Don't take my word for it. Take it from one of the most embarrassing pleas for free money ever written, at Goldman Sachs. Here he is saying if Kuroda does not manipulate long rates to pre-Abe stability, he will have to stop investing in no-growth companies that haven't borrowed enough to create inflation, haven't spent enough to create inflation, and haven't hired enough to create inflation, at least since the Andrea Doria set sail.QuoteOne of the main focuses for overseas equity investors since late May has been the JGB market. They have invested in Japanese equities with one eye on the tail risk from Japan?s fiscal problems, which could explode at any time. They are therefore more nervous than most Japanese about the rise and instability in long-term JGB yields since unprecedented easing was introduced in April. We believe there is a particularly large gap in recognition between overseas investors and the BOJ on this issue. BOJ Governor Kuroda's comments at a press conference on May 22 after the monetary policy meeting were taken by the market as an acceptance of rising JGB yields. Overseas investor confidence in the BOJ was further undermined after the June 11 policy meeting when the committee decided not to extend the duration of fixed interest rate operations, an action that was already reported in the press and priced in by the markets. As a result, instability in long-term JGB yields has been having a significant knock-on impact on the equity and forex markets since late May. A look at forex, equities, and the JGBi expected inflation rate shows that most of the initial positive impact from unprecedented easing was reversed in mid-June, with only high yields and volatility remaining. The BOJ urgently needs to reestablish forward guidance for its policy duration and a communication strategy that does not involve contradictory messages.The author has recently returned from meetings with more than 100 overseas investors in Europe and Asia in early-June and have also talked to investors who visited Tokyo from around the world. Discussions with them focused on Abenomics, and we were surprised that the JGB market was not only the main focus of investors who concentrate on rates and forex, but also for equity investors.The specific themes that came up in our meetings with these investors included: (1) reasons why long-term JGB yields rose and have become unstable after the introduction of unprecedented easing aimed at doubling the monetary base over two years through large-volume JGB purchases (announced by the BOJ on April 4); (2) how to interpret BOJ?s stance toward the JGB yields and their stability based on conflicting statements made by Governor Haruhiko Kuroda on long-term yields; (3) whether or not the government, and the Finance Ministry in particular, plans to allow the JGB market to remain unstable; and (4) the possibility that huge JGB purchases by the BOJ may cause the government to lose incentives for fiscal restructuring, given calls to postpone consumption tax hikes among some officials close to Prime Minister Shinzo Abe.Of course, this strong interest in the JGB market among overseas investors is due to concerns over Japan?s fiscal conditions. Given government debt is currently at 240% GDP and still rising, they probably see Japan?s fiscal state as fragile, which could potentially give way under further pressure (see Exhibit 1). These overseas investors are very conscious of this huge tail risk when they invest in Japanese equities, and compared to the Japanese, they have been much more uncomfortable with the increased yield volatility under the current unprecedented easing (see Exhibit 2). In the beginning, the easing helped the yen to depreciate and pushed up the Japanese equity market, and the BOJ may be thinking that volatility on the JGB market is a small price to pay for these positive market reactions.Up to now, the driver of Abenomics has been overseas investors, but we see a significant gap between these investors and the BOJ in terms of the degree of concern over the instability of the JGB market. As a result, Kuroda's remarks at a press conference post the May 22 monetary policy meeting were interpreted as an acceptance of further rises in long-term rates. Overseas investor confidence in the BOJ was further undermined at the June 11 monetary policy meeting when the BOJ decided to forego an extension to fixed rate operations after it was widely reported in the media and already factored into the market.Of course, other negative factors were present, including disappointing market reaction to the "third arrow" growth strategy in Abenomics and an increase in global volatility on expectations that the Fed could wind back its quantitative easing measures soon. However, any positive market reaction to unprecedented easing has largely been undone, leaving only high JGB yields and high volatility, and we are not in any doubt that overseas investors have started to lose their confidence in the BOJ.... Some institutional investors actually sold off JGBs as the BOJ expected, but market liquidity dried up with the resulting exit of these liquidity providers. This in turn increased market volatility, and some other market participants came under pressure to sell their JGB holdings in order to manage their risk, which fuelled a malignant cycle of further instability. The BOJ was left as one of the few buyers on the JGB market, and it is also being criticized for reducing market liquidity because of the lack of clarity around its large-lot JGB buying operations. Also, equity prices of some regional banks declined as a result of their substantial JGB yield risk exposure and the current instability of yields as well of concerns about future yield rises. We also need to be aware of the risk that they might attempt to sell even more JGBs than they need to if the JGB market continues to be volatile in the future....Our conclusion is that the positive market reaction initially created by the policy has been almost completely undone. At the same time, a lack of credible forward guidance for policy duration means that five-year JGB yields have risen in comparison with before the easing started, and volatility has also increased.It will not be an easy task to completely rebuild confidence in the BOJ among overseas investors after it has been undermined, and the BOJ will not be able to easily pull out of its 2% price target after committing to it. We therefore see a need for the BOJ to offset this with an improvement in its communication strategy. We especially see a need for the BOJ to clearly outline its basic intentions and provide, in a consistent manner, a time frame for how long-term yields will be formed under the unprecedented easing. It also needs to establish specific measures to stabilize the JGB market in case of an emergency. Unprecedented easing relies overwhelmingly on financial market transmission channels, and it is important for the central bank to urgently rebuild stability thereby enhancing the visibility for the main players on these markets - overseas investors.Yeah, okay. So basically your stupid-ass equity investments are unprofitable. Unless the BOJ prints more free money to lend to them than any sane person ever would. And if they cannot afford high interest rates, and will go broke, then they can never, and will never (and have never), create inflation through their operations.These equity investments cannot afford for Abenomics to work, if it would cause interest rates to normalize to international levels. This is an admission that they do not expect to participate in, or contribute to, a growth cycle. If they can only survive with negative real rates, or below market rates, it is an admission that they would not participate in, or cause, inflation.They are selling shit for less than they are buying it for, and want to keep doing so. With negative rates to make up the difference. Can you imagine a gold miner borrowing, buying equipment to dig for gold, selling the gold, and then paying back less than he borrowed? That would never lead to inflation or growth. And it is sad, because the fiscal danger the author is worried about, can only be helped by activities that cause inflation and grow.
Last edited by farmer
on July 31st, 2013, 10:00 pm, edited 1 time in total.