Tag: Japan

Japan Hangs On As Inflation Rises…

Japan’s core consumer inflation rose more than expected to a near eight-year peak in August, data showed on Tuesday, as heightened raw commodity costs and a depreciating yen continued to batter the economy with rising price pressures.

The national core consumer price index, which excludes the price of fresh food but includes energy, rose 2.8% in August, compared to a 2.4% rise in July, data from the Statistics Bureau showed. The figure also came above estimates for growth of 2.7%.

Overall nationwide CPI rose 3% in August, more than July’s reading of 2.6%, and also at an eight-year high. The reading marks the fifth straight month that inflation has trended above the Bank of Japan’s (BoJ) 2% annual target rate and reflects continued headwinds for the world’s third-largest economy.

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UBS Does Major Deal With Japanese Banking Giant

The Swiss bank has revealed plans to launch a comprehensive strategic wealth management partnership in Japan, via InvestorDaily.

UBS and Sumitomo Mitsui Trust Holdings Inc. (SuMi Trust Holdings) have agreed to establish a joint venture, 51 percent owned by UBS, that will offer products, investment advice and services beyond what either UBS Global Wealth Management or SuMi Trust Holdings is currently able to deliver on its own.

The JV will open UBS’s current wealth management customer base to a full range of Japanese real estate and trust services, while SuMi Trust Holdings’ clients – one of the largest pools of high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals in Japan – will be able to access UBS’s wealth management services, including securities trading, research and advisory capabilities.

“No wealth management firm today provides this range of offerings to Japanese clients under a single roof. UBS expects the new joint venture to fill this gap by offering expanded products and services to clients from both franchises,” UBS said in a statement. 

“This is the Japanese market’s first-ever wealth management partnership developed between an international financial group and a Japanese trust bank. Subject to receiving all necessary regulatory approvals, the two companies plan to begin offering each other’s products and services to their respective current and future clients from the end of 2019. Also subject to approvals, these activities will ultimately be incorporated into a new co-branded joint venture company by early 2021.”

UBS Group CEO Sergio P. Ermotti said the Swiss banking giant has over 50 years of history in Japan.

“This landmark transaction with a top-level local partner will ideally complement our service and product offering to the benefit of clients,” he said. “The joint venture is a blueprint for how complementary partnerships can unlock value for clients as well as shareholders.”

Zenji Nakamura, UBS’s Japan country head, said the transaction is a boost for the group’s overall business in Japan, bringing reputational benefits to its investment banking and asset management units, which fall outside the alliance.

“It is a new milestone that sends a clear message of long-term commitment to the Japanese market.”

UBS will contribute all of its current wealth management business in Japan to the new company, while SuMi Trust Holdings will extend its trust banking expertise and refer relevant clients to the new joint venture.

Sumitomo Mitsui Trust Holdings is Japan’s largest trust banking group, with Sumitomo Mitsui Trust Bank Limited serving as its core business. It offers a range of services, including banking, real estate, asset and wealth advisory to individuals and corporate clients. As of end March 2018, it held 285 trillion yen in assets under custody – Japan’s largest such pool – and a significant portion of those assets come from HNW and UHNW clients. 

UBS boasts over US$2.4 trillion in assets under management. It operates from locations in Tokyo, Osaka and Nagoya.

The two companies have agreed not to disclose the financial details of the transaction.

Japanese Banks’ Voluntary Curb on Credit Card Loans

From Moody’s

Last Friday, the Nikkei reported that Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, Sumitomo Mitsui Banking Corporation, and Mizuho Bank, Ltd. (MHBK, the main banking units of Japan’s three megabank groups, Mitsubishi UFJ Financial Group, Inc., Sumitomo Mitsui Financial Group, Inc., and Mizuho Financial Group, Inc., introduced voluntary limits on consumer credit card loans at half or one-third of a borrower’s annual income. The banks’ self-imposed limits are credit negative because they will likely hamper growth in credit card lending, one of few highly profitable domestic businesses for the banking sector.

