Abenomics: medicine or poison for Japan?

[Puppycow]

Japan Revises Growth to 4.1% in First Quarter in Boost for Abe

Japan’s economy grew more than the government initially estimated in the first quarter, helping Prime Minister Shinzo Abe to sustain confidence in his campaign to defeat deflation.

Gross domestic product expanded an annualized 4.1 percent, compared with a preliminary calculation of 3.5 percent, the Cabinet Office said in Tokyo today. The current-account surplus for April was 750 billion yen ($7.6 billion), the finance ministry said in a separate release. That was more than double the 350 billion yen median estimate of analysts.

The Nikkei is currently up over 400 points or 3% on the news. The yen is at 97.77 to the dollar.

 

[Puppycow]

Rough day for the markets here. Anyone who was shorting the yen must be getting a bit nervous.

Yen Surges Past 95 Per Dollar to 2-Month High on Japan Flow Data

The yen surged, jumping to the strongest level in two months against the dollar, after government data showed Japanese investors were net sellers of overseas bonds and stocks for a fourth-straight week.

The greenback’s volatility against the Japanese currency jumped to the highest in more than two years before U.S. economic data that may provide more direction about when the Federal Reserve will begin to slow stimulus. The yen has now unwound all its losses since the Bank of Japan announced unprecedented monetary stimulus on April 4.

“The market wants evidence of Japanese capital outflow and that evidence is just not there, in fact it’s the opposite,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc. “Global fund managers who got into short yen trades in the early part of the year are now sitting very nervously watching the volatility in global markets.”

The yen surged 1.3 percent to 94.75 per dollar as of 11:28 a.m. in Tokyo after climbing to 94.45, the strongest since April 4. Its 4.2 percent, three-day advance is set to be the biggest since May 2010. The currency pair’s one-month implied volatility touched 17.1 percent, a level unseen since March 2011. The yen gained 1.2 percent to 126.59 per euro.

The Nikkei is down over 700 points or over 5% since opening this morning.

I was watching a news analysis on NHK last night about the recent volatility in the markets. The gist was that nobody really knows what's going to happen and so the markets seem to be panicky and prone to stampedes. It makes it hard for businesses to plan: does it make sense to hire more people or invest in plant and equipment now? People aren't sure what's coming.

What does look less likely is Peter Schiff's 200 y/d and hyperinflation theory. If anything it looks like more upward adjustments to the QE program may be necessary to achieve the 2% inflation target in 2 years.

I wish they'd put the volatility in better context than "a level unseen since March 2011". That's only two years ago. What is the normal level (range) of volatility?

 

[The Don]

It's certainly supporting your proposed link between the yen and the Nikkei.

It's looking less and less likely that Peter Schiff is going to be right, but I'm sure that he'll change his prediction or reinterpret it to demonstrate that he would have got away with it if it hadn't been for those pesky markets

 

[Puppycow]

And the Nikkei finished trading down 843.94 points or 6.35%. That's a pretty big one-day loss. The Yen is at 94.05 to the dollar, up 2.05%.

According to one estimate:

a one-yen depreciation against the US dollar can be expected to increase operating profits by 1-2% for aggregate corporate earnings excluding financials.

So the exchange rate has a very direct effect on the profit margins of certain Japanese companies. At the (recent) peak of the Nikkei, the yen was at around 103 to the dollar, so profits are going to be 9%-18% lower if the yen stays where it is now.



Meanwhile some hedge funds are apparently making big bets on a Japanese default:
Abenomics has bond traders frenzied, hedge funds counting on Japan crash as public debt swells

A handful of overseas hedge funds are seeking to make a killing on the gloomiest scenario for Abenomics. Experts say their methods involve futures trading, which allows betting on bonds you don’t own.

They are counting on what they see as an inevitable catastrophe. If bond prices crash, their owners, mostly Japanese financial situations, will lose a major chunk of their assets overnight. It would freeze up the market that funds the government’s mammoth deficits, shattering Japan’s credibility as an economic power and send shockwaves rippling around the world.

“My assessment of the situation is that nothing can be done from this point forward to avoid a full bond crisis,” said J. Kyle Bass, managing partner at Dallas-based Hayman Capital Management. “I think it is not only possible. It is probable.”

His hedge fund invests in conventional ways, too, such as stocks, although none in Japanese equities, and currencies, including investing in a cheaper yen. But he has made positions that will allow his hedge fund to come out ahead if Japanese bond prices plunge. He declined to give details of how he hedges, citing policy.

