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The Failure Of Abenomics In One Chart… When Even The Japanese Press Admits “Easing Is Not Working” | Zero Hedge

The Failure Of Abenomics In One Chart… When Even The Japanese Press Admits “Easing Is Not Working” | Zero Hedge.

Since late 2012 Zero Hedge has been very critical of Japan’s Abenomics experiment, and its first and only real arrow: a massive increase in the monetary base thanks to the BOJ’s shock and awe QE announced in April, resulting in the collapse of the Yen (although in a not zero sum world this means ever louder complaints from US exporters such as Ford competing with Japanese companies), a soaring Nikkei (if only through May), and what was expected to be an economic renaissance as a result of a return to stable 2% inflation.

We repeatedly warned that the only inflation anyone would see in Japan is in imported energy costs and food prices, which in turn would crush real disposable income especially once nominal wage deflation accelerated, which it has for the past 16 months straight. So far this has happened precisely as warned.

Another thing we warned about is that the result of the bank reserves tsunami – just like in the US – lending in Japan would grind to a halt, as everyone and their grandmother sought to invest the resulting excess deposits in risk markets as exemplified best by JPMorgan’s CIO division.

Today, with the traditional one year delay (we assume they had to give it the benefit of the doubt), the mainstream media once again catches up to what Zero Hedge readers knew over a year ago, and blasts the outright failure that is Abenomics, but not only in the US (with the domestic honor falling to the WSJ), but also domestically, in a truly damning op-ed in the Japan Times.

We will let readers peruse the WSJ’s “Japan’s Banks Find It Hard to Lend Easy Money: Dearth of Borrowers Illustrates Difficulty in Japan’s Program to Increase Money Supply” on their own. It summarizes one aspect of what we have been warning about – namely the blocked monetary pipeline, something the US has been fighting with for the past five years, and will continue fighting as long as QE continues simply because the “solution” to the problem, i.e., even more QE, just makes the problem worse.

We will however, show the one chart summary which captures all the major failures of the BOJ quite succinctly.

More importantly, we will repost the Japan Times Op-Ed from last night, titled “BOJ’s money mountain growing but debt may explode” because it not only copies all we have said over the past year, but is a dramatic reversal from the Japanese population eagerly drinking Abe’s Koolaid long after its expiration date. Because once the media starts asking questions, the broader population can’t be far behind.

From Japan Times, November 17, 2013 highlights ours

BOJ’s money mountain growing but debt may explode

by Reiji Yoshida

Haruhiko Kuroda hit the ground running when he was appointed by Prime Minister Shinzo Abe in March to take charge of the Bank of Japan.

Out of the blue, the central bank’s new governor unveiled a super-aggressive easing policy the next month to double the nation’s monetary base in just two years. He said the BOJ would buy more than ¥7 trillion in long-term Japanese government bonds per month to flood the financial system with money to end more than a decade of deflation.

The BOJ’s nine-member Policy Board unanimously supported Kuroda’s goal of stoking 2 percent inflation in two years — a surprise about-face from its stance under his predecessor, Masaaki Shirakawa, who was concerned about the potential side effects of embracing such radical quantitative easing.

More than six months have passed. How has the BOJ’s strategy changed Japan’s financial markets and the real economy?

Critics say Kuroda’s monetary easing scheme isn’t working, although most of the public apparently believes otherwise.

There are growing signs of inflation, but not the sort heralding the start of Abe’s much-advertised recovery and rising wages. Instead, imported fuel and other products have become more expensive because of the weak yen ushered in by Kuroda and Abe, and this bodes ill for the public’s living standards.

Meanwhile, Kuroda’s aggressive plan is allowing the debt-ridden government to issue fresh bonds continuously, further increasing the likelihood of a fiscal crisis, they said.

People have been deceived by ‘Abenomics,’ ” Yukio Noguchi, a prominent economist and adviser to Waseda University’s Institute of Financial Studies, told The Japan Times in a recent interview.

Monetary easing is not working, and it’s going nowhere,” Noguchi said.

