zNews (update every week)
Latest News 09.01.2017
After a break of almost four years Information about Japanese capital markets will resume on this webpage. Capital markets in Japan are still quiet with a positive momentum in the equity market. Interest rates stay at there low levels at around zero percent. It can not be expected during the year that this will Change dramatically. For that reason JPY currency rates will be weak especially towards the dollar.
Almost one year after my last news update Japan has changed, but has it really changed. Equity markets soared and growth came back. Most impartant unemployment rates ared down and at the same level as before the Lehman shock. The outlook for Japans economy has improved, but the structural problems have not moved away. Labor regulations are still favoring the classical corporate employee looking for a life time employment. Thererfore the split between temp workers and regular employed people has widened. Nevertheless the rift is less harsh as more and more young graduates can get into a permant position thanks to the demographic effect of attrition in the workforce. It seems that the Japanese solution is a lower income after the normal exit year once the 60 years old, but still improved to bridge better to the official retirement age of 65.
In case the unemployment stays below 4 per cent and as it looks now it will even go down further there will be no unrest in the population as young people - at least graduates from college and universities will find decent jobs. Clear loosing in this scenario will be low qualified people and employess in industries where bankruptcy will happen more often.
As it looks the preservance of the system of life long employment will also keep productivity low as there will be no strive for structural improvements Japan will loose relatively to their neighbours, but probably still prevail as a domestic economy.
Energy and demography will be the big topics in the next 10 years. For demography a solution - like importing foreigners - is a no-go, so a little bit of improvement and cooperation will be probably seen in the energy sector. Here Japan has some comparative advantages like storage technology or solar power. Combined with the still srog
No move in politics in the last 4 weeks as attention seems to be focused on the conflict regarding the Sengaku islands. Economic figures for Japan do not look that grim. Unemployment rates come down further and nominal growth is creeping up. It looks that the economy is now back to levels before the Lehman shock, but some dynamics are missing. Joining the TPP initiative would be a good mover for new sentiment. Topics like renvewable energy could be a good way to work closer with countries like Germany, so that knowhow and investments could be leveraged as Japan is leading in battery technology.
10-year rates seem to be sticked to a level below 0.80%, but exchange rates could see a weaker yen with a stronger commitment in the Euro zone towards the Euro.
Politics will be the focus for the next weeks in Japan wiht Mr Hashimoto - mayor in Osaka - heading into the ring. The dispute with China about the Senkaku islands will be another hot spot. No real dramatic will evolve, but the upward movement of the currency could continue with the improvement of the Euro crisis. The only miracle is when the low JGB rates will also move upward. At the moment no impuls can be seen, but it would be likely that with a weaker yen - not only against the Euro - rates could finaly move above 0.90%.
After the ECB commitment for unlimited buying of government bonds in the Eurozone the Yen lost ground against the Euro. The impact for the 10-year JGB rate remained limited, but it could now step-by-step move higher as the reelection will bring new uncertainty. For the equity market an alignment with rallying exchanges in the western hemisphere seems to be the natural way for the next weeks to come.
As mentioned two weeks ago rates went up and with an awareness that the European debt crisis is subsiding stock exchanges around the world see positive movements. In September with the return of administration and politicians back in the office the crisis could make it back to the headlines, but besides Greece no severe news impact is to expected. Astonishing enough equity volatility around the world has dropped significantly to levels clos to pre-2008 crisis. It looks that safe havens like JGB's loose their positive momentum. This could mean that JGB rates could return to rates above 1.10%. Taking into account the overliquidity in the market this is probably to ambitious. An 0.9% would already signal a turnaround situation.
| Forecast|| 09/2012|| 10/2012|| 11/2012|
| 10-Year JGB rate|| 0.95%|| 1.10%|| 1.10%|
| YEN/EUR|| 102 YEN/EUR|| 106 YEN/EUR|| 111 YEN/EUR|
| Lower Range || 99 YEN/EUR|| 101 YEN/EUR|| 101 YEN/EUR|
Next week should see higher JGB rates and also a stronger Euro against Yen. Final vote on consumption tax hike will pinpoint again on Japanese high debt problem and could move sentiment less in favor for Japan. Interesting development for JAL. The airline will return to the stock market only 2 years after declaring bankruptcy. It seems this a little bit early especially when given advantages will be taken away.
An interesting overview of the Japanese bonds market was currently compiled by the Asian Development Bank
Sustainability of Japanese debt situation will be examined and compared in special folder(Strategies for Japanese debt sustainability) beginning next week. It will be an approach to compare the European debt situation with the Japanese way of handling the high indebteness of the country.
Summer vacation ahead markets will be more quiet. Yields and exchange rates have reached lows and it is hard to imagine that those can move even further down, but yields for 10-year JGB bonds have had lower rates.
Rates in the Japanese markets are coming down further. Now with a monetary easing in developing and developed countries lending money was never cheaper and getting return on investments never more challenging. In Europe for the core Eurocountries rates are negative for the first two years. Now Japan looks even better when it comes to the short end of the curve. Looking at exchange rates the Euro weakens further as long as this trend continues. For Europe the future looks like Japan at least for the next 3 to 4 years in order to bring debt levels in the southern countries back to a Maastricht level. This means 3% . It will be interesting if markets will honour the effort. Below 3% is not safe heaven as nominal growth will normally not reach 5%, so the ultimate target is 1%. Looking at growth and debt projections those numbers will not be achieved before 2016 in Spain, Portugal and Ireland. Greece is a special case. Nevertheless the direction at least is right with lower new debt in 2012 - even slower than projected last year. Ireland is a positive example. All projected numbers for new debt were reached and adjustment action is done in line with needs.