The restriction responds to growing criticism from lawyers and politicians that excessive credit card lending could lead to a repeat of Asia’s 1997 debt crisis. In Japan, banks’ unsecured lending, including card lending, is not subject to the country’s money lending business law, which was revised in 2010 to restrict consumer finance companies’ unsecured lending to one-third of each customer’s annual income.

Some regional banks in Japan, such as the unrated Akita Bank, Ltd., the 77 Bank, Ltd., and Hyakugo Bank, Ltd., have implemented similar limits on credit card loans, and more banks will likely follow to fend off public criticism. Last Thursday, Nobuyuki Hirano, chairman of the Japanese Bankers Association and president of BTMU’s parent group, MUFG, said at a press conference that while he does not see a need to legally limit banks’ credit card lending, each bank should try to prevent consumer clients from taking on excessive debt.

Banks have benefitted from the 2010 revision to the money lending business law, which led to the rapid growth in banks’ card loans and a sharp decrease in consumer finance companies’ unsecured loans. High margins make card lending an attractive revenue source for Japanese banks and especially domestically focused regional banks as low interest rates and weak credit demand weigh on their profitability. Interest rates on banks’ card loans are 2%-15%, significantly higher than an average loan yield of 1.1% for all Japanese banks in fiscal 2016, which ended in March 2017.

Credit card lending is riskier than secured lending, but because the size of each credit card loan is small, risks from the business are easily  manageable for banks. Also, default rates for banks’ credit card loans have been low.

Aging Japan Puts a Strain on the Financial System

From The IMFBlog.

Japan’s population is shrinking and getting older, posing challenges to the nation’s financial system. How Japan copes could guide other advanced economies in Asia and Europe that are grappling with the same trends but are at an earlier phase of similar demographic developments.

A declining and aging population weighs on growth and interest rates. This puts pressure on profits of banks and insurance companies. Judging how these shifts affect financial firms was part of the IMF’s Financial Sector Assessment Program for Japan, the world’s third-largest economy. The program is a comprehensive and in-depth assessment of a country’s financial sector. It analyzes the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises.

An aging population is also likely to reduce the role of banks in the financial system. With increasing longevity, the demand for longer-term securities rises (since people save more for longer retirements). This results in a flatter yield curve–and banks typically make money by borrowing at low short-term rates and lending at higher longer-term ones. In line with this intuition, analyses of data from 34 countries around the world confirm that the size of the banking sector relative to nonbank financial intermediaries is negatively associated with aging. About 40 percent of the increase in the size of market finance in Japan since 1990 can be explained by aging.

Smaller banks that rely on lending to local markets are particularly vulnerable, since they face less demand from households and firms. Older households still need banking services for transaction purposes, which means that lending will likely fall much faster than deposits. As a result, over the next two decades some regional banks could see their loan-to-deposit ratios fall by 40 percentage points.

In response to profitability problems, banks are also engaging in riskier forms of lending and investment as they search for yield. They have been making more real estate loans, helping to drive up housing prices in some areas despite overall population shrinkage. Condominium prices appear to be moderately overvalued in Tokyo, Osaka, and several outer regions. Banks have also been investing more in securities in countries where economic growth is faster than Japan’s.

Life insurance companies are also facing increasing pressure. They have been putting more money into riskier overseas markets to get the yield needed to meet interest guarantees.

The problem is that many banks and insurers still need to develop the capacity to manage the risks associated with these new types of investments.

Consequently, stress tests suggest that market risks are increasing and that there are some vulnerabilities among regional and shinkin (cooperative) banks and life insurers. Although bank liquidity is generally ample, some of the regional banks are exposed to risks in foreign-currency funding.