Since April, the BOJ has been gobbling up JGBs from banks and the open market. Its purchases amount to roughly 70 percent of the value of all new JGBs issued.

But the banks are just stowing that money in their accounts at the BOJ because they can’t find any companies interested in borrowing it.

“There is no demand for funds on the part of businesses. That’s why the monetary easing is not working,” Noguchi said.

Japan’s monetary base — the sum of cash in circulation plus banks’ current account balances at the BOJ — surged from 23.1 percent in April to 45.8 percent in October, thanks to the BOJ’s aggressive operations.

But its money stock — the total amount of monetary assets available in an economy including credit created by bank loans, but excluding deposits held by financial institutions and the central government — only rose to 3.3 percent from 2.3 percent in the period.

This means banks are just depositing the massive funds provided by the BOJ in their own accounts at the central bank. The unloaned cash is thus having little affect on the real economy.

Meanwhile, the long-term interest rate, which theoretically factors in an expected rate of inflation, has fallen and is dwindling at an ultralow level of around 0.6 percent.

This signals that the market does not yet seriously believe that inflation in Japan will reach Kuroda’s 2 percent goal, said Kazuhito Ikeo, an economics professor at Keio University.

“When the policy interest rate has effectively fallen to zero, monetary policy won’t work much any more,” Ikeo said in a recent interview.

Ikeo believes the economy is stuck in a rut because its potential for economic growth has declined and monetary measures alone can’t solve the problem, he said.

“I think it has become clearer that there is a limit to what monetary policy can do,” Ikeo said.

Much of the public believes the drastic easing measures adopted by Abe and Kuroda helped weaken the yen and benefitted exporters. The yen-dollar rate has fallen from around 78 to about 100 over the past 14 months. This helped send the Nikkei stock index soaring from December, one of the main reasons Abenomics has public support.

But the yen started depreciating last fall, long before Kuroda’s widely proposed takeover at the BOJ officially took place in April, Noguchi said.

Abe was just “lucky” to see the yen fall, Noguchi claimed, crediting the easing of the eurozone debt crisis last fall rather than clear signs that Abe’s Liberal Democratic Party was getting ready to boot the unpopular Democratic Party of Japan from power.

In September, Japan’s consumer price index rose 0.7 percent from the same month last year to log its fourth consecutive rise, hinting at inflation. The uptick, however, was misleading. It was largely caused by the costly rise in energy imports, exacerbated by a weaker yen.

This, of course, is not a sign of economic recovery, both Noguchi and Ikeo said.

Workers’ real wages fell 2 percent in August compared with the same month the previous year, logging two drops in a row. Inflation without wage hikes will only erode people’s living standards.

“It is wages that matter. If prices go up without a rise in wages, the real income of the people just goes down,” Noguchi said.

Abe apparently is well aware of this risk and has repeatedly urged top business leaders in Keidanren, the nation’s largest business lobby, to push for wage hikes to generate “a virtuous cycle” of raises and economic expansion.

Noguchi calls Abe’s approach “sheer nonsense” because Japan is not a planned economy and the government thus cannot force businesses to raise wages against their will.

Probably the biggest risk with Abenomics, however, is a potential crash in JGB prices that would cause long-term interest rates to spike and gut the debt-laden government.

Ikeo pointed out that the BOJ’s massive bond purchases are in fact helping the debt-ridden government finance itself, even if the central bank claims this is not its intention. If the BOJ keeps up this charade, confidence in JGBs might crash, Ikeo said.

Soon or later, concerns over fiscal sustainability will emerge. You can’t rule out the possibility of a surge in the (long-term) interest rate at a critical point,” he said.

The resulting surge in debt-serving costs would devastate the government, which has already racked up a public debt totaling almost 200 percent of gross domestic product — the highest of all developed countries. Nearly half of Japan’s ¥92.6 trillion general account for fiscal 2013 is barely being financed by fresh JGB issues.

According to Noguchi’s simulation, if the average JGB yield jumps to 4 percent in fiscal 2014, debt-serving costs will leap to a staggering ¥50 trillion in fiscal 2025 alone, which is more than half the size of the fiscal 2013 budget.