Japan is now also on track with the tax increase and Ozawas is loosing steam with just 49 people leaving DPJ. It looks that Noda was quite successful and still in the lead. Nevertheless the tax increase is not enough and there has to be more push for higher taxes, but even more for deregulation and competition. Hopefully FTA talks with US and Europe will be successful and not stopped by the farmers lobby.
Tax hike legislaton now done and the restart of the nuclear plant in Oi shows a strong and smart managing Mr Noda. The final decision for tax hike can be seen as a first step to tackle the unsustainable debt growth. A full comprehensive strategy is still missing, but it looks now that peopel will accept next tax hikes more easily. Somehow related is the restart of the nuclear power plants. This helps to keep the importing costs of fuel down, but the more sustainable strategy could be the feed-in tariff, which started also on the 1st of July. This tariff could lead to a breakthrough for renewable energy in Japan. Japan is actually a country perfectly fitted for geothermal, wind and solar power. In 10-years Japan will probably as successful in this area as Germany and in the end lower its big bill for importing energy.
With the European decision to support banks more directly through ESM the Euro will be stronger in the next weeks against yen. It looks Europe has done a major stop to move forward. New stumbling blocks - as elections or rescheduling of debt - are currently not on the horizon. Euro could move to 104 against the yen in the next weeks.
One week after the 2nd Greece elections market calmed down significantly. This is reflected in the EUR/JPY exchange rate, which moved up to above 101 yen per euro. JGB rates did not move, because of quarter end positioning. This will probably change in case the situation in Europe stabilizes more.
Interesting in Europe yield on Portugese bonds came down to levels not seen last year, but also yields for Italian and Spain bonds were moving south. Now as it is clear that Spain needs currently only around 50bn euro for capitalizing the weak savings banks, markets make a more professional judgement on a debt rate for Spain of less than 90%. This debt ration is lower than the US or UK debt ratio!
Looking at the tax discussion and legisalation it seems to be an showdown next week between Noda and Ozawa. In case Noda moves ahead Ozawa will probably leave DPJ with 50 lawmakers. I would asume this will not happen as Ozawas is now weakened and he could not a start a comeback from the sideline.
Even with the tax hike it looks highly likely that the debt ration in Japan could exceed 250% in 2020. Comparing this to the Spain figures or even Greece it shows that in perspective the Euro Crisis should be a manageable challenge.
Now that the Spain problem of undercapitalized banks seems to find a sustainable solution (100bn euro recapitalization and funding by EFSF) markets will be more relaxed and flight to Bund and JGBs will be slower. Therefore rates for JGB could come to 0.9% or even close to 1%.
Consumption tax will be the topic in the two next weeks and it could have a negative impact on the yen - means a weaker yen. This could result in rates above 80 againt the dollar and above 100 against the euro. Greece election results will not have a big impact as most players and creditors in the market have priced in an anti-euro outcome. Besides that almost only public creditors are left. France election results will be positive for the Socialist party. In the short term this will have not much of an impact, but in the long run the socialist approach could weakenn France and in the end Europe.
In July things should have settled and markets should return to levels seen before August 2011. JGB above 1.1% and Bund above 2% (but this will probably take more time). Yen against Euro should move closer to 110. In case lawmakers can not agree to raise consumption taxes the interest rates could jump even higher as ratings will start to deteriorate further.
The 'Japan Scenaro' with ultralow interest rates for 10-year bonds has now arrived in Germany with rates as low as 1.14% on Friday. Longterm rates in Japan with tenors of 20-years now match German rates. It looks that Germany can now look to Japan to learn how to escape a low interest rate environment distorting capital allocations. Effects of the low interest rates are seen in the exchange rates not only for the euro but also fort dollar. Nevertheless the dip of rates is less pronounced compared to the end of last year. Economy in Japan is slow but steadily improving.
In Japan the impass of DPJ about the consumption tax rise is lingering, but Noda puts his people in the position to be able to win the battle against Ozawa.
This week Ozawa and Noda will meet to discuss about the future of the consumption tax hike. Ozawa is still not willing to move and probably the party has to be split, but it could also be the case that Ozawa will get a strong hand or even a position as a leader in case he gives in to Noda. In the long run this could lead to a return of Ozawa to the top of the DPJ, but in the end it could be the end of the party, because the people distrust Mr Ozawa. In any case the consumption tax will make its way, but as mentioned before, it can be only a start.
It seems that Ozawa-san is coming back into politics and could push the consumption tax back again. This would change the picture as the LDP could not bargain new elections against an approval of the consumption tax. As it looks now the breakthrough for a consumption tax hike will be delayed and also the first step towards a solution for the mounting debtwith problem. In fact fiscal debt for Japan (currently around 10% of GDP - Spain 8.9% in 2011) will be above all other Eurozone countries - even Greece - for the next years to come.
Currently the consumer tax initiative is not in the spot in Japan. It looks that markets are going for lows for the 10-year JGB rate as the situation in Greece seems to head for an exit from the Euro zone. Greece is playing with fire and it could happen that the country will loose it all. Most of the Greece investors have written off their investments so the spread effect would be relatively small in case Greece fails, but for Greece it would be disastrous. At least now the story will come to an end soon lastest in June. In any case the event will be singular and not killing the Euro.
In case Japan does not learn from the Greece lesson and start to focus and deliver on a debt reduction pace it could be the next candidate for a debt repayment failure.
Inflation in Japan is on the rise. For March it has reached a level of 0.6 per cent. This comes close to the current low level of 10-year JGB with less than 0.9 percent. It also means that real interest rates are now turning negative. Pressure for rising interest rates should mount. On the employment front there are stable signs as the rates are unchanged now for month, but the open jobs ratio to job seekers is steadily improving.
