– «Yen surges after governor’s comments in Japan’s parliament
– He’s been under pressure to provide guidance on normalization
The Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, Governor Haruhiko Kuroda said Friday, marking the first time he’s provided any clear guidance on timing for normalizing policy.»
«Nuovo scatto dello yen contro il dollaro dopo che Haruhiko Kuroda, governatore della Bank of Japan, ha affermato che la banca centrale prenderà in considerazione un’uscita dalla sua politica monetaria ultraccomodante se l’obiettivo di inflazione sarà raggiunto nell’anno fiscale 2019 (che terminerà a marzo 2020). Parole che hanno portato il cross dollaro/yen scendere fino a 105,64. Acquisti sullo yen dettati anche dall’incertezza sui mercati globali dopo l’annuncio del presidente degli Stati Uniti Donald Trump di imporre dazi sull’acciaio e sull’alluminio.
Nell’audizione al Parlamento giapponese, Haruhiko Kuroda ha detto che c’è bisogno che la crescita dei salari sostenga l’inflazione, sottolineando che il Giappone non è più in deflazione, ma che “l’attitudine deflazionistica sta condizionando l’inflazione”. In ogni caso, Kuroda esclude un rialzo dei tassi nel breve termine.»
In addition to the suddenly escalating global trade war, overnight traders had one more thing to worry about: another central bank unwinding its QE program. This happened shortly after midnight ET, when BOJ Governor Kuroda unexpectedly announced that the Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, and that there could be policy change before the 2% inflation target is achieved, marking the first time he’s provided any clear guidance on timing for normalizing policy.
“Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too,” he said. “I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting.”
In immediate reaction, Japanese shares fell sharply, the Nikkei sliding as much as 2.9% as the Yen surged as much as 0.5%, with the USDJPY tumbling below 106, a 15 month low, while JGB yields jumped across the curve.
“Kuroda’s comments are important because he officially acknowledged a change in policy was likely before the end of fiscal year 2019,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney. “A move sub-105 yen over the coming days wouldn’t be surprising under the current risk off/trade war concern environment”
In testimony that lasted about three hours, Kuroda seemed to try mitigating the negative market impact by saying that this doesn’t affect his “overshooting commitment,” which pledges the BOJ to continue expanding the monetary base until inflation exceeds 2 percent in a stable manner. Even with the recent easing in the pace of bond purchases by the central bank, the monetary base is still increasing at an annual pace of more than 9 percent.
By then. however, the damage had been done.
“The BOJ’s stance is that in around fiscal 2019 inflation will reach 2 percent,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “If inflation rises above 2 percent, to be honest it’s just logical to consider an exit strategy around then.”
Of course, the problem is that nobody really had, which is surprising because with the Fed already raising rates and the ECB debating normalization, Kuroda has so far snuck between the cracks, even if he has been under increasing pressure to provide details on when the BOJ may follow suit.
And while the outlook for prices and the economy have pointed for quite some time of the need to mull an eventual exit, Kuroda’s acknowledgment of this is significant.
To be sure, the market did not like it.
At least Kuroda has the economy in his side: as Bloomberg reported earlier, Friday showed movement in prices and the job market that should help the central bank. Japan’s unemployment rate fell to 2.4 percent, the lowest since 1993, while inflation in Tokyo rose more than expected in February, suggesting prices could move higher nationwide.
The only problem is that 30 years into its grand monetary experiment, Japan’s wages have still to rise (see “Over half of Japan firms do not plan base pay rise this year“) , which is a problem. Kuroda said stable 2% inflation isn’t possible without wage growth of more than 3%. Pay gains are still well below this level even as the labor market continues to tighten, and Japan’s unemployment rate just tumbled to a fresh 25 year low, an increasingly meaningless metric in the world’s oldest society where the bulk of the population is outside the labor force.
nd suggesting that perhaps Kuroda has misspoken, he added that the increases in consumer prices are still quite far from the target, and went on later to say he felt cautious or negative about changing the 0 percent target for bond yields now.
Still, if nothing else, Kuroda did provide a window of action, and as ING Bank’s Rob Carnell said, when the European Central Bank begins to formally normalize its own monetary policy, it may provide a window for the BOJ to act as well.