“This is nothing but fiscal bankruptcy,” Noguchi warned.

For some two decades, fears and rumors have swirled about just such a scenario. Economists who warned of the impending crisis were labeled alarmists while speculators who bet on it always lost.

That situation may soon change.

Japan’s trade balance has turned into a deficit and the current account surplus has shrunk. Japan posted a surplus of ¥3.05 trillion in the current account for the April-September half, the second-lowest level since 1985, when comparable data became available.

Ikeo warned that if the current account balance sinks into red and people are convinced the yen will no longer strengthen, investors may start buying foreign bonds and ditch their JGBs.

Another possible danger is, ironically, a full-fledged economic rebound, which would also push up long-term interest rates, Ikeo said.

The government needs to walk “a dangerous narrow path” of seeking a recovery while trying to prevent interest rates from surging at the same time, he said.

 

Testosterone Pit – Home – What Will It Take To Blow Up The Entire Japanese Banking System? (Not Much, According To The Bank of Japan)

Testosterone Pit – Home – What Will It Take To Blow Up The Entire Japanese Banking System? (Not Much, According To The Bank of Japan). (source)

Hideo Hayakawa, former Bank of Japan chief economist and executive director, set the scene on Wednesday when he discussed the BOJ’s ¥7-trillion-a-month effort to water down the yen by printing money and gobbling up Japanese Government Bonds. It wants to achieve what is increasingly called “2% price stability,” a term that must be a sick insider joke played on the Japanese people. He warned that if these JGB purchases are “perceived as monetization“ of Japan’s out-of-whack deficits, it would drive up long-term JGB yields “to 2% to 3%.” Up from 0.60% for the 10-year JGB. “But once interest rates start rising, they would overshoot,” he said. So maybe 4%?

He’d set the scene for the Bank of Japan’s 81-page semiannual Financial System Report, released the same day. Buried in Chapter V, “Risks borne by financial intermediaries,” is a gorgeous whitewash doozie: if interest rates rise by 1 percentage point, it would cause ¥8 trillion ($82 billion) in losses across the banking system.

This interest rate risk associated with all assets and liabilities, such as bondholdings, loans, and deposits has been dropping since April 1, the beginning of fiscal 2013, the BOJ explained soothingly – the largest decline in 13 years. Banks would be able to digest that 1 percentage point rise.

A big part of that interest rate risk is tied to the banks’ vast holdings of JGBs. The BOJ has begged banks to dump this super-low yielding stuff that could blow up their balance sheets. The three megabanks – Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group – have done that. From the beginning of the fiscal year through August, their JGB holdings plummeted by 24% to ¥96 trillion. And much of what they still hold is paper with short to medium maturities that poses less risk.

The regional banks have not been able to do that, and their JGB holdings remained flat at ¥32 trillion. However, the amount of loans with longer maturities, such as those to local governments, has gone up, which raised the interest rate risk “slightly,” the report said.

Then there are the 270 community-based, cooperative shinkin banks. And they’re stuck in a quagmire. They’re stuffed to the gills with JGBs because, unlike megabanks and, to a lesser extent, regional banks, they have no other options to place their ballooning deposits. On their balance sheets, interest rate risk continued its long and relentless upward trend [my take on the shinkin bank debacle…. “We Don’t Feel Any Impact Of Abenomics Here”]

A 1 percentage point rise would cost megabanks ¥2.9 trillion, regional banks ¥3.2 trillion, andshinkin banks ¥1.9 trillion. A total of ¥8 trillion ($82 billion). If the yield curve steepened, with long-term rates rising 1 percentage point and short-term rates remaining low, the losses would be smaller. In all, it would be survivable. The banking system is safe.

Whitewash doozie because it assumes a 1 percentage-point rise. The yield of the 10-year JGB would rise from todays 0.6% to 1.6%. With annual inflation hitting 2% soon, bondholders would still get sacked. Hence Mr. Hayakawa’s warning: if inflation hits 2%, long-term interest would likely head to 2% or 3%, and once they start rising, they’d “overshoot.” So, with a little overshoot, 10-year JGB yields might rise by 3 percentage points, to 3.6%. Still a very moderate interest rate, by historical standards. What would that do to the banking system?