Looking at the Japanese debt levels (200 perc cent of current GDP - Greece is only at around 130 per cent) the future looks bleak with a primary deficit of around 10 per cent and a goal to bring in to zero in 2020. This nevertheless looks impossible as the consumption tax rate has to be hiked even more than the currently proposed 10 per cent. In case the consumption tax rate hike will not be approved by the Diet financial markets will start to have a close eye on Japan. It looks obvious at a certain point the Japanese Central Bank will be the only lender of last resort and at that moment the yen will depriciate significantly. Ironicaly it will also lead to a high inflation as it happened in Italy in the 80s of last century. In Italy inflation jumped to 21 per cent.
The last two weeks in Japanese markets where quiet. Rates came down a little bit and shares as well. Fundamental data is still improving like unemployment rate and a persistent move upwards of consumer prices. Japan is supportive for IMF funding. Consumption tax hike seems now more likely as a deal emerges between DPJ and LDP. LDP will support the hike as DPJ will dissolve the parliament. Elections would then be held at the end of 2012.
Opposition against nuclear power plants is quite strong within the Japanese poplulation. As it looks now there will be now restarting before July this year. Nevertheless power supply disruptions are also quite unlikely as business had anticipated this move and last years experience showed that the Japanese people are able to cope with limited supply of energy. Nevertheless it means a negative current account deficit for a while, which could also put more pressure on the funding of the Japanese debt. This means support for a weaker yen in the coming weeks.
Markets in Europe came back and so the Euro against the Yen. For the next two weeks not much move for currency exchange rates is visible. Interest rates are also coming back below 1%, but this could move quickly once the tax hike will get stalled. Overall the business conditions in Japan improved with unemployment rates coming down and new starts for housing increasing slightly. It looks that without new turmoil in Europe the Japanese economy will have a positive upside movement this year. It looks still quite realistic to see 1.20% in the next few month.
No decision yet on the tax rate hike. Probably next week will be quiet as the fiscal year ends and nobody takes big positions. The data set still looks bullish for the Nikkei and JGB rates. In case the tax hike will not happen a jump in interest rate could happen up to 1.20%. With the world highest debt ration of 220% and a high interest rate Japan would face difficult times ahead. As it will take a long time to reduce the debt interest rate payments will weigh heavy on the economy and on the tax payer in the future or the yen has to depreciate sharply.
For the longer horizon some positive signs appear as Japan is willing to enter into mor Free Trade Agreements.
Now the expected market data set seems to be realized. Nikkei is above the 10.000 yen level and with the rise to this level interest rates for the 10-year JGB have also risen to 1.05%. In addition to that the EUR/JPY exchange rate is almost at 110 yen per 1 euro. It seems also that abroad the sensitivity for Japanese debt problem gets more pronounced. Retail investors seem to have started trading on the Mini-JGB future.
Only two weeks left for the final call on the sales tax hike and the start of a new fiscal year. In case the government has to call a snap election Japanese debts will be in the global spot of 'government debt'. It wil be interesting to see the reactions in the markets. As it looks now the yen will continue to be weaker. For rates there could be a jump at a certain point. A level of 1.20% for the 10-year JGB could be realistic especially with an inflation rate now back in the positive territory.
One year after the big earthquake Japan has found its way back to normal, but still the rebuilding of the cities is slowed by the bureaucrats not be able to act quickly and flexible. As it looks now the main effect on ecomic figures are higher prices, because of energy to be bought from abroad like LNG gas. Utility rates will go up in July for private consumers by ten per cent and a lower yen will contribute to a higher inflation rate. The central bank could slow quantitative easening and slowly rates could move above 1%.
I realized the AUD appreciated significantly against the Japanese yen, which is a sign that private money is flowing into AUD denominated deposits. Rates for AUD even for short term like one year are above 2%.
An interesting development is that even quietly but persistent the Japanese people do reject the use of nuclear power after they have realized the dramatic consequences of its usage. It looks to me that the bureaucrats and politicians will not be able to turn the tide again. Japan will therefore closely looking to the German experiment of the so called 'Energiewende'.
Before fiscal year end Nikkei could move above 10.000, but somehow limited as banks probably will keep selling off above this treshhold. In April with a new positioning a further jump in Japanese equity markets seems to me realistic, if there is no crash in Europe or sudden strike against Iran.
This week was quite calm after Greece had made its offer to its creditors. Japan was not touched very much as Samurai bonds were excepted from the haircut. Besides that Japanese insurance and banks had no exposure to Greece. With the goodwill of not cutting the bondvalue for Japanese investors the Greece or Eurozone made a wise decision to keep the investment channel open.
For reform progress and TPP talks no new update this week. Probably a week before the anniversary of the Tohoku earthquake markets in Japan kept quiet. In addition to this now the fiscal year end comes soon so not much of a new positioning of the professional investors.
With employment rates not really improving, but at least an improved job offer to job seeking rate the tendency is more shifted to a positive economic development this yeart. A stronger USD could help with a rate above 81 per yen.
Euro and USD are moving hand in hand upwards and this also pushes the Topix/Nikkei higher. There is a flow out of Japanese bonds as a safe haven and this means money moves into Euro and USD. It helps the stock exchange as export oriented companies get a boost, because of assumed higher earnings and profits in the end. As I wrote once in case Nikkei is at 10,000 the interest rates for 10 year JGB should be at 1.20%. This is a historical correlation, but this time it could be a delayed one.
Interesting question is where will the fx move stop. Looking at patterns in the past this can take a long time. Most likely in case no bad news comes from Europe the sky is the limit. Keeping in mind that before 2008 the exchange rate stood at 168 for the Euro. Looking back on the chart 120 looks like a testing ceiling.