The Bank of Japan has had to adapt its monetary policy to low “natural” rates in the economy and sought to stimulate demand by monetary easing. In this context, it had to resort to large-scale asset purchases. These purchases in turn, have put a strain on markets. The level of liquidity—how easily and quickly investors can buy and sell securities—in Japanese government bond markets seems to have been adversely affected by the central bank’s purchases. Moreover, the resilience of government bond market liquidity also seems to have declined as the share of Bank of Japan holdings has increased.

Japan’s financial system has so far remained stable. But there are steps policymakers can take to ensure that it remains sound as society ages and slow growth continues:

  • Supervisors need to modernize supervision to keep pace with the more sophisticated activities emerging across banks, insurers, and securities firms. Tailoring capital requirements to individual bank risk profiles and implementing a framework that appropriately recognizes the financial conditions of insurers would be key.
  • Corporate governance needs to be strengthened across the banking and insurance sectors to manage new risk taking.
  • The macroprudential framework could be further strengthened to better identify and address any buildup of systemic risks.
  • Some (in particular regional) banks will feel increased pressure, so they should be encouraged to take timely action in response to viability concerns.
  • Regional banks should be encouraged to consider augmenting fee-based income, reducing costs, and consolidating.
  • Sustaining productivity growth is a particular challenge as the population ages, and new, innovative firms can play an important role. Constraints to financial access for small and medium enterprises and start-ups should be eased by further promoting risk-based lending. Alternative forms of financing for these young businesses should be further encouraged.

These long-term challenges for business models of many banks, combined with the existence of large systemic institutions, highlight the need for a strong crisis management and resolution framework.

Japan and Australia cooperate on fintech

The Japan Financial Services Agency (‘JFSA’) and Australian Securities and Investments Commission (‘ASIC’) today announced the completion of a framework for co-operation to promote innovation in financial services in Japan and Australia.

This Co-operation Framework recognises the global nature of innovation in financial services. In this environment, this Framework enables the JFSA and ASIC to share information and support the entry of innovative fintech businesses into each other’s markets.

This Framework will help open up an important market for Australian fintechs. The Japanese economy is the third largest in the world, with services – including financial services – accounting for about three quarters of GDP.

In recent years, the JFSA has been actively involved in encouraging fintech through a range of measures including the modification of the legal system to enable financial groups to invest in finance-related IT companies more easily and establishing a legal framework for virtual currency and Open API. This Framework will encourage Japanese fintech start-ups to engage with innovative financial businesses globally.

ASIC Commissioner John Price said, ‘Japan has been a world leader in technology for a long time. As we move into a new era of financial regulation, we look forward to sharing experiences and insights with our colleagues at the JFSA.’

Shunsuke Shirakawa, JFSA Vice Commissioner for International Affairs, said, ‘We are delighted to establish this Co-operation Framework with ASIC. ASIC is one of the leading Fintech regulators that actively promote fintech by taking progressive actions including setup of the Innovation Hub.

‘We believe that this Framework further strengthens our relationship and facilitates our co-operation in further developing our respective markets.’

The Co-operation Framework will enable the JFSA and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and the JFSA’s FinTech Support Desk.

It also provides a framework for information sharing between the two regulators. This will enable the JFSA and ASIC to keep abreast of regulatory and relevant economic or commercial developments in each other’s jurisdictions, and help to inform domestic regulatory approaches in the context of a rapidly changing global financial environment.

A formal ‘Exchange of Letters’ ceremony between Australian Ambassador to Japan, the Hon Richard Court AC and State Minister of Cabinet Office, Takao Ochi, took place in Tokyo today to seal the Framework.

This Co-operation Framework further underlines the strength and closeness of the broader Australia-Japan trade and investment relationship.

Background

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been made with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority, Ontario Securities Commission and Hong Kong’s Securities and Futures Commission. In addition, information-sharing agreements have been signed with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

Informally, ASIC has also met with numerous international fintech businesses referred to us by industry or trade bodies, including delegations from the United Kingdom and the United States.