“You don’t want to be the odd-man out in this game,” said Carnell.
Finally, in response to this surprising announcement, here is how some other analysts reacted to Kuroda’s unexpected announcement, via Bloomberg:
National Australia Bank Ltd. (Rodrigo Catril, currency strategist)
– “Kuroda’s comments are important because he officially acknowledged a change in policy was likely before the end of FY2019. Technically, however this shouldn’t come as a surprise as core inflation is expected to reach 2.3% by then”
– “Still, markets shoot first and ask questions later, so yen appreciation remains the path of least resistance near term”
– “Technically dollar-yen has a lot of room to move lower and the current risk-off environment supports a stronger yen. A move sub 105 yen over the coming days wouldn’t be surprising under the current risk off/trade war concern environment”
Mitsubishi UFJ Morgan Stanley Securities (Daisaku Ueno, chief currency strategist)
– BOJ Governor Kuroda’s comments will add further downward pressure on USD/JPY, which could lead it to push toward 105 in the near term
– Sentiment toward USD/JPY has already been weighed by concerns over U.S. protectionism. Yen-buying also tend to be strong around this time of the year
– Unclear why Kuroda made specific comments about monetary exit when downward pressure on USD/JPY was already in place. May need to closely watch what Kuroda says after the BOJ policy meeting next week
ING Bank NV (Rob Carnell, chief economist for the Asia Pacific)
– Kuroda has “done as well as you could possibly imagine with the tools he’s had. He’s used them imaginatively and aggressively. Has it worked? Not entirely. Do you blame him for that? Not really.”
– “If you set ambitious targets and miss them, but get halfway, that’s better than setting unambitious targets and missing them and not getting there”
– “Japan no longer feels like it’s flirting on the edge of a dangerous deflation cliff”
– When the European Central Bank begins to formally normalize its own monetary policy, it may provide a window for the BOJ to act as well; “You don’t want to be the odd-man out in this game”
«Fed officials discuss when to start reducing asset holdings»
«If global economy continues to improve ECB and BOJ may be next»
«After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening»
«How the Federal Reserve, European Central Bank and — eventually — the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 “taper tantrum,” or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years»
«Combined, the balance sheets of the three now total about $13 trillion, equating to greater than either China’s or the euro region’s economy»
* * * * * * *
Un vecchio proverbio recitava che un bel gioco dura poco. il Qe è durato fin troppo.
I QE fatti dalle banche centrali occidentali hanno generato un qualcosa come 13,000 miliardi Usd.
adesso che le cose si dice vadano meglio, emerge il problema opposto: come rientrare in maniera non eccessivamente dolorosa.
«A key unknown is how the heavily indebted global economy can cope with the rising interest rates that are likely to result from stimulus withdrawal.»
«As central banks squeeze their balance sheets, they will add selling pressure on longer-dated bonds and effectively push up borrowing costs. Getting the balance right won’t be easy»
I tempi umani non sono infiniti. Anzi, sono sempre troppo brevi quando va bene, e troppo lunghi quando va male.
Ma i problemi irrisolti non sublimano nel nulla: a star lì marciscono.
Gli stati occidentali hanno sperperato il tempo comprato al prezzo di 13,000 miliardi senza fare alcuna riforma strutturale. Non hanno ridotto il debito sovrano, anzi, lo hanno ingigantito.
Uscirne a buon mercato sembrerebbe essere un’utopia.
– Fed officials discuss when to start reducing asset holdings
– If global economy continues to improve ECB and BOJ may be next
After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening.
How the Federal Reserve, European Central Bank and — eventually — the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 “taper tantrum,” or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years. Combined, the balance sheets of the three now total about $13 trillion, equating to greater than either China’s or the euro region’s economy.
Former Fed Chair Ben S. Bernanke — who triggered the 2013 sell-off in risk assets with his quip on tapering asset purchases — has argued for a pre-set strategy to shrink the balance sheet. Current Vice Chairman Stanley Fischer says he doesn’t see a replay of the 2013 tantrum, but the best laid plans of central bankers would soon go awry if markets can’t digest the great unwinding.
