All of it. Quality not guaranteed.
Careful what you wish for, is that I’m trying to say, but I guess few people are fundamentally happier than me over the decision to do something over in Tokyo, represented by the BOJ’s foray into inflation targeting. Inflation target is the new black, or something? Nevertheless, we get a yen on the cheap, pumped money throughout the system and probably a whole host of JPY/Anything (guess a whole bunch were speculative, but quite a few must have been fundamental) longs getting squeezed out, and carry traders getting a windfall galore just as they were finding more attractive trades in US$’s and LTRO’d euro’s.
Exporters of… mostly cars get a windfall as well, but again, I maintain my reservations on just exactly how sensitive the customers of most non-car Japanese goods (machinery, niche items, luxury goods, etc.) are to the currency prices. It’s not exactly like you’re buying Chinese produce at a 3% margin to their Indian competitors just because the supply chain in far cheaper Vietnam is perpetually broken… If there is anything though that’s showing signs of exuberance, well look no further than the Nikkei 225! Banker bonuses for all? The four kids with money not saved for pensions go out buying more champagne in Ginza after 11 pm? Who really knows…
It’s probably no surprise I would have preferred them to patch up their tax system to fix it and let the currency be alone, but given deflationary pressures on all imports from the strong yen, I guess there is very little optical supply side inflation, and people wouldn’t call it “Two Lost Decades” if there was any inflation on the demand side! Deflation snuff-out is good enough in my book to warrant a lot of credit on Japanese policymakers. Revel in the taste of exhilaration while it’s fresh!
What’s that numbing, tingling feeling in your lips, you say?
Why, an annual trade deficit. You might not remember much of it since it last showed its face more than 30 years ago. Someone might say that if we can get the decade that followed it as well, we’re all fine! Still, talk about bad timing to push up the yen! Idling of all energy sources more or less, and a resource price spike in all resources priced to US$ terms doesn’t bode particularly well for import inflation to be maintained at 1% when the yen is down 6-7% in a few weeks! Then of course, the question is how large of a fraction of the economy is coming from imports, but it looks increasingly set to increase if there is any economic rebound to follow and they still need to import stuff. On a currency-negative trajectory I suppose companies perversely get expected greater gains the longer their cash conversion cycles are!
Let me get this straight: retail sales are up good (cars! green energy! you’d have to have a heart of stone to sink this one, right?), so things do look fairly OK there if you follow the headlines, and then you get the stock market rally and added liquidity right in time for Valentine’s evening. Government reconstruction spending should come in any day as well. We double up on the whole thing with a sinking currency, and by such a force that you pretty much wiped out any and all yen-strength trades applied (6% on a currency in a few weeks, especially something as inert as the yen, does damage at trading desks!) and safe-haven seekers, shooed off by the fundamental change in policy. Then ask yourself: how many carry traders went in just on the hope for further currency appreciation? Most of the high-risk high-yield complex looks fairly good, so why not bag the 4% annual interest rate differential, put a stop for your current long position at AUDJPY 85, and call it a night?
Things risk spiraling out of control pretty fast here unless the energy issue is somehow brought under control, or the expectation of inflation is enough to keep the business confidence and standards of living high enough that the economy gets its wheels greased and people go out and get a taste for that expensive fugu, with the tax collectors in tow to take a cut as well, of course. In combination with other policies however, there is potential benefits of scale. And yes, that gambling trip looks juicier and juicier, hopefully other people in Greater China are thinking the same way! (Honestly, gambling with five or six figures in a hand? Getting excited just thinking about it!)
Is there a single factor that is likely to be most influential for the long term prospects of the Japanese economy given the changes?
Yes, I think so. And it’s not Okubo Takuji‘s ability to give positive statements of the state of the Japanese economy. Okubo-san’s analysis is encouraging, for sure, but it’s getting bullish to the point that it’s even hard to see the nuance and what stuff is the most important, where risk factors are and what to watch out for. It’s looking like he thinks the deck is straddled in Japan’s advantage, for sure.
What I would need to be willing to agree, is an estimate of the dry-powder capital available in Japan and its rate of change from, say, trade balances, corporate spending, and so forth. This does not include savings that are tied up in JGB’s! It does not include cash that is significantly longer term prevented from either being spent off, or reinvested into other things. Yeah, that’s pensions for you! The stock market could be included, but the most accurate description of this would of course be the value creation accumulated from its total return on year-on-year basis, since this seems to either return to the stock market or seep away to other sectors of the economy, so don’t double count it! Other examples of what this is would be corporate coffers, pure cash hoards, pretty much straight up, deployable cash.
If there is enough of this to funnel it out into yield-seeking activities (plowing it into companies in whatever form, foreign assets, whatever) to push Japan up the yield curve significantly, then it could snowball “in a good way”. If the deployable capital is low, and growth instead follows a bout of inflation (try a year, two maybe) and is representative of the desperate attempts by Japanese savers to maintain their real wealth and giving up on JGB’s to do so, then things could indeed get very ugly, very fast. And yes, I do believe that this one factor is pretty much the only difference between a fly that found its windshield and the koi that swam all the way up the river to become a dragon. Speaking of dragons, the X-factor is of course any potential Chinese involvement, since other foreign investment is fairly negligible, but China is also a pretty tentative and difficult-to-model case.
Is anyone out there any wiser on Japanese dry-powder capital?