Two to Tango—Inflation Management in Unusual Times

From The IMFBlog.

Monetary and fiscal policies interact in complex ways. Yet modern institutional arrangements typically feature a strict separation of responsibilities. For example, the central bank targets inflation and smooths business cycle fluctuations, while the fiscal authority agrees to respect its budget constraint and to support financial stability by maintaining the safe asset status of its debt. This gives governments the freedom to pursue a multiplicity of economic and social objectives (in IMF parlance, inclusive growth).

This separation of responsibilities typically works well, but can come at a cost as it limits the potential benefits that arise when fiscal and monetary policy work together. While in normal times the forgone benefits may be small, in more extreme situations the benefits of coordinated policy are much larger.

By looking at the case of low inflation in Japan, we illustrate—in particularly difficult circumstances—how vital it is for these policies to work together. Good coordination between monetary and fiscal policy is key and calls for policies that are:

  • comprehensive—exploiting the full range of synergies between monetary, fiscal, and appropriate structural policies; and
  • consistent—anchoring long-term expectations by demonstrating a clear commitment of monetary, fiscal and structural reform policies toward common objectives.

Japan’s low inflation

Japan is an obvious candidate for taking better advantage of the synergies between monetary and fiscal policies. Inflation is well below target after decades of depressed nominal GDP growth, despite the Bank of Japan’s efforts to push the boundaries of monetary policy innovation—including the introduction of yield curve control in September 2016.

However, a lack of consistency in fiscal policy has undermined the effectiveness of monetary policy. Fiscal plans have been caught between the short-term need to help monetary policy escape the low inflation target, and the very clear medium-term priority of reducing Japan’s large and unsustainable burden of public debt.

Setting objectives

 The government could build credibility by introducing a policy framework wherein policy actions are data-dependent—so as to promote the achievement of crucial policy objectives, such as inflation or price level targets. If the government feels compelled to tighten certain policies sooner, they should introduce temporary offsetting measures to continue to support progress toward reflation. The resulting higher nominal GDP growth would also have the added benefit of helping reduce the real burden of the debt.

Of course, such conditional policies potentially carry fiscal risks: if the requisite target is not met, then continued fiscal stimulus could imperil debt sustainability. A consistent and comprehensive approach therefore also requires a framework to manage public sector balance sheet risks that mitigates the financial stability risks from a potential loss of safe asset status for Japanese government bonds.

So, as well as being oriented toward key policy objectives, deficits must be offset by real future surpluses. To avoid the appearance of policy inconsistency, the government should tighten fiscal policy gradually, and consistently with the economic cycle. Such an approach should also include structural reforms that boost future surpluses, for example, measures that close wage gaps.

Credible policies

 We should also be clear that fiscal policy should be sustainable, taking as given that the central bank has designed monetary policy to achieve the inflation target. It may seem tempting to instead spend without the promise of (or even ruling out) future tax raises, in the hope that the price level rises to equate to the real values of debt and future surpluses. But this idea, which invokes the so-called Fiscal Theory of the Price Level, assumes that the safe asset status of government debt is guaranteed.

The risk of such a policy, which relies on the shaky assumption that Japanese consumers have very particular expectations of future policy, is that a bond market scare occurs and government bonds lose their safe asset status.  This would then relegate monetary policy’s role to that of guaranteeing fiscal solvency (by guaranteeing the promised nominal payments on government bonds), precluding its use in stabilizing inflation and anchoring inflation expectations. This would destroy policy credibility.

The debate on Japan’s consumption tax increase is a good example to illustrate the importance of consistency and credibility. The planned consumption tax increase has been postponed twice: once from 2015 to 2017, and again until 2019, in fear of a negative impact on growth. This policy reversal and the associated lack of a credible anchor has reduced the effectiveness of fiscal policy.

