since i told myself to watch japan, yen/dollar/euro, and japan/china (together w/ france, france/n.africa, cliff/ceiling/usa/entitlement, middle east, and whatever)
as part of the exercise, just in in-tray
i am encouraged, since the currency munition may be a dud, we must then suspect japan shall try harder
From: C
Sent: Wednesday, January 23, 2013 1:12 PM
Subject: FW: GK Research Daily - BoJ's Latest Currency War Salvo: A Dud
If the Yen stops falling, this removes one of the drivers of the rally in equity markets, ....the other be zero interest rates and overpriced bonds.
If for some reasons markets are able to break through and break out further (even after consolidation?) and the Yen also stops its recent flirtation with weakening currencies (...everyone loves to talk about "currency wars" these days), then that would be quite amazing.
***
Good day. Please see today’s GaveKal Daily.
Japan’s Latest Salvo In Currency War: A Dud – by Yuchan Li
When Bank of Japan officials convened around a table for a policy discussion this week, they had to pull up extra chairs: two top ministers from Shinzo Abe’s government joined the discussions. This alone would seem to justify protests from the Bundesbank and other central banks that monetary policy independence is dead in Japan. Yet outgoing BoJ governor Masaaki Shirakawa, whose term expires in April, did not completely cave under the pressure—as yesterday’s sharp post-meeting jump in the yen made obvious. In short, Shirakawa bent but did not break. It looks like Japanese monetary policy, and the yen, will basically be in limbo until the outgoing governor’s replacement is appointed.
Here’s where Shirakawa bent: the BoJ doubled the inflation target to 2%, and whereas the previous 1% goal was apparently based on a finger-in-the-wind criteria, this time the target is explicitly tied to the consumer price index. The central bank also extended its quantitative easing program, juicing it up with a Federal Reserve-style open-ended asset purchase approach, under which the BoJ will keep buying assets for an indefinite period of time starting in 2014.
But Shirakawa did not completely break. What disappointed was the pace of asset purchases for this year, at a net JPY36trn, compared to last year’s JPY25trn net expansion. By way of comparison, US monetary base will grow by at estimated 38% this year, while Japan’s should expand by around 20%. Moreover, by the BoJ’s own estimates, the expansion will shrink to JPY10trn on a net basis in the following year.
While the BoJ made clear that current targets are provisional — i.e., would be expanded if the yen strengthened — the market was not impressed. The yen saw its biggest one-day gain in eight months, and is now back at JPY88.6 to the dollar. The Nikkei fell in lock-step.
What does this mean for the vigorous short yen/long Japan equities trade (see chart on web version)? The risk is that Japanese monetary policy remains in limbo until the announcements of replacements for Shirawaka and two BoJ deputy governors, whose terms are set to expire on April 8 and March 19 respectively. There is no set date for announcement of replacement nominees, but we would hazard a guess that this will occur before the end of February.
The LDP leadership gets the right to nominate the candidates, but must push the nominees through both the upper and lower houses of parliament. The challenge is in the upper house, where the Shinzo Abe’s party is 16 seats short of the 118 needed for a majority. That said, the smaller parties are inclined to cooperate with bold monetary easing.
Top contenders for the top job include Kazumasa Iwata, president of the Japan Center of Economic Research and former BoJ deputy governor, and Heizo Takenaka, former minister for economic and fiscal policy. Both have expressed intentions to ease further if they get behind the steering wheel. If the LDP is successful in instating a dovish triplet of new governors, then the short yen/long Nikkei will be back in full force. Otherwise, investors will return to their normal state of ignoring Japan, which means a continued grind lower from here. At the very least, investors may want to choose the potential winners of a renewed “currency war” more carefully (see Japan’s Reflation 2.0). |
