BoJ job

6 min read

If you think the US economy is a tricky read for the FOMC, then spare a thought for Haruhiko Kuroda and his merry men on the Policy Board of the Bank of Japan.

The Monetary Policy Statement of this morning called for stable action with now new stimulus but still maintaining QE at ¥80trn per annum. Looks to me like a is a lot of whistling in the dark. The BoJ has delivered a fairly up-beat statement about an economy which is, despite more stimulus that one can shake a stick at, still going nowhere in a hurry.

Of late, key indicators have not been at all poor but there is first and foremost next to no sign of the inflation targets which Abenomics were supposed to bring closer coming even within telescope distance.

That said, stock markets are performing very nicely with both the Topix and the Nikkei up by about 16%, year-to-date and all this in the face of a yen which continues to play dead. In October 2011, the currency was trading close to ¥75/US$. The announcement in late 2102 by the then new Prime Minister Shinzo Abe of his Three Arrow policy for recovery kicked the floor out from under it and it raced down to around ¥100/US$ where it stayed through the second half of 2013 and until late summer of last year. Then the next massive rounds of QE were announced and it headed to ¥120/US$, an area where it has been stuck for the past 6 months.

To be sure, there are signs of life in the Japanese economy – March Machinery Orders were pretty strong at +2.9% MoM, +2.6% YoY – and Q1 Preliminary GDP releases on Wednesday confirmed that there is satisfying growth across the platform but the question remains as to how many ¥ of QE are needed to create how many ¥ of GDP? The BoJ can be pleased with growth of 0.6% QoQ and +2.4% YoY for the first quarter of the year but the question remains whether the patient will breathe on, or turn up his toes and expire if the life support machine were to be disengaged.

I might be flogging a dead Samurai but it helps to be reminded that the debt/GDP ratio was at 227.7% when last read at the end of last year. Greece, just as a comparison, is at 174.5% but it of course lacks the benefit of its own central bank which can create money at will. Japan is still a ticking time bomb but it is one with a clock which has been fitted with a fresh battery. Thus, the BoJ can blithely point to the improvements in the economy and promise that inflation, the good kind, is just around the corner – just as it has been for the past 20 years.

Rigging it in Riga

When it comes to smiling, the BoJ has no monopoly and this weekend Riga (site of the EU summit) is the smiling capital of the world. The news is full of pictures of Alexis Tsipras shaking hands with all and sundry while sporting a very broad smile. Does he perhaps know something we don’t? I think not.

We hear much if the shift in underlying thinking in Berlin as both Mutti Merkel and her best attack dog, Wolfgang Schaeuble, seem to be working through the permutations of a possible Grexit. Tsipras, on the other hand, looks to me ever more like Charlton Heston in the closing scene of El Cid. There might be another Spanish literary comparison but I suspect that Miguel de Cervantes’ masterpiece has been rather overworked in this particular context.

Sitting still

Overall, markets had a pretty decent day on Thursday with bonds looking stable and equities off to the races with the S&P closing at an all-time high at the Dow making its second best after Tuesday’s record close.

The air of inevitability prevails in equities – Never mind the price, where are the alternatives? – while bond and credit markets remain very uncertain. Investors and traders alike don’t seem entirely happy at these levels but every attempt to short the market has cost money just as every attempt to be long. In not being certain which way to jump, almost everyone is simply sitting still. The money is in day trading which adds to short term volatility but which takes the market nowhere.

Issuance continues apace with ever stranger names appearing in the euro credit markets. The cross-currency swaps are working a treat for the issuers but from an investor’s point of view this is not clever. If key European corporate names go illiquid at the drop of a hat, what chance for ever getting out of US industrials of Chinese property bonds if, as and when. Everyone is talking about it and yet the beat goes on…

——————————–

Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. With all of us out on Monday – Late Spring Bank Holiday in the UK, Whit Monday in Europe and Memorial Day in the US – nobody has to fiddle with the Blackberry “to see what’s going on”.

You have the choice this week-end of the screaming of F1 engines at Monaco or the gentle sound of leather on willow at Lords with discreet applause for a well deserved boundary or a craftily carved out LBW. I’ve done both and I know which I prefer. Howzat!

Anthony Peters