For the interest rates the consumption tax hike is the lackmus test for the government and the willingness to tackle the debt challenge. Prime minister Noda tries to get Ozawa-san on his side. In case he succeeds this will pave the way for the hike. In case he fails the project is almost dead. New elections would be the logical next step. Then the Japanese people could decide their fate about this important topic. Probably in the second half of 2012 this could happen. In case the answer is 'NO' to the consumption tax hike the interest rates will start moving upward.
Now the Greece debt restructuring is taking place. Today the approval was given and on Wednesday the offer for the voluntarily restructuring - means debt forgiveness by the creditors for the debtor - will be sent out. Therefore no default at least this year for Greece and some more time to achieve the ambitious goals until 2020. It is clear that there will be more adjustments down the road, but for the time being things will not explode.
This means that markets are somehow happy and return their assets to more risky assets as there is not much return on the so called save haven assets like the German bund.
Japan is showing exactly this pattern. Money goes to equity and also seems to move back from Japan or but less likely at least in bigger size is starting to move outside Japan to earn higher yields.
Next week will be the final week for Greece. As it looks now things move in the right direction. Therefore foreign exchange rates will see a weakening yen. Only in case the euro blows up the drastic opposite will be the case. It is a 90 to 10 chance for a positive scenario. After that week the direction of the exchange rate movements will be decided and will stay in this momentum for a while. In case of a positive outcome this would also entice the Japanese stock market as earning expectations would grow for export oriented companies.
What does this mean for the JGB rates. Clearly interest would diverge a little bit, but as the banks and insurance companies will be rewarded for holding government bonds by Basel III and Solvency II there will be not much of an alternative for those big players. This means that the levels will only slowly move above the 1% rate. Pressure would only rise in case Mr Noda will not be able to pass the consumption tax increase by June. In case this happens the interest rates and the exchange rates could gain momentum towards 1.20% and 80 for the dollar or 110 for the euro.
For the TPP it looks quite favorable for Japan that the other countries will be positive about a Japanese participation. Even the rice topic could loose its NO-GO as Japanese eateries now already start to use Australian rice.
TPP seems to be in reach now for Japan. With concessions on the American sides for mini-vehicles it looks that the US is interested to get the Japanese on board. Also the agreement on the move of the base made progress.
With the Greece debt restructuring coming on around the final curve the world economy could move to a growth scenario this year as the US market data also looked positive. Taking into account that the rebuilding efforts in Tohoku now get into full gear Japan could see with a weaker yen at least 6 month of growth. The job market also improved and will be even stronger, but definetly with a shift away from production as more and more of the jobs in the electronic sectors for TV will be lost.
The consumption tax hike sees strong opposition as Ozawa-san takes still an opposite view and the popular mayor of Osaka is not positive towards tax increases.
As expected the progress for the Greece debt solution put the Euro/Yen to a turnaround. Now it is back again above the 100 level. Shortly the 10 year JGB made the same turnaround to above 1%, but was taken down by the announcement from the Fed to keep interest rates low for the next 3 years.
Progress for the sales tax hike seems to be slow and with a focus in the media on the trading deficit, which became negative for the first time a sense of urgency could come into play for Japanese politicians.
Interest in other parts of the world for Japanese capital markets is low especially with the collusive and not transparent business culture (e.g. the Olympus case is only the tip of the iceberg seen standing out of the water).
China is moving ahead to open up their capital markets with the designated offshore center for foreign exchange. Equity markets are also more liquid nowadays even in mainland China. Main big hurdle is the interest market as Dim Sum bonds are still very few, but this could change over time. Markets for government bonds are liquid and available up to 10 years.
In case the Greece private debt relief will be successful next week the euro should move up further to 103 or even higher.
Turn around in Europe debt crisis could turn around the exchange rates yen versus euro. Now with a solution for the debt of the Greece government in sight the risk premium or fear to invest in European asset could vanish. In case no further bad surprise pops up in the next months to come the yen will weaken towards the euro.
Also for the JGB interest rate level a return above the 1% level seems now to be quite realistic.
The struggle for raising the consumption tax will make it more clear that Japan has not less problems than the rest of the world, but even more miles to go to realize a sustainalble economic structure.
2012 will be the year of the consumption tax hike. It is still not clear if this will be successfull, but in case not the debt issue will become very severe for Japan. Mr Noda could achieve the tax hike for the funding of the reconstruction bonds even with a long tenor, but in the end he was able to succeed. As this is a good sign it is most likely that it will also work out for the consumption tax hike - probably with a face saving "checking of economic condition" in 2014.
What does this mean for the Japanese debt challenge?
The consumption tax hike is better than nothing, but not enough to cover the payouts for the social expensense for the aging society. It will fall short and leave a gap of around 6%. This will lead to an even higher debt ratio. In 2012 we already have a budget for Japan financed by issuing bonds and this is an incredible 50% of the whole budget. Tax revenues are declining every year and as there will be an increase in income tax for reconstruction bond there is no room to raise those taxes a second time. The only way out is to increase growth. Therefore deregulation should be back on the agenda. Small, but only picked deregulation is seen with airport maintenance privatized or a push to deregulate the energy sector. It is obvious that this is not enough.
One of the view positive signs is the participation in the Transatlantic Partnership Program to open the Japanese agricultural market and probably increasing the pressure to become more efficient in the domestic market. High yen rates could lead to a massive influx of foreign goods especially in the food sector as Japanese 'safety' bonus got lost with the Fukushima accident. Even it looks inevitable this process will take time.
Looking ahead 5 years from now the debt ration will stand at 250% and without current accounts to be positive Japan will face a Greece alike situation. At that moment the government will take a strong grip on its citizens and their wealth. A strong tax control regime will be introduced and it is certain that a hefty outflow of capital will take place.