In our view, a pre-announced, gradual increase of Japan’s consumption tax rate, offset by temporary fiscal measures when necessary, remains a preferred option. The gradual increase should continue until the tax rate reaches a medium-term level that ensures fiscal sustainability. This approach will help raise inflation expectations and has high revenue potential given the relatively low level of revenue collected from the consumption tax in Japan, compared with VAT collections in other Organization for Economic Cooperation and Development countries. In the process, Japan should preserve its single rate, which makes its consumption tax system simple, and constitutes an important structural advantage.

Lessons learned

 The experience of low inflation in Japan has a clear message for the interaction between monetary and fiscal policy. And that message is in such extreme circumstances, macroeconomic policies will only be successful if they take full advantage of the synergies of different policies working together.

Contagion Concerns Slam Japanese Financials As Toshiba Crashes 50% In 3 Days

From Zero Hedge.

After two days of total carnage in Toshiba stocks, bonds, and credit risk, the bloodbath continues with the once-massive Japanese company is collapsing once again in early trading – now down 50% in 3 days. Following the semiconductor and nuclear business catastrophes, the company had nothing to add regarding today’s crash but more worryingly the massive loss of market cap is spreading contagiously to Japanese financials with Sumi down 4%, and MUFG down almost 3%.

As we noted yesterday, Tsunukawa said that “I apologize to shareholders, business partners and all stakeholders for the trouble we have caused,” after Toshiba said cost overruns at U.S. nuclear reactors it is building were likely to force a write-down of as much as several billion dollars, clouding its turnaround plan after the 2015 accounting scandal. Specifically, the company said it may have to book several billion dollars in charges related to a U.S. nuclear power plant construction company acquisition, rekindling “concerns about its accounting acumen.”

The problem is that the nuclear business, together with the semiconductors, has been positioned as one of key pillars underpinning Toshiba’s growth which has been trying to shift away from its consumer electronics core. Alas, the latest gaffe now means that much of Toshiba’s growth is gone, and the stock price reflect that overnight, when Toshiba’s stock plunged by 20%, the most permitted, before it was halted for trading.

The derisking is weighing heavily on USDJPY…

And now, as Bloomberg reports, Japanese financials are tumbling on cross-default, contagion concerns…

Sumitomo Mitsui Trust Bank has highest capital exposure to Toshiba, with loans equaling 5.5% of the bank’s equity, analyst Shinichiro Nakamura writes in report.

SMTB would also suffer greatest earnings hit, with a Toshiba impairment charge of 100b-190b yen shaving ~9.9% off bank’s current profit for fiscal year to March 31: SMBC Nikko ests.

If Toshiba impairment charge reaches over 400b yen, banks may conduct debt/equity swap; would lower near-term earnings impact while carrying risk of preferred shares losing value

In 3rd scenario, Toshiba could undertake private placement with strategic partner; major banks would be limited to funding support but could be asked to waive claims

Sumitomo Mitsui Trust shares fall as much as 4%, MUFG -2.6%, Mizuho -2.4%, SMFG -2.4%

The Bank of Japan Was The Top Buyer Of Japanese Stocks In 2016

From Zero Hedge.

When it comes to propping up the stock market in the US, the Federal Reserve does so with a certain degree of nuance, keeping at least one layer of disintermediation between itself and the market, which usually involves “advising” Citadel to intervene when it comes to acute moments of market stress, granting the HFT-heavy hedge fund a green light to stop and reverse and violent selloffs, or more traditionally, allowing companies to repurchase their own stock thanks to (until recently) record low interest rates.

This is nothing new: as Goldman has repeatedly pointed out, in 2016 corporations have been the largest source of equity demand, purchasing $450 billion of US equity through buybacks and cash M&A (net of share issuance). Outside of the Great Recession, corporates have been the primary source of US equity demand (see Exhibit 1).