. . .

The risks for investing in bonds tend to be minimal compared with stocks and currencies. But the rewards for betting on a bond crash can be great — although that’s a big “if.”

Although the stock market fell sharply, yields on 10-year JGBs actually fell by 3 basis points today.

I'm rooting against hedge funds that hope to profit on a debt crisis in Japan.

 

[kevsta]

rooting is one thing, but I wouldn't bet against Kyle Bass over an extended period of time, given his track record thus far.

re the Nikkei. it now does not look good, technically, anyway, for what that's worth these days. the previous incursion into technical bear territory bounced and still closed just above, but last night we collapsed through support and closed deeply red on the lows.

remember when I said it didn't look good when it did that on the first big downday from the top? this is worse because it did the same closing firmly in technical bear territory. even the slowest of the algorithms now understands this is a technical sell scenario.

I would expect price to definitely re-test the 50% retracement from the start of the rally in Nov now, its most of the way there already, and the 61.8% at 11500 also looks likely at this point.

BOJ - your move.. (MOAR? which is what Schiff's and Bass's predictions are based on, they will always do moar until it's too late)

 

[Eddie Dane]

WTF is happening in Japan?

After the Tsunami I contemplated buying Japanese stock. Then got focused on other activities.
The next time I check Nikkei is shooting up like a rocket and now it's collapsing like crazy.

Can somebody give me quick summary?

 

[kevsta]

WTF is happening in Japan?

After the Tsunami I contemplated buying Japanese stock. Then got focused on other activities.
The next time I check Nikkei is shooting up like a rocket and now it's collapsing like crazy.

Can somebody give me quick summary?

Nov 2012 and prior, new PM expected to win on massive "print our way out of deflation" mandate, smart money starts accumulating stocks in advance and the uptrend starts.

then a little while back the BOJ went all shock and awe on deflation's ass and the whole world sold the yen and bought the Nikkei, parabolic acceleration up, starting with a gap up on the news, see it? (btw from a technical perspective it was always virtually certain that gap will get "filled" -ie price re-visited again)

from mid-April (above about the 23% line) the smart money were then into distribution and now offloading to all the latecomers, (in both trades, so buying back their yen, offloading their stocks)

now we're watching them starting to bank their gains on the downside again.

 

[kevsta]

..oh, and people have started taking about "Abegeddon" possibly following on from "Abenomics" if it turns out the BOJ cant keep control of it all.

and its not just evil speculators private hedge funds who see the possibility of it coming off the rails..

http://www.cnbc.com/id/100790158

Japan risks facing stagflation - where accelerating inflation is not met by higher growth rates - if "Abenomics" fails to restore momentum in the world's third largest economy, warned Alex Friedman, global chief investment officer at UBS Wealth Management.

"It's possible we could see a stagflation scenario, where you see inflation in asset prices but no real growth. The ultimate story is you need a hand off to real growth - in Japan there's a real question of whether that's possible," Friedman told CNBC Asia's "Squawk Box" on Wednesday.

(Read More: Consumers Still to Buy Into Abe's Economic Experiment)

"If you don't have growth, then you end up with a potential Armageddon story, something we would call Abegeddon," he added.

In an "Abegeddon" scenario, Friedman said investors may grow increasingly concerned about the sustainability of Japanese debt levels that could lead to a "stampede" out of government bonds.

note, ensure to process this information through your CNBC (glasses-de-rosifier) & Global Forex Bank & Marketmaking hedge-fund investment banking (we're buying what you're selling and vice versa) filters.

 

[Puppycow]

WTF is happening in Japan?

After the Tsunami I contemplated buying Japanese stock. Then got focused on other activities.
The next time I check Nikkei is shooting up like a rocket and now it's collapsing like crazy.

Can somebody give me quick summary?

Abe proposed 3 kinds of stimulus: a fiscal stimulus of about 8 trillion yen on infrastructure, monetary stimulus by increasing QE and some kind of deregulation. The second one is probably most important.

So far, the program has been successful. Japan's economy grew 4.1% last quarter, which is better than Japan has done in a long time, and better than anything in Europe or America currently. The main problem I see is that the stock market got way, way too carried away over Abenomics and bid up the prices much too high. A 20% or 30% gain probably would have been justified, but it went up almost 70% and now it is correcting. The volatility has increased.

