Unless you want to focus on Hillary’s Gmail account and Donald’s ‘wall’ most of the headlines came from the Far East this morning, where amongst other news the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) held meetings. The RBA, as widely expected, left the policy unchanged as did the BoJ but some interesting tinkering from the BoJ as to their inflation thoughts did emerge. They moved down their expectations once again, now looking for CPI to run at 1.5% in 2017 from the previous 1.7% and pushed out their 2% target rate to fiscal 2018, which still appears a little optimistic to us.
The Bank of Japan (BoJ) now seem to have tried enough policy tricks to fill even a samurai’s sleeves with today’s introduction of yield curve targeting, ~0% yield cap on 10 year government bonds, broadening the targeted maturities of asset purchases and an ‘inflation-overshooting commitment’ to complement their continued negative interest rate policy (held at -0.1%) and qualitative easing (for now expected to remain close to the current 80 trillion yen annually).
Unconventional monetary policy and negative rates continue to bring unintended consequences. Globally, more and more sovereign bonds (over USD 10 trillion) now trade on negative yields with the 10 year German bund also joining the club. As negative rates and QE are being pursued policy outcomes are becoming less predictable than might have originally been hoped for. For example, currency moves are not necessarily as central banks predicted: take Japan, where the shift to negative rates earlier in the year was expected to help the currency weaken and boost growth and inflation. In fact the Yen has strengthened, exacerbated by the latest meeting, when the BoJ left policy unchanged and the Yen strengthened breaching the JPY105 level against the US dollar. At the time of writing the Yen is trading at ~104.28 to the US dollar; at the moment the market is not heeding attempts by government officials to ‘talk down’ the Yen. The Finance Minister, Taro Aso, called for global coordination to address these disorderly moves in the foreign exchange market.
Yet again the IMF has downgraded their global growth estimates to 3.2 percent for 2016 and 3.5 percent for 2017. Their policy prescription is more proactive use of fiscal policy and structural reform in conjunction with already supportive monetary policy. Indeed a criticism of current policy is its over-reliance on central banks and that the prolonged use of QE and negative rates bring unintended consequences. Olivier Blanchard, now at the Peterson Institute in Washington, but formerly the Chief Economist for the IMF, said he is wary on the use of negative rates saying “I don’t like it, I think it interferes with the business of banks in ways that are very complex” instead “I much prefer what we now call regular QE.”
Japan is a wealthy nation, although as we all know the government balance sheet has suffered over the last 20 years. However, the savings held by the nation easily offsets the government deficit and results in Japan Inc. having a Net Foreign Asset score of 62% of GDP which equates to a six star rating. The problem we have is that Japanese names trade expensive relative to other credits and it is very difficult to obtain paper over and above ‘fair value’ due to the demand of savers.
Shares of the Japan Post trio finally began trading today after a decade old political promise of privatisation and months of hype. The USD 12bn IPO was the largest since Alibaba’s record USD 25bn issuance in September last year. Eleven major underwriters and countless local brokerages have been focusing on this deal along with swathes of domestic savers who are keen to move some of their mountain of savings into something safe, familiar and slightly less unspectacular than JGBs. Likewise government officials are relieved and see this as the beginning of further privatisation in order to reduce wasteful public spending and raise circa USD 33bn for reconstruction funds, primarily to help rebuild in the northeast areas damaged by the 2011 earthquake.
Last week, in jest, we projected what the Rugby World Cup (RWC) results might be if they were correlated with the countries’ corresponding Net Foreign Assets (NFA) scores. We speculated that Japan, with a NFA of +62% and 5000/1 odds to win the tournament, would take the cup to become defending hosts in 2019. In reality this was unlikely as up until this weekend the Japanese ‘Cherry Blossom’s’ only previous RWC victory was in 1991 against Zimbabwe. To make expectations worse, their first opponents this year would be RWC twice champions South Africa. But on Saturday the Blossoms clinched a 34-32 point victory against the ‘Springboks’ in what is being widely heralded as the greatest shock in World Cup history.