Furthermore, Goldman recently predicted that that as a result of Trump’s proposed repatriation tax holiday, buybacks in 2017 will surge even more, to wit:

Buybacks ($780 billion, +30%) will rise sharply in 2017. Our economists expect tax reform legislation will pass during 2H 2017. President-elect Trump and House Republicans have expressed support for a one-time tax on previously untaxed foreign profits as part of their tax reform proposals. We forecast that S&P 500 firms will repatriate $200 billion of their total $1 trillion of cash held overseas in 2017 and spend $150 billion of the repatriated funds on share repurchases. Managements generally remain committed to buybacks, which will benefit from 2% US GDP growth and ex-Energy earnings growth of 6%.

None of that should be news to regular readers, however it is worth repeating that the primary source of demand for US equities are the stock-issuing corporations themselves, who – in a page right out of Baron Munchausen – continue to pull themselves up by their bootstraps with the blessings of the Federal Reserve’s cheap money. That may soon be changing, however, now that rates have spiked higher and announced buyback have tumbled 28% Y/Y according to FactSet.

Meanwhile, in Japan, the BOJ had taken a less “stealthy” approach, and as has been the case for years, the Japanese central bank under Kuroda has had far fewer qualms about intervening directly in the equity markets by purchasing either ETFs, REITs or single name securities.

Did we say “less stealthy?” We meant the central bank is now intervening directly in the stock market with all the finesse of a stock bull in a china store (just not Chinese china, it’s a patriotic thing), and according to a report by the Nikkei, the Bank of Japan is set to become the biggest buyer of ETFs  in 2016 for the second straight year, in the process masking a srecent surge in foreign investor selling.

According to data through Thursday, the value of the BOJ’s ETF purchases this year has topped 4.3 trillion yen ($36.5 billion), up 40% from 2015. Last year, the central bank bought more than 3 trillion yen worth of ETFs. The data was released by the BOJ and compiled by the Tokyo Stock Exchange. Should it continue at this rate, in a few years, the BOJ will have nationalized the entire market: as of this moment it own approximately 2.5% of the market cap of the entire Topix according to the FT chart below.

As the FT recently noted, “the central bank’s overwhelming dominance of ETFs, combined with the structural oddities of Japan’s most famous but esoteric equity benchmark, the price-weighted Nikkei 225 Average, has given the BoJ indirect but massive positions in many of the country’s biggest corporate names.” Normally, this kind of activity would be associated with command-style, centrally-planned economies such as that of the USSR. Now, however, it is considered part of the “new normal.”

As the BOJ bought, foreign investors sold…  a lot; in fact more than a net 3.5 trillion yen worth of Japanese shares through Dec. 16. These sales were “offset” by the BOJ’s intervention, traditionally through trust banks, including those commissioned by the Government Pension Investment Fund, to buy a net 3.5 or so trillion yen worth of shares.

What is scarier, however, is the BOJ’s own direct intervention: the figure for trust banks was below that for the BOJ, which “will become the largest buyer of ETFs this year,” said Masatoshi Kikuchi of Mizuho Securities.

This year, the central bank increased its buying after doubling its annual ETF goal to purchase 3 trillion yen worth of the instruments. The decision came in July as the bank stepped harder on its yen-printing pedal. The central bank’s ultimate goal is to flood the economy with so much money that prices get moving predictably upward again; the BOJ is targeting a 2% inflation rate. Instead, one day it will create a currency crisis, as faith in the Yen collapses and unleash hyperinflation. We are not there just yet, though.

The value of the bank’s ETF holdings, based on purchase prices, is 11 trillion yen. However, unrealized gains send the market value to 14 trillion yen, according to an estimate by Mitsubishi UFJ Kokusai Asset Management, Nikkei added.

And while foreigners have bought more than a net 2 trillion yen of Japanese shares since November, when Trump was elected president, the amount does not offset their selling in the first half of 2016. Furthermore, there is speculation that the Trump rally is on its last legs, and the next move will be lower. This has already been noted in the USDJPY which has fallen for 4 straight days.