Now, even after all the recent losses, the market is still up by somewhere around 30% to 40% compared to last Nov. If we could have gotten to the same place in a straighter line with less volatility it would have been nicer, but it's still a big gain.

 

[Eddie Dane]

Abe proposed 3 kinds of stimulus: a fiscal stimulus of about 8 trillion yen on infrastructure, monetary stimulus by increasing QE and some kind of deregulation. The second one is probably most important.

So far, the program has been successful. Japan's economy grew 4.1% last quarter, which is better than Japan has done in a long time, and better than anything in Europe or America currently. The main problem I see is that the stock market got way, way too carried away over Abenomics and bid up the prices much too high. A 20% or 30% gain probably would have been justified, but it went up almost 70% and now it is correcting. The volatility has increased.

Now, even after all the recent losses, the market is still up by somewhere around 30% to 40% compared to last Nov. If we could have gotten to the same place in a straighter line with less volatility it would have been nicer, but it's still a big gain.

Thanks guys.

I read about Abe going all QE in the Economist and was wondering if he totally screwed the pooch on the currency front.

I'm very intersted in the austerity vs stimulus debate, so I wondered if he broke the whole machine with his Abenomics.

Glad to see it's just a gold rush of greedy people falling over each other.

I have my eye on a new Mazda and the price came down last month, could that be a direct result of QE?

 

[kevsta]

Thanks guys.

I read about Abe going all QE in the Economist and was wondering if he totally screwed the pooch on the currency front.

I'm very intersted in the austerity vs stimulus debate, so I wondered if he broke the whole machine with his Abenomics.

Glad to see it's just a gold rush of greedy people falling over each other.

I have my eye on a new Mazda and the price came down last month, could that be a direct result of QE?

hmm. you're in Europe aren't you? so it came down priced in Euros?

since the beginning of May, EURJPY has been from (start) 128.xx, up as high as 133.xx, (price got cheaper in Eur) and back down to 126.5 currently (getting more expensive in Eur)

so unless they're repricing it daily along with exchange rates, it seems doubtful this is the reason

edit. although looking again, it came from 99.xx in November, so if they just got round to repricing now, it should be like 30% cheaper. is it?

 

[Eddie Dane]

hmm. you're in Europe aren't you? so it came down priced in Euros?

since the beginning of May, EURJPY has been from (start) 128.xx, up as high as 133.xx, (price got cheaper in Eur) and back down to 126.5 currently (getting more expensive in Eur)

so unless they're repricing it daily along with exchange rates, it seems doubtful this is the reason

edit. although looking again, it came from 99.xx in November, so if they just got round to repricing now, it should be like 30% cheaper. is it?

Thinking about it, it had probably more to do with our crappy car market.
30% less new cars sold as in the same month last year.
Taking less margin to kick Volkswagen in the cojones, I presume.

 

[Puppycow]

Yields on JGBs coming down.

http://www.bloomberg.com/markets/rates-bonds/government-bonds/japan/

Thinking about it, it had probably more to do with our crappy car market.
30% less new cars sold as in the same month last year.
Taking less margin to kick Volkswagen in the cojones, I presume.

At the beginning of this year it was around 115, last October it was around 100.

http://www.bloomberg.com/quote/EURJPY:CUR/chart

 

[lomiller]

then a little while back the BOJ went all shock and awe on deflation's ass and the whole world sold the yen and bought the Nikkei,

For the world to buy anything on the Nikkei it first has to buy yen. The world cannot “sell the yen and buy the Nikkei” simultaneously.

What seems to be happening with the yen is speculators are unwinding their positions. Speculators who bought into the currency crash/hyperinflation fears would have shorted the yen and need to buy yen to cover these positions to close out these deals.

 

[kevsta]

For the world to buy anything on the Nikkei it first has to buy yen. The world cannot “sell the yen and buy the Nikkei” simultaneously.

really? so I couldn't short the Yen through buying the chosen crosses, and go long the index without ever owning a single Yen then? using a EUR or GBP funded account in fact?

I think you'll find its entirely possible.

edit, and traders didn't buy into hyperinflation fears they front-ran the certain pop on printing/devaluation news, but now, yes we have an intermediate reversal / dip, and they have been and are cashing in.

whether anybody convincingly "buys the dip" again now remains to be seen

 

[lomiller]

really? so I couldn't short the Yen through buying the chosen crosses, and go long the index without ever owning a single Yen then?