“You know what they say about mountaineering right? The descent is always more dangerous than the ascent,” said Stephen Jen, London-based chief executive of hedge fund Eurizon SLJ Capital Ltd. “Shrinking the balance sheet will be the descent.”
Economists and investors are stepping up analysis of the implications of balance-sheet contraction after minutes of the Federal Open Market Committee meeting last month showed officials favor kicking off the process as soon as this year.
While the BOJ appears to be some distance from shrinking its balance sheet, Governor Haruhiko Kuroda has said that’s one of the tasks the BOJ will face when it exits its monetary easing policies. That would only be after inflation exceeds 2 percent, which the BOJ forecasts will come sometime in the year starting April 2018.
The ECB’s balance sheet will continue to grow until at least the end of this year and isn’t likely to shrink until well after it finally winds down asset purchases. Any discussion on when to start shrinking appears to be some distance away.
A key unknown is how the heavily indebted global economy can cope with the rising interest rates that are likely to result from stimulus withdrawal. As central banks squeeze their balance sheets, they will add selling pressure on longer-dated bonds and effectively push up borrowing costs. Getting the balance right won’t be easy.
“In practice, the FOMC will probably have to determine the appropriate terminal level” of the balance sheet “through experience and observation of market functioning as it gradually shrinks,” David Mericle, an economist at Goldman Sachs Group Inc., wrote in a recent note.
All three main central banks in the largest developed economies used government bonds as a major avenue for monetary expansion. The Fed also accumulated almost one-quarter of the mortgage bonds sold by government-linked agencies over the last year.
Underscoring just how diverse the programs have become, the ECB’s securities purchases have included French yogurt-maker bonds, while the BOJ’s holdings through exchange traded funds include shares of Japan’s top soy-sauce brewer.
Fed officials’ current game plan is to start the balance-sheet run-down with a phasing out of reinvestment in maturing securities. The central bank will have $426 billion of its Treasuries mature in 2018 and another $357 billion in 2019. “If the Fed tapers reinvestments, the market will have to find a way to absorb the additional supply,” Societe Generale SA analysts led by Brigitte Richard-Hidden wrote in a recent note.
Bernanke in January laid out the case for a permanently large balance sheet, arguing in part that this is needed to ensure the effectiveness of monetary policy decisions. The argument is that it’s easier for the Fed to raise and lower borrowing costs using the rate it pays commercial banks for their reserves than it would be to return to the pre-crisis days of adding or subtracting marginal amounts of funds in the overnight interbank market.
A wild card is the potential overhaul of the Fed board that’s open to President Donald Trump. With Janet Yellen’s term as chair due in February, and three board-member nominations pending, the Trump administration has the scope to affect the balance-sheet strategy. While Trump has told the Wall Street Journal he is open to renominating Yellen, some Republicans have encouraged an exit from credit markets, raising the risk for volatility.
How markets react could also affect the outlook for the Fed’s benchmark overnight rate target, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. He notes that during the 2013 taper tantrum, 10-year Treasury yields climbed over 3 percent from about 1.6 percent before Bernanke signaled a phasing-out of asset purchases.
“The Fed will attempt to avoid a repeat of the taper tantrum by thoroughly preparing the markets before starting to cut its balance sheet,” LaVorgna predicted.
In a speech prepared for delivery at Columbia University in New York on Monday, Fischer said that the muted response of investors so far to the emerging details of the plan suggests that the out-sized financial market moves seen four years ago probably will be avoided.
As for euro area officials, when they turn to balance-sheet contraction they may have less to debate because the ECB’s balance sheet before the crisis was already much bigger relative to the size of the economy than the Fed’s. That stems from its much greater role in providing liquidity to banks on a regular basis.
The impact of an ECB phase-out of asset purchases could have knock-on effects outside of Europe, illustrating again the potential for unintended consequences from unorthodox monetary actions. European investors took money out of the euro area at a record pace to escape the negative yields resulting from ECB policy, and much of that went into Treasuries. That leaves the U.S. government bond market potentially facing a double whammy from both ECB and Fed balance-sheet contraction in coming years.