Now the new prime minister has taken the helm - Mr Noda. It looks like a wise decision as Mr Noda clearly understands and advocates tax hikes to finance the reconstruction efforts. This means hopefully that the 10 trillion yen needed over the next five years will be adequately funded. In addition to that Mr Noda also wants to double value added tax to 10% to finance the burden of social welfare costs especially for the elderly people. All his initiatives and ideas hint in the right direction. In the long run it seem Mr Noda's choice will be seen as wise, but currently nothing has been achieved yet.
Short term is still dominated by the US crisis and the inability of Greece to get things in order. Therefore JPY will be still the safe haven currency and rates will not go up significantly - at least not above 1.10% in the next one or two month. Looking on the fundamentals the Japanese economy is doing better and better. Energy savings was successful - even more than expected and productions for all parts of the industry are back to precrisis levels. It is to be expected that until the end of the year business will be quite stable. Equity prices will see an upward trend back to the 10.000 level in the next 6 to 9 month.
Kan - the current Prime Minister is leaving soon. So it is time to summarize his achievements. As being in this position during a national crisis not seen after the Second World War he was able to stand (which is already an achievement in Japan on its own) and to put the country through the crisis. He also achieved his milestone he had set, before he acknowledged to quit.
What are his milestones:
1. People have houses who lost those during the earthquake. This goal was achieved as all people who want can live now in a house provided by the government or found a place in another prefecture.
2. Budget for reconstruction is approved. The missing part is that he could not achieve to have it bundled with a tax hike.
3. Move to renewable energy - away from nuclear power. Here he achieved a big success for his country when he shut down
the nuclear power plant only 140 km west of Tokyo. He also was able to have a law passed where feed-in tariffs will
make sure that solar and wind power get a chance to be part of the energy supply in the future in Japan.
Those achievement show that he was a very efficient and decisive leader. More than even Koizumi who was more popular, but could not change the course (like the postal reform) like Kan.
After Kan a period of uncertainty in the leadership will come back and it is not a good sign that the drunkyard Ozawa is back in the candidate making game again. This kind of power game and the new PM will not tackle the debt problem. This topic will be put even more down on the agenda. Also all efforts for reforms are stucked. It is already obvious that after the earthquake many specialists especially in the finance industry have left Japan. Hongkong and Singapore are the winner of this crisis, but the worst thing is that in Japan it seems the leading people have not realized what happened.
What does it mean for the JGB yields? In the short rund JGB's will be the safe haven. So short term money is flowing in and lowering the rates even more and keep the 10-years rate down as a trigger on effect. Nevertheless that can switch quickly. Means money flows out and a backbounce will happen. As nobody nows how long the European crisis will have this high perception it can be some weeks or month to go, but as soon as in Europe things get more sorted out Europe and the money will go back there. For the US it could take longer, but a normalizing path will be the course of the future and then Japans problem will emerge more concise.
Forecast for the next 4 weeks: 10-year JGB will stay below 1.10%
Last week has seen a turbulence in the global capital markets. It seems that not a real reason was driving the panic. Therefore for next week markets should calm down and the Nikkei should rebound. Especially in Japan there were mainly positive news and only a little bit more weak dollar should not have such a big impact on the Nikkei. For rates it seems that the safe haven brought those below 1.10%. There are first news in the market that the car manufacturing companies have problems to get contract workers for the picking up production levels. Inflation also stays above zero.
Last week the news about the deteriorating debt situation in Europe and the US drove the fx rate for the yen down. Parallel to this the 10 year JGB yield fall below the 1.10% water mark. Next week could be a turning point in case the US gets its acts together. The economic data for Japan released last week does not look that bad with a strong production increase, a positve figure for inflation and only 0.10% higher unemployment rate. Main important numbers are now positive for the last 3 month. Looking at the sentiment in the street there is also a clear improvement sensible. Japanese office workers go out again at night. To book a beergarden place is getting impossible at favorite spots. Besides that summer heat is not breaking new limits and the progress to control the nuclear power plant is making progress according to plan.
Tokyo AIM the new segment for alternative investments at the Tokyo Stock exchange has seen its first listing. This has attracted important players from domestic and foreign banks as well. After more than 2 years of marketing a small success for the Tokyo capital market place.
News (update 17.07.2011)
Last week saw a crisis momentum on the European bonds. Therefore the JGB yields for 10 year bonds went down a little bit. As soon as the Euro debt crisis gets a clearer focus on a more long term solution there is a pressure for an increase of the yields. Probably not much will happen during the summer heat and the less active markets, but as the economy is improving steadily in Japan with unemployment rates down and inflation now already the second month in a positive territory n September there could be a 1.20% or higher.
The last weeks I was in Hongkong and Singapore and it is amazingly positive business sentiment in the area. The price level in both territories for housing, but also for food are now almost higher than in Tokyo. Also salaries in the finance industry are now on average higher than in Japan. It looks that in Asisa the economies are in a booming mode, but with the brakes put on by the central banks with rising interest rates could show its effect. China definetly is building up a bad loan book with the still mostly government controlled banks. Nevertheless the consumer sentiment as I could see in Hongkong and Singapore is very positive at the moment. This will drag also Japan in a positive territory as soon as the Fukushima nuclear crisis and effects will be better controlled and contained.
To finance the reconstruction bond Japan will probably also issue new bonds. An increase of debt will lead to a higher level of interest rates in the 4th quarter of 2011 as it will become clear that the commited ceilng will be exceeded.
News (update 22.06.2011)
Just before the summer heat and the 'energy savings month' the progress regarding the crisis is as follows. Earthquake and tsunamis related challenges are taken and as it looks now everybody will have an appartment or house in August. The deadline is the traditional 'Obon-week', which has a special meaning in Japan as people think about the death. Having achieved this for so many people is a big success and to be admired.