The BOJ’s ETF program has propped up share prices but distorted “the formation of stock prices,” said Shingo Ide of NLI Research Institute. Alternatively, one could say that the BOJ’s ETF program has made the very definition of “market” a joke. The ETF-buying program allows, and in fact mandates, that the central bank purchase a wide range of stocks regardless of the issuing companies’ business results. This means that zombie companies which would otherwise be insolvent and bankrupt, are kept artificially alive thanks to central bank intervention, which in turn leads to deflation as in the race to the bottom, “zombie companies” around the globe are willing to undersell all their competitors in “hail Mary” hopes of survival, leading to lower interest rates and even more central bank intervention.

FSB completes peer review of Japan

The Financial Stability Board (FSB) published today its peer review of Japan.

The peer review examined two topics relevant for financial stability and important for Japan: the macroprudential policy framework, and the framework for resolution of financial institutions. The review focused on the steps taken by the authorities to implement reforms in these areas, including with respect to the recommendations in the 2012 Financial Sector Assessment Program (FSAP) report by the International Monetary Fund (IMF).

The peer review finds that progress has been made on both topics in recent years. In particular, the creation of the Council for Cooperation on Financial Stability in 2014 facilitates the periodic exchange of views among senior Bank of Japan (BoJ) and Japan Financial Services Agency (JFSA) officials on macroprudential issues. The establishment of the Macroprudential Policy Office in 2015 has enhanced the JFSA’s macroprudential monitoring capabilities. There is improved data collection and use of market intelligence for risk analysis, and enhanced dissemination of information. The analytical frameworks of the BoJ and JFSA have become more sophisticated, while public communication of risk assessments has improved.

In addition, the 2013 revisions to the Deposit Insurance Act introduced a regime for ‘orderly resolution’ that covers all financial institutions. Few other FSB jurisdictions have implemented such a cross-sectoral resolution regime with a wide range of powers, so this represents a substantial enhancement to Japan’s resolution framework. The authorities have also expanded the scope of recovery and resolution planning, and developed a preferred resolution strategy for Japanese global systemically important banks in their proposed framework for the orderly resolution of such firms.

Notwithstanding this progress, the review concludes that there is additional work to be done:

  • On the macroprudential policy framework, this involves strengthening the institutional arrangements for financial stability; improving inter-agency cooperation to develop coordinated systemic risk assessments; and broadening systemic risk analysis. Much of this work relates to making macroprudential policy-setting more explicit, with clearer roles and closer cooperation among authorities as well as with stronger analytical tools for decision-making.
  • On resolution, this involves developing transparent and formal guidance on the choice of resolution measures; publicly clarifying the resolution funding framework to minimise gaps between market expectations and the authorities’ intentions; developing sector-specific adaptations to, and strategies based on, the resolution regime; and ensuring that court involvement does not compromise the timely and effective implementation of resolution measures. These would ensure that the resolution framework aligns fully with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and is perceived as credible by market participants.

The peer review report includes recommendations to the Japanese authorities in order to address these issues.

 

Speculation Grows Japan Will Tighten Next

From Zero Hedge.

First it was the Fed, then the ECB (which last week tapered when it reduced the monthly amount of bond purchases under its QE program). Now attention shifts to the Bank of Japan, because as the WSJ writes, one of central banking’s most aggressive easers – Kuroda’s Bank of Japan – may soon have to think about tightening for the first time since 2007.

While it has yet to permeate the markets (confirmation would send the Yen soaring), the latest buzz in Japanese monetary-policy circles is that the BOJ may have to lift the 10-year government-bond target from a recently set zero, in the process tightening financial conditions even more. Indeed, as the WSJ notes, such a changed view on BOJ policy is quite a turnaround.

Just a few months back investors and economists world-wide were discussing what would be the next easing steps in the bank’s 15-year fight to boost the economy and produce inflation. More certainly seems needed: Japan’s economy grew more slowly than expected in the latest quarter and prices are falling.

