MACRO-JAPAN: We Expect the Unexpected – Part I

The Bank of Japan did the “unexpected” on Wednesday morning, by announcing an expansion to their own ‘quantitative easing campaign’, with a 10 trillion yen increase in their Asset Purchase Program (“APP”), taking the total of quantitative easing to 80 trillion yen, 55 trillion of which is direct open market purchases of government bonds and discount bills.

We shine the spotlight on the Bloomberg headline …

… “The Bank of Japan unexpectedly expanded their asset purchase program by 10 trillion yen, seeking to counter an increasing danger of contraction in the world’s third-largest economy.”

But wait … in fact, readers of Weldon’s Money Monitor have been fully EXPECTING an expansion in the Japanese Central Bank’s “APP”, dating back to our January year-ahead focus “Twelve-for-Twelve”, as one of our twelve macro-themes to watch, during 2012 … running into our May 22nd