Unfortunately the financing of the cleanup is not so much progressing. The expense side is clear and well structured with the typical bureaucrat approach to control and not let the local communties decide or even mor progressive take private initiative on board. This is a missed chance, but probably not easy to be changed in such a short time frame.
The disappointing part is the Fukushima crisis. Even so a plan is set up and worked through. The government and the bureaucrats missed the point to set up a surveilance system for radioactivity. This is a shame and a justifed case for mistrust against the authorities. The government should have assigned fixed measurement location for radiation and also a clear system for measuring food with an easy and accessible side to follow, but also with a strong enforcement to stop selling food which is radiated. It is scary that tea from Shizuoka prefrecture which is more than 300 km away from Fukushima had a higher than acceptable radiation level and this tea was even exported to France, where the high radiation level was discovered. As Tokyo is in between Fukushima and Shizuoka noboday knows what other food is sold and eaten in Tokyo area with a population of more than 30mn people.
For the finance market a relaxed atmosphere is now emerging as the Greek crisis seems to be handled. Therefore I expect a stronger Euro and some small increase of the 10 year JGB rates (like 3bp up to 1.15 or 1.16).
News (update 14.06.2011)
BOJ has a more positive view on the economy. The big challenge will be the reconstruction budget. For this purpose special tax surcharges will be raised to redeem the bonds issued by the government. The opposition party is still opposed to tax raising. It will be the ultimate test for Japan, if it will be able to raise taxes.
Now with Italy also rejecting nuclear power there is a sense of 'no' to nuclear power from the normal people. It is possible that in the next 12 month more and more nuclear power plants will be laid idle and it will remain uncertain, if local people who have the decision power for restarting a nuclear power plant will approve.
News (update 10.06.2011)
This week had no surprises. Therefore the JGB rates stayed more or less flat, but in the market itself the liquidity returns. The companies hit by the earthquake are recovering and the production plans return to normal. Sometimes even faster than planned. In Tokyo itself the mood is steadily improving, but still cautious. The main next challenge will be the 3 month 'hot summer' period. So far the preparation for this time have been finished and tests have shown that all the methodes to reduce energy consumption are feasible. As it looks for now the Fukushima problem especially how to deal with the contaminated water and the ongoing leaking will be overshading the markets. TEPCO and the need for compensation will keep dragging on as long as it is not clear when the situation in Fukushima is fully under control.
News (update 07.06.2011)
Kan did not loose the no-confidence vote and that gives him some strength to push through some of the needed reforms likte the separation of supervision on nuclear power or the reconstruction bills. Actually for the first time a prime minister could stay in his post even with so many people trying to topple him down. This is a positve sign for Japan as it means that a stronger leadership of the country could evolve.
Nevertheless the current situation with hugh needs for financing the crisis especially the nuclear crisis compensation there will be only one way for Japan - higher taxes. Perhaps not a bad thing in itself as noboday can no deny the need to increase the consumption desk and doubling this tax to 10% latest in 2015 will definetly happen. The problem is that this will not be enough. Therefore the debt load will keep increasing and the question is where the tilting point is. Currently the interest rate spreads against the major currencies are not that high and not really available for the customer, but this can change as more e-banking will definitely lead to better rates for the normal savers in Japan. Second threat is that the people could bring the money outside of Japan, which is not so much the case at the moment, but will increase with an increase of tax rates on savings. Once the home bias for Japan gets lost movements will be erratic.
News (update 31.05.2011)
Normalizing markets and a glimpse of hope for Greece will drive the Japanese JGB market to higher rates as equity prices move up. The move towards foreign currency is slowly coming back as the choice of currency for the retail clients over time increase. Should there be an increase in the ECB rate in the next weeks the JGB rates will definetly move above the 1.20% treshold level. Also instability in the political landscape in Japan especially over raising taxes will add to pressure for higher JGB yields besides the possible change of the rating outlook to 'negative' for Japan. In case the currency depreciates quickly an inflation hype could be seen of around 1% or higher this year.
News (update 22.05.2011)
CDS spreads are now flattening out with a slow tendency to come down. Somehow the curve represents the climate on the Japanese market and also reflects somehow the reality with slowly downtrending radioactivity levels. Compared to before the earthquake there is a clear risk premium in the credit market for the 'unknown' of the future development. CDS market in Japan will become more and more prominent with the Dodd Frank act in the US forcing settlement of CDS instruments on stock exchanges. The designated stock exchange in Japan is the TSE. Therefore the CDS index with its constituents will give the investor a good starting point to look into fundamentals of Japanese companies. The list of 50 is a relatively good mirror for the Japanese economy and investment decision could be done by looking into the balance sheets and business models of those stocks. Please have a look on the chapters provided to this topic.
News (update 19.05.2011)
An interestin move from the traditional Tokyo Stock Exchange. Its 'experimental' arm called Tokyo AIM (a joint venture with the LSE) started today an initiative to set up a 'Special Financial Zone' in Okinawa. The key advantage of this zone would be a tax free investment in venture equities with a holding period of at least 2 year. An agreement was reached with the local authorities in Okinawa, but the tax regime has to be approved by the central government. It will be interesting to see if this initiative takes off. An update will be done as new news come out. Refer to: http://www.tokyo-aim.com/english/files/pressreleases/110519_okinawa_eng.pdf
Interest rates for the 10-year JGB will see an upward move in the next days as the environment gets more friendly in Japan.