So why switch gears now? Blame Donald Trump, stupid, whose miraculously adverse impact on the Yen has been more profound than either of Japan’s recent QEs…. and that is before Trump is even inaugurated, or reveals any of the details behind his fiscal stimulus plans.

The U.S. dollar and Treasury yields have been climbing since soon after Trump was elected president on Nov. 8, triggered by expectations that his policies would boost U.S. growth, inflation and interest rates. So far, that has been good for Japan, where the weaker yen is brightening exporters’ prospects, helping send Tokyo stocks to 11-month highs. A weaker yen bolsters their bottom lines by making their products cheaper overseas and inflating the value of repatriated income. As of Friday, one dollar buys ¥114.50, 9.6% more than the day before the U.S. election.

While that may be fine as far as it goes, according to various central-bank watchers who spoke to the WSJ, the BOJ’s latest easing policy raises the risk of far greater, and potentially damaging, depreciation. That is because as a result of the curve “anchoring”, the wider the yield spread between JGBs and foreign bonds, the greater the outflows, the more aggressive the selling of the Yen. For example, since U.S. Election Day, U.S. 10-year Treasury yields have risen to 2.426% from 1.862%, far outstripping the Japanese benchmark bond’s rise to 0.056% from minus 0.064%.

 As yields rise around the world—led by the U.S., whose Federal Reserve is expected to raise rates on Dec. 14—the gap between Japan and other markets widens. That draws money out of Japan as investors search for better returns, which puts further pressure on the yen.

So what happens if US TSY yields spike even higher (the 10Y was at 2.493% moments ago, the highest since June 2015)? Should 10Y yields climb to 3% or higher next year, as some economists think it could, “the BOJ may be forced to raise its yield target in response, even if it hasn’t achieved its policy goal of 2% inflation.”

The pressure to raise the target could be especially intense if the yen weakens to levels like ¥130 to the dollar.

While for those who believe an imploding yen is what the doctor ordered, referencing Abe’s plan to goose the economy with easy money, there are notable downsides.

Sure, a weaker yen could boost optimism and inflation expectations among Japanese companies, argues Abe adviser Etsuro Honda, making them more willing to invest and raise wages. If the result was increased upward pressure on bond yields, the “natural course of action” would be for the BOJ to raise the 10-year yield target a touch from zero, he said. Two months ago Mr. Honda was calling on the BOJ to lower its targets as an added jolt of easing.

However for Abenomics skeptics, the yen’s deteriorating prospects ring alarm bells. BNP Paribas chief Japan economist Ryutaro Kono said in a recent note for clients that a fall to ¥115 to the dollar could upset consumers by raising the cost of living.

The Yen is already below that level.

When BOJ easing weakened the yen to ¥125 to the dollar from ¥110 between autumn 2014 and summer of 2015, it cast a chill over the economy as rising costs for imported food and necessities battered consumers while companies held back from raising wages.

Then there is the yield curve argument: Japanese economists say the BOJ may have to raise its bond-yield target just to give more breathing room to the country’s banks, whose profits are dwindling as their longer-term lending rates fall dangerously close to what they’re paying on deposits.

“It’s like they’re submerged under water and holding their breath,” said Kazuo Momma, a former BOJ executive director who is now executive economist at Mizuho Research Institute. “If this situation becomes protracted, they could drown.”

Naturally, the BOJ – just like the ECB – which are both agreeable to steepening the yield curve even more (seemingly unaware that will also crash the housing market), is allergic to any discussions of tightening. After all, if there is one thing that could crash this market, it is further hints of tightening and the yanking of billions in reserves. Then again, just like in the case of the ECB, perhaps all Kuroda needs to do is come up with a fancy-sounding economic name for its imminent tightening, one which doesn’t wake up the algos. Perhaps “inverse massive QE” should do the trick…