I didn’t say you have to own yen I said the world can’t buy the Nekkei without buying yen. Either foreign capital is flowing into the Nekkei causing it to rise or it isn’t you can’t have it both ways.

edit, and traders didn't buy into hyperinflation fears they front-ran the certain pop on printing/devaluation news, but now, yes we have an intermediate reversal / dip, and they have been and are cashing in.

More like the speculators shorting the yen got burnt when it remained relatively strong and they are now jumping ship and buying yen to cover their positions.

 

[Puppycow]

really? so I couldn't short the Yen through buying the chosen crosses, and go long the index without ever owning a single Yen then? using a EUR or GBP funded account in fact?

I think you'll find its entirely possible.

I think what lomiller is saying is that for the Nikkei to be affected, you have to actually put money into it. You may be able to buy an index fund that tracks the Nikkei with dollars or euros or pounds, but the fund manager then has to convert that money into yen and use it to buy shares on the Tokyo Stock Exchange.

Think about it, you cannot actually drive up the price of something without buying it. Thus, I think the recent bull run and subsequent bear run have mostly been driven by domestic Japanese money.

 

[G6000]

Abenomics is doomed to catastrophic failure.

The debt to GDP ratio has surpassed 250%. The population is aging. Most of the bonds used to monetize the debt were bought by internal investors. Those investors are now aging and cashing in their bonds, not buying more.

Additionally, Kuroda has said he wants to get inflation to 2%.

Now think about that. Would you buy a Japanese bond, which currently pay less than 1%, if has just been announced the inflation goal is 2%? You'd have to be pretty stupid, yes?

All of that means the central bank will have to buy all the bonds it is going to take to get to the 2% inflation goal. Because no one else is going to want that garbage. Clearly, any other investors are going to want Japanese bond yields to rise above 2 percent to stay ahead of the inflation target.

But guess what happens if interest rates hit just 2 percent? Think about how low that is. Just 2 percent.

Look at that debt to GDP ratio. If Japan's bonds hit 2 percent, 80 percent of all revenues will have to go toward servicing their debt. Yeah. 80 percent of all the revenues the government takes in will go to servicing the debt. That leaves 20 percent for roads, bridges, universal healthcare, social security, etc.

You see the problem.


That's why the day after Kuroda's announcement, JGB futures hit a 52 week high and a 52 week low...on the same day!

What's more, do you think the other Asian countries are going to sit around while Japan weakens the yen? Seriously? You think South Korea is going to let their export trade take that big a hit?


There is going to be a currency war such as you have never seen before. A race to the bottom.

 

[G6000]

Japan is going to abandon its elderly. Put them on ice floes.

Short the yen.

 

[kevsta]

I think what lomiller is saying is that for the Nikkei to be affected, you have to actually put money into it. You may be able to buy an index fund that tracks the Nikkei with dollars or euros or pounds, but the fund manager then has to convert that money into yen and use it to buy shares on the Tokyo Stock Exchange.

or USD priced futures contracts through the CME? or options based on that?

http://www.cmegroup.com/trading/equ...ikkei-225-dollar_contract_specifications.html

Think about it, you cannot actually drive up the price of something without buying it.

this is not as straightforward as people think, modern electronic markets do not have to work the way economics graduates think they must, but even assuming this was fact, its pretty naive to think that fund managers and traders cant short the Yen and long the Nikkei simultaneously.

Thus, I think the recent bull run and subsequent bear run have mostly been driven by domestic Japanese money.

http://www.japaninvestor.net/2013/04/time-to-bail-on-hottest-trade-short-yen.html

Time to bail on the Hot trade, short Yen, long Nikkei? -

While Piling In, They Also Discuss Possible Loss of Control By the BoJ

For many years very underweight and generally very pessimistic about Japan, foreign investors have piled into Japanese equities since November of last year, and this buying accelerated to a record weekly figure last week, according to the Tokyo Stock Exchange.

A new net buying record of JPY1.58 trillion was set in the second week of April, after the Bank of Japan unveiled new “shock and awe” quantitative and qualitative easing measures under newly installed Governor Haruhiko Kuroda.

The new data put cumulative net purchasing by foreign investors since mid-November, when the decision to dissolve the lower house was made, at JPY8.15 trillion.

here's a chart of funds flows into the Nikkei