News (update 15.05.2011)
Progress in Fukushima has some setbacks, but seems to move in the right direction. The impact on the capital markets is still felt. Liquidity in the interest rate sphere is still limited and trades can easily move prices in the OTC markets. Once again the market is still very much driven by a few domestic big players with some foreign investment houses adding a little bit to liquitidy and market making.
It will be interesting to see the handling of TEPCO bonds. Even so the government will try to get some burden sharing from bondholders the legal position will not be very strong. As interantinal inverstors would also be affected by this kind of socialising the TEPCO failure will limit the effect of the government initiative. Nevertheless it could effect the bond market as investors will loose trust in clear rules about dealing with debt. It would also have a secondary effect on the Japanese CDS market as clear triggering rules would be diluted.
JGB rates came down as it seems that the insurance companies have positioned themself by staying on the JGB side and not reaching out too far to the Euro or USD market. The Greece crisis is still a big hinderance to support such a change of investments. It will be interesting to see if the government will issue more bonds than originally planned. For municipalities this is already the case, but with less than 1 trn yen additional volume it has not a big impact. Main question remains when the government will raise taxes and how much.
News (update 21.01.2011)
JGB yields for th 10-year term are now above the 1.20% level. New issuance of JGB bonds will keep a steady supply and with no safe heaven momentum it should stay there for a while. US and Euro bonds (here to read as Bunds) are moving above 3% and this will keep also the drive upward for the JGBs. The upside is a 80% to 20% chance. Until end of February 1.30% should be in sight.
News (update 11.12.2010)
This week the rates shoot up to almost 1.30% for the 10-year JGB. Now that the Nikkei is above 10,000 again the rates are following. There is also some interesting news on the Japanese bond markt. The "Growth Initiative" from the Japanese government actually includes a revival of the Japanese corporate bond market. There has not been a real vibrant corporate bond market yet, but already in the 1st quarter of 2011 the Tokyio AIM exchange will start trading on corporate bonds. There will be more information on this initiative on this webside.
Looking ahead for the next week it is clear that there will be not much move any more before year end. Therefore the expectation is that the rates will stay in the range of 1.15% to 1.30%. In case there is no crisis in Euro zone the rest of the year will be calm and then for the new year a move back to the range above 1.30% is most likely. Actually the growth in Japan are above 4% - even higher than in Germany.
News (update 30.08.2010)
This week Japan has probably seen its lows on the 10-year JGB yields for a long time. As it could be ssen there is a bottoming out for the yield and the exchange rates as well (even so the BOJ did not intervene). An easening of money would anyway not help, because money is abundandly available in Japan. Good to be seen with the issuance of a 3-year bond by softbank for a 1% coupon! One year ago it was close to 5%. Next week will see a rise in the Nikkei.
News (update 08.08.2010)
This week was a kind of long time low for the 10 year JGB rate. This low level was last seen in 2003. Even during the crisis in the beginning of 2009 there was not such a low level for the 10 year JGB rate. The big question is will the low rates stay. Taking into consideration the interest rates reflect inflation plus productivity gains in the economy it would be possible to argue that the current deflation of perhaps 1% adds to a 2% real interest rate. That would be then be in line with a real productivity growth of 2%.
Does the 1% reflect a market price for lending money?
This is not the case. Consumers still pay on average more than 10% and on credit cards 18%. The only interest rate reflecting the low level are housing loans. Here teh consumer can get a 2% loan and some of the rates depend on the 10year JGB rate. Do corporates borrow on market rates. Companies able to issue bonds are able to tap the market levels. Most of those companies are somehow related to the public sector like utility companies or railway operators. Besides that only big name like Toyota and Panasonic have a chance to borrow at market rates besides the three megabanks. Normal companies have to rely on their house bank, which gives credit most against cash or backed by property. A real cash flow lending is rare, sometimes leasing is possible.
Conclusion: The low 10 year JGB rate affects mainly the government which can lend cheap and the insurance company which are really challenged to achieve suffient returns for their customers. Nevertheless this is not really a problem as long as the supervisor allows the insurance companies to adjust their guaranteed interest rate for payout to the customers. The only difficulty stays for the normal depositor as it stays for the normal borrower, because the first one receives close to nothing for its money and the latter one pays regardless of market rates something around 18%. Here is a big gap within the domestic market already. Some peer-to-peer lending companies are now active in Japan and try to close this gap, but as in other countries this will be a slow process. More interesting is the possibility for private investors to go outside the domestic sphere. This seems to be a continous process independend of crisis talks wherever. Having some kind of guarantees on those investments would nevertheless be very appreciated by private investors (like with Vairable Annuities). The big challenge is the low interest rates will make it difficult to finance the option to protect against losses.
News (update 12.07.2010)
After the election a defeat of the DPJ will lead to a delay of the hike in consumption tax. So the earliest date will be somewhere in 2012. This will increase the upward pressure on the Japanese bond yield in the long run. Currently as of today rates came back, but this is mainly due to still some uncertainty related to refinancing issues related to Europe and the banking stress test there. Once the stress test does not show big impacts the appetite for European bonds will come back and an appreciation of the Euro against the Yen can be seen. This also means that the investment in Euro bonds will increase and it will trigger some upward pressure on the JGB 10 year yield, which is currently relatively low when the Nikkei level is taken as an indicator. Once the Nikkei is back at 10,000 the JGB yield will be back over 1.20%.