When it comes to Japan, the country where modern-era QE began in 2001, the BOJ’s balance sheet is currently set to continue swelling given its target for asset purchases of about 80 trillion yen ($737 billion) a year. With policy makers having adopted a specific strategy of targeting government bond yields, the prospects for major volatility are slim in that market.
The bigger risk for investors lies in any phasing out of purchases of stocks and real-estate investment trusts, where the BOJ has come to play a large role.
If the BOJ did come to the point of seeking an exit from its risk-asset investments, there’s a template for disposal from an Asian neighbor. The Hong Kong Monetary Authority took the extraordinary step of buying more than 7 percent of the benchmark Hang Seng Index in August 1998 during the throes of the Asian financial crisis. As soon as the next year, it began to implement a disposal plan once the turmoil had passed.
HKMA officials came up with a tracker fund of Hong Kong shares, composed of the central bank’s holdings, then sold it in batches over a period of years. With the BOJ’s holdings already mainly in the form of exchange-traded funds, it could be even easier. The Japanese government’s pension fund has also been a ready buyer of Japanese shares, offering a potentially market-friendly solution.
Still, care will be needed.
“Central banks need to be very cautious in starting to run down their balance sheets,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “They need to reiterate that it’s conditional on continued economic improvement, that it will be gradual and that it could be a substitute at times for rate hikes.”
– Praet, Coeure stress commitment to ECB stimulus and guidance
– Officials put forward differing views on balance of risks
European Central Bank officials signaled that they’re getting close to the point when they’ll start preparing for the end of an era of unprecedented stimulus.
In the last round of speeches before a week-long quiet period ahead of the next policy meeting, Executive Board members Benoit Coeure and Peter Praet agreed that the euro-area recovery has become broad-based, while diverging on whether the risks to that outlook are still skewed to the downside.
The 25-member Governing Council will debate the precise formulation of its stance on the economy when it decides on interest rates and stimulus settings on April 27. But with a potentially explosive election in France coming this weekend, that may still prove too soon for any change in its currently ultra-cautious tone.
“We would say that risks are still tilted to the downside” in the medium term, Praet said in New York on Wednesday, even as he acknowledged that the shorter-term outlook has improved. That differed slightly from his colleague Coeure, who said a few hours earlier that he doesn’t “personally see risks to the downside any more.”
If that sentiment were to be reflected in the ECB’s official language — stating that the risks are now evenly balanced, rather than pointed to the downside — it could signal that the beginning of the end for ultra-loose monetary policy is at hand. Even so, while anti-euro Marine Le Pen is still challenging for the French presidency, core inflation is still feeble and uncertainties linger over the strength of global trade, officials are likely to be reluctant to rush in.
Praet and Coeure’s remarks follow weeks of divergent signals from their colleagues on the ECB’s Governing Council over how they’ll eventually exit their unprecedented stimulus, including an attempt by President Mario Draghi to stem the discussion by saying inflation isn’t strong enough to start signaling any shift. Praet pointed to Draghi’s affirmation of the current guidance while Coeure noted it’s too early to change anything just yet.
“We are very, very serious about the forward guidance we have given to financial markets,” Coeure said, “including the fact that we will be buying financial assets until December or later if necessary, that rates will remain low, that we don’t see a reason today to change that sequence, that rates will be lifted only well past the horizon of our asset purchases.”
The last scheduled policy speech before the Governing Council’s quiet period came from French central-bank Governor Francois Villeroy de Galhau, who said in New York that the current economic situation in the euro area “does not call for a recalibration” of policy.
“Our current monetary policy stance remains fully appropriate based on current information,” he said. “For the future, on the most appropriate way to reduce the intensity of our accommodation when it becomes warranted, two principles should in my view guide us: these are prudence and effectiveness.”
That’s because the recovery is still fragile and inflation wouldn’t sustainably return to the central bank’s target of just below 2 percent if stimulus was removed, he said, adding that officials will assess the situation with “great pragmatism.”
Earlier in the day, the Estonian Governor Ardo Hansson said in Tallinn that a debate on a future exit from ultra-loose policy is “definitely justified” given that it involves complex technical preparations.
“A lot of news has been relatively positive but it hasn’t yet translated into wage growth or core inflation, but it will happen sooner or later,” Hansson said.