Sunday, April 10, 2016

Today's Links

1--With Japan’s Yen Still Rising, Ceiling Appears Political

With investors seemingly ignoring the BOJ’s interest-rate cuts, many now say the only impediment to the yen’s continued strengthening is direct market intervention from Japanese authorities—a move that in turn is subject to hard-to-gauge issues such as how prepared Tokyo is to annoy other countries...

this time around, Japanese officials are worried about the potential U.S. backlash that could ensue if they weaken the yen by direct action. Prime Minister Shinzo Abe told The Wall Street Journal that countries should refrain from “arbitrary intervention” and “competitive devaluation.” His remarks, which surprised traders who had been expecting Tokyo officials to take a harder line, likely reflect his desire to avoid friction with the U.S., a person familiar with the matter said Friday.

U.S. presidential candidates Donald Trump and Hillary Clinton have both effectively labeled Japan a currency manipulator on the campaign trail, unnerving Tokyo policy makers....

The Japanese authorities also may be unwilling to intervene heavily before Japan hosts a meeting of the Group of Seven leading nations in late May, analysts say. Just last month, finance officials from the Group of 20 industrial and developing nations agreed not to engage in competitive devaluations as global growth slows...

We think there could be a limit to how much the negative-interest-rate policy and the dovish comments from central-bank officials help to weaken the currency,” said Irene Cheung, senior foreign-exchange strategist at ANZ in Singapore.

2---By One Measure, U.S. Rates Are Already Negative---Yield on 10-year Treasurys, adjusted for inflation, falls below zero for first time since 2012

Negative interest rates have swept the globe, from Switzerland to Sweden to Japan.

By one measure, they’re here in the U.S. too.

The 2016 rally in government bond prices has taken U.S. real yields, which subtract inflation from the 10-year Treasury yield, below zero for the first time since 2012.

The 10-year U.S. Treasury yield was recently 1.72%, which is below the latest reading on the core consumer-price index of 2.3%. By this metric, the real U.S. 10-year yield is -0.58%.

Inflation is the main threat to bondholders. Many look at real yields because they reflect the real purchasing powers investors obtain from investing in fixed-income assets. The fact that investors are willing to buy the 10-year note without enough compensation for an uptick in consumer prices has been confounding many analysts. Some are concerned that this leaves the bond market vulnerable to jolts if sentiment sours.

About a quarter of government bonds in Japan and Europe have nominal yields below zero, reflecting policy makers’ embrace of negative interest rates in their latest bid to reflate stagnant economies.

Germany’s 10-year bond is yielding below 0.1%, raising the prospect that it too may soon trade at negative rates. The European Central Bank has increased its purchases, intensifying the investor scramble for safe bonds.

Though negative nominal interest rates don’t appear imminent in the U.S., investors say the gravitational pull of low rates overseas stands to pull real yields here further into negative territory, by pushing down nominal yields.

Guy Haselmann, head of U.S. interest rate strategy at Bank of Nova Scotia, expects the 10-year nominal yield to fall to its lowest level ever, 1.25%, before 2016 ends, from a recent 1.72%, even if there isn’t another market shock that leads to a retest of the February lows in stocks, riskier bonds and U.S. yields. The previous low, 1.40%, was set at the height of the 2012 euro crisis.

“If things get really bad…the yield will test sub 1%,’’ he said.

Such a state of affairs would have been unthinkable just a few years ago, when Wall Street analysts routinely predicted a swift return to 5% long-term Treasury yields, let alone in the early 1980s, when yields briefly topped 15% at the height of the U.S. inflation scare.

That episode looms large in the minds of many investors and, some analysts say, policy makers. With yields as low as they are, it doesn’t take much inflation to wipe out a bondholder’s purchasing power, they say.

U.S. inflation has been running below the Fed’s 2% medium-term target for years. Even so, long-term U.S. real yields’ foray into negative territory this year marks the first time since the euro crisis.

3--Rising Yen Adds to Abe’s Challenges as Japan’s Economy Contracts

When Prime Minister Shinzo Abe of Japan began a campaign three years ago to turn around his country’s economy, he took aim at areas as varied as taxes, trade and women in the workplace. The campaign, given the nickname Abenomics, relied heavily on one strategy: weakening the country’s currency.

Initially, it worked, as Japan’s stock market soared and corporate profits rose. But now that weapon is misfiring, and Abenomics may be in trouble.

Turmoil in global markets is making the yen rise in value again. That has resulted in big hits to the Japanese stock market and has raised worries among economists that Mr. Abe will not be able to deliver the economic growth his country needs to get back on track.

“Abenomics is in danger of falling apart,” said Masamichi Adachi, a former central bank official who is now an analyst at JPMorgan Chase

The challenge mounted on Monday, after officials said the Japanese economy — the world’s third-largest, after those of the United States and China — shrank more than expected in the last three months of 2015. The economy has now contracted in five of the past 12 quarters, and for all of 2015 it grew an anemic 0.4 percent. Japan will hold elections this summer, putting more pressure on Mr. Abe and his governing coalition to turn around the economy.

In the eyes of many Japanese policy makers and business leaders, a weaker yen is a better yen. It makes big employers like Toyota and Panasonic more profitable by inflating the value of their overseas earnings. A weaker currency also drives up the cost of imported goods, but even that can be beneficial: It helps Japan shake off a vicious cycle of falling prices that has led to lower profits and less spending.

Currency depreciation goes a long way to explaining how Toyota’s profit in North America rose five times faster than its sales volume from 2012 to last year. Toyota is now on course to become the first Japanese company to earn 3 trillion yen ($26.4 billion) in operating profit this financial year.

The currency windfall is a byproduct of Abenomics

The central bank, under Haruhiko Kuroda, the governor Mr. Abe appointed in 2013, has been flooding financial markets with yen by buying vast quantities of government bonds. The explicit goal of the strategy is to make it as easy as possible for people to borrow and spend.

An unspoken goal, many economists says, is to weaken the yen. Three years after Mr. Abe took office, the yen had fallen against the dollar by about 40 percent.

But growing worries about the global economic outlook have undone some of that weakening. Since December, the yen’s value has risen about 10 percent against the dollar. Investors have flooded into the currency, which they see as a haven for their money.

The shift could hurt Japanese companies that have been counting on the yen’s weakness, Mr. Adachi of JPMorgan Chase said. So far, companies have been saving most of their windfalls.

Last week, the Nikkei 225 stock average plunged 12 percent, as the yen strengthened to its highest level in more than a year. It was the worst performance of Japanese stocks since the depths of the global financial crisis seven years ago.

The stock surge came despite news that gross domestic product had declined at an annualized rate of 1.4 percent in the final quarter of last year, dragged down by anemic consumer spending and exports. Economists surveyed by Bloomberg News had expected, on average, a contraction of 0.8 percent.

Masahiro Ichikawa, a strategist at Sumitomo Mitsui Asset Management, said that investors were less concerned about the economy contracting than about what that might mean for the central bank’s stimulus program. The Bank of Japan loosened policy even further last month by announcing that it would cut its benchmark interest rate below zero, joining a group of European central banks that are also struggling with deflation. Now more action is likely, Mr. Ichikawa said.

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