that the Yen is at 108.

 

 

555 views