martes, 4 de noviembre de 2014

martes, noviembre 04, 2014

Japan risks Asian currency war with fresh QE blitz

The Bank of Japan is mopping up the country's vast debt and driving down the yen in a radical experiment in modern global finance

By Ambrose Evans-Pritchard, International Business Editor

9:01PM GMT 31 Oct 2014


The Bank of Japan has stunned the world with fresh blitz of stimulus, pushing quantitative easing to unprecedented levels in a bid to drive down the yen and avert a relapse into deflation.
 
The move set off a euphoric rally on global equity markets but the economic consequences may be less benign. Critics say it threatens a trade shock across Asia in what amounts to currency warfare, risking serious tensions with China and Korea, and tightening the deflationary noose on Europe.
 
The Bank of Japan (BoJ) voted by 5:4 in a hotly-contested decision to boost its asset purchases by a quarter to roughly $700bn a year, covering the fiscal deficit and the lion’s share of Japan’s annual budget. “They are monetizing the national debt even if they don’t want to admit it,” said Marc Ostwald, from Monument Securities.
 
In a telling move, the bank will concentrate fresh firepower on Japanese government bonds (JGBs), pushing the average maturity out to seven to 10 years. It also pledged to triple the amount that will be injected directly into the Tokyo stock market through exchange-traded funds, triggering a 4.3pc surge in the Topix index.
 
Governor Haruhiko Kuroda said the fresh stimulus was intended to “pre-empt” mounting deflation risks in the world, and vowed to do what ever it takes to lift inflation to 2pc and see through Japan’s "Abenomics" revolution. “We are at a critical moment in our efforts to break free from the deflationary mindset,” he said.             
 

The unstated purpose of Mr Kuroda’s reflation drive is to lift nominal GDP growth to 5pc a year. The finance ministry deems this the minimum level needed to stop a public debt of 245pc of GDP from spinning out of control. The intention is to erode the debt burden through a mix of higher growth and negative real interest rates, a de facto tax on savings.
 
Mr Kuroda’s own credibility is at stake since he said in July that there was “no chance” of core inflation falling below 1pc. It now threatens to do exactly that as the economy struggles to overcome a sharp rise in the sales tax from 5pc to 8pc in April.
 
Marcel Thieliant, from Capital Economics, said the BoJ already owns a quarter of all Japanese state bonds, and a third of short-term notes. Its balance sheet will henceforth rise by 1.4pc of GDP each month, three times the previous pace of QE by the US Federal Reserve.
 
There is little chance that the BoJ will meet its 2pc inflation target by early next year, showing just how difficult it is to generate lasting price rises once deflation has become lodged in an economy. Household spending fell 5.6pc in September, though there are tentative signs of an industrial rebound.
 
The latest move - already dubbed QE9 – sent the yen plummeting 2.6pc to ¥112 against the dollar, the weakest in seven years. The currency has fallen 40pc against the dollar, euro and Korean won since mid-2012, and 50pc against the Chinese yuan. This is a dramatic shift for a country that remains a global industrial powerhouse, with machinery and car producers that compete toe-to-toe with German and Korean rivals in global markets. “They are going to be screaming across Asia if the yen gets near ¥120 to the dollar,” said Mr Ostwald.




Panasonic said it plans to “reshore” plant from China back to Japan. There are increasing signs that Japanese companies are rethinking the whole logic of hollowing out operations at home to build factories abroad.
 
Hans Redeker, from Morgan Stanley, said Japan is exporting its deflationary pressures to the rest of Asia. “It is not clear whether other countries can cope with this. There have been a lot of profit warnings in Korea. The entire region is already in difficulties with overcapacity and a serious debt overhang. Dollar-denominated debt has risen exponentially to $2.5 trillion from $300bn in 2005, and credit efficiency is declining,” he said.
 
Albert Edwards, from Societe Generale, said Japan is at the epicentre of a currency maelstrom, a replay of the Asian financial crisis from 1997-1998, though this time the region is a much bigger part of the global economy. “China cannot tolerate this kind of shock when it already faces a credit crunch and has suffered a massive loss in competitiveness. Foreign direct investment into China has already turned negative,” he said.
 
It was a yen slide in 1998 that led to the most dangerous episode of the Asian drama. China threatened to retaliate, a move that would have threatened the disintegration of the regional trading system. It took direct action by Washington and concerted global intervention to stabilise the yen and contain the crisis.
 
This yen-yuan dynamic is looming again. China has for now stopped buying foreign bonds to weaken its currency but this has let deflationary forces gain a footing in the Chinese economy.

“If China’s inflation rate falls below 1pc, it will be forced to devalue as well. Currency war was always how this was going to end, and it risks sending a wave of deflation across the world from Asia,” he said.

 



As each country resorts to a beggar-thy-neighbour policy in moves akin to the 1930s, deflation is dumped in the lap of any region that is slow to respond - currently the eurozone.

Stephen Lewis, from Monument, said the BoJ’s new stimulus is a disguised way to soak up some $250bn of government bonds that will be coming onto the market as Japan’s $1.2 trillion state pension fund (GPIF) slashes its weighting for domestic bonds to 35pc. This avoids a spike in yields, the nightmare scenario for Japanese officials.
 
The GPIF will have buy $90bn of Japanese equities and $110bn of foreign stocks to lift its weighting to 25pc for each category. This will be a shot in the arm for global bourses, but also a clever way for Japan to intervene in the currency markets to hold down the yen.
 
The BoJ has in effect outsourced its devaluation policy, shielding it against accusations of currency manipulation. Any retaliation by China is likely to be conducted by the same arms-length mechanism.
 
Japan has to move carefully. The world turned a blind eye to the currency effects of Mr Kuroda’s first round of QE because the yen was then seriously overvalued. This is no longer the case.
 
The risk for premier Shinzo Abe is that further bursts of stimulus may be taken by critics as an admission of failure, though it is in reality far too early to judge whether the country has closed the chapter on its two Lost Decades. What seems certain is that Japan was sliding headlong into a debt compound trap before Mr Abe launched his “Hail Mary” pass into the unknown.

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