The report tells us what it would do: megabanks would be severely damaged; the rest of the banking system would be wiped out. If there is a parallel stock market crash, the megabanks would be wiped out as well.

The megabanks combined have ¥28 trillion in Tier 1 capital. Against it are credit risk, market risk from stock holdings, interest rate risk, and operational risk. The risk scenario the BOJ envisioned with a 1 percentage point rise in interest rates would create losses of nearly ¥17 trillion for the megabanks, a big part from its bond and loan portfolio, but an even bigger part from its stockholdings. That would leave about ¥11 trillion in Tier 1 capital.

But if the scenario plays out as Mr. Hayakawa sees it, with a 3 percentage point rise in interest rates, losses at megabanks, according to the report, would jump by ¥4.6 trillion, leaving only ¥6.4 trillion in Tier 1 capital.

Then there is the stock market risk. Traditionally, banks held large chunks of shares of companies they did business with. It cemented the relationship and propped up equities, which in turn made loans appear stronger. It worked wonderfully until the bubble it helped create blew up in 1989. Banks turned into zombie banks. Since then, 20 of these zombie banks have been consolidated into the three megabanks. And they have reduced ever so gradually their stock holdings to get out from under that risk that took them down the last time.

But in the money-printing induced mania, they’ve been adding stocks, and their exposure to the stock market remains enormous. The market downturn envisioned by the BOJ would produce around ¥7 trillion in losses. If that downturn becomes a crash, of which Japan has seen its share, losses could easily wipe out the remaining Tier 1 capital. Bailout time.

Regional banks will get wiped out by a 3 percentage point rise in interest rates. They don’t need a stock market crash. Even the BOJ is worried. According to its risk scenario with a 1 percentage point rise in interest rates, losses will eat up ¥11 trillion of the banks’ ¥15 trillion in Tier 1 capital. Leaves ¥4 trillion. If interest rates rise by 3 percentage points, another ¥4.6 trillion in losses would hit the banks, more than annihilating all of their Tier 1 capital. They’d be goners.

And the beleaguered shinkin banks? They have ¥6.5 trillion in Tier 1 capital. They don’t own a lot of stocks but are loaded with JGBs and local government bonds with long maturities. In the scenario where interest rates rise 1 percentage point, half of their Tier 1 capital would be wiped out. A 3 percentage point rise in rates would produce an additional ¥2.7 trillion in losses, wiping out almost all of the remaining Tier 1 capital.

But the 3 percentage point rise is only theoretical. If that happened, the government wouldn’t be able to make interest payments on its ¥1 quadrillion in debt. The whole house of cards would come tumbling down.

No, interest rates will not be allowed to jump this high. Even if inflation is 6%, the BOJ will see to it that yields remain low. It would impose brutal financial repression. It could use numerous tools, including a yield peg. If it had to, it could print enough money to buy the entire national debt of Japan, even if that might finally be “perceived as monetization” – with all the consequences that this would entail.

Japan is still the second richest nation in the world, according to Credit Suisse. About ¥1 quadrillion of that wealth is tied up in JGBs. But debt that yields almost nothing and can never be paid back, will eventually succumb to fate: either slowly through inflation and devaluation or rapidly through default. Abenomics has chosen the slow route.

But if the house of cards were allowed to come down rapidly, from the ashes would rise a young generation that suddenly could look into the future and actually see something other than the oppressive dark wall of the government debt hurricane coming their way.

Trade is another critical pillar of Abenomics. Devaluing the yen would boost exports and cut imports. The resulting trade surplus would goose the economy. But the opposite is happening. And it isn’t happening in small increments, with ups and downs over decades, but rapidly and relentlessly. It’s not energy imports. They actually dropped! It’s a fundamental shift. Read….Why I’m So Worried About Japan’s Ballooning Trade Deficit

 

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