News (update 10.07.2010)
In tomorrows upper house election the fate of the JGB 10 year rate will be also decided. In case the ruling DPJ gets more than 54 seats the upward tick for the JGB yield will be modest. In case they fell short on those seats then definetly a jump in the yields from Fridays 1.155 to 1.25 could be possible (especially in case the the Nikkei moves upward as well in the next weeks). Is it llikely that the DPJ can achieve the goal of 54 seats. This is related to the question how supportive the Japanese people are to the proposed consumption tax hike. As most of the big parties have endorsed this hike and the press explained why it would be necessary and also talking with the Japanese people my impression is that the people have some understanding that there is a need to hike the rate and with Prime Minister Kan it is definetly the right guy to be credible that the money is not wasted (that is what the people believe). Therefore a victore of DPJ is possible and a further modest incrrease of the JGB yield in the next week will happen. A sudden jump is not much likely, but because of the easening of the crisis feeling the big investors in Japan will have a look at domestic equity and foreign equity and foreign bond assets again (especially with rising interest rates outside Japan).
News (update 27.06.2010)
Nobody had expected that sharp drop of the 10 year JGB yield. It seems there is such a demand of safe investments and since even European government bonds are seen as something dangerous now in Japan the way out is quite limited. Nevertheless this is also a question of perception. With the big distance to Europe in kilometers and culture the Japanese are more risk averse and focused on one news source only. This means that all the decision makers get the same opinion and anyway are more follower to the other big inverstors. There is so much liquidity in the Japanese market which can go nowhere, but I assume sooner or later the exchange rates will start quickly turning the table. Nevertheless for European exporters Japan is now paradise. High profit margins, low office rent and also cheap but reliabe labor and sales force people. I expect a big increase of sales of European goods in Japan in the next 12 month (not only Belgian beer).
How long will the low interest situation last. I assume this will change once the European crisis perception has calmed down. The third quarter can only show an uptick trend. Even in the aftermath of Lehman the JGB yield came only for a short time of period below 1.10%.
News (update 20.06.2010)
Now it is official the current leading party will propose a hike of sales tax to 10%. This is typical Japan. Out of sudden the sales tax will be doubled (nothing happened in the last 10 years - even with the lowest tax rates in the world!). The opposition party had proposed the 10% before. So there is nobody who could be opposed to it and nobody can loose the election, because the people have no choice. The only point now open is the timing and what it will be used for. Definetly a big proportion will be used for reducing the debt, but it is also necessary to support on the medical and care side. A big challenge will be the generation around 50, because those people will have less favorable company pension schemes. In case the exchange rates reverse from the current strong Japanese yen the people will quickly see an inflation and stagnation type of scencario. Just to remind that Japan produces less the half of its groceries and a weakended yen plus a 5 percent increase of tax will make the life for older people with low retiement benefits quite difficult.
Increasing tax rates is not helping on the productivity side. There not much initiative is seen. Probably the tourist industry can be a new source of income for Japan especially for the rural areas as the Chinese people will get no easily tourist visas. This is not to be underestimated as Japan has a good reputation for high quality goods and good customer service. The Chinese share of tourists can easily reach 20% or more of the overall tourist numbers. Besides that the Japanese writing is easy to catch for Chinese people and that makes them feel quite comfortable in Japan.
JGB 10-year rates staid low as there was still some caution on the buy side for equities, but also that there is too much liquidity in the Japanese market. The money has to go somewhere. Currently Europe is blocked, but with improving growth numbers that can easily change.
News (update 13.06.2010)
Japan has a new Prime Minister: Mr Kan is a much stronger leader than the previous one. It can be foreseen that he will drive the policy much stronger and also that he will work with earnest on the financial debt problem in Japan. Now it is also clear that the consumption tax will be raised within the next 2 or 3 years, but latest in 2013. Corporate taxes will only go down in case the economy picks up further.
For the JGB market it means that the amount of new bonds issued will be kept constant. This would mean in a normal logic that the rates will stay stable or go down, but there could be a point that the markets start asking for a proper credit marging. This will only happen in case the domestic money goes abroad or the money from outside will increase. The latter will become in 2015 and later, because the disinvestments of the ageing Japanese population will start to level off. So the window of opportunity to manage and structurally to reduce the country debt is in the next 5 years.
First steps are already taken and the promise of paying 26,000 yen as child allowance is taken back. At least the government pays now 13,000 yen. The highway toll reduction to zero will probably also not happen. Social security will be the big driver for expenses. Here the government has no idea how to tackle this. Definetly a reform of the pension system has to happen, but the discussion has not really started yet.
News (update 30.05.2010)
The turbulence on the markets calmed down a little bit, but as it can be still seen in 10-year JGB rate now at 1.25% the domestic investors are still hesitant to shift back from the safe heaven. Nevertheless it is also not the meltdown scenario we had in the beginning of 2009 when the rates came close to 1 percent. Therefore I expect with the normalization of the market (and Spain is not Greece) that we will see the JGB level back above 1.30%.
It will be interesting if we will see a breakup of the current government in Japan, but it seems unlikely that this will happen. Actually the Futenma decision made things clear and now the government can focus more on the economic state.
News (update 23.05.2010)
When I read my statement from April I look wrong in a certain sense, but for the Japanese economy the fundamentals are actually improving. Nevertheless the JGB 10-year rate is a direct reflection to Nikkei market developments and there we saw a sharp drop induced mainly by foreign investors who sold on the strong yen and the fear of a Greece induced financial turmoil. With normalizing markets and the German parliament having approved the rescue umbrella I expect a calm down in the market, a stronger Euro and also a rebound of the Nikkei. That also means that the JGB rates for 10 years will go up in the next weeks. Interesting enough the 20-year rates reached a high point and that shows that the trust in debt management in Japan itself is also not that high.
Mr Kan, the Finance Minister has also realized that it is better to address the debt problem sooner than later and therefore he initiated the forced discussion on the value added tax which is compared to other OECD countries relatively low with 5%. Nevertheless the political risk of a hike is not small, but with a long and ongoing preparation of the Japanese people it could move to a 10% level after the Lower House election in 2014. Hopefully Japan has the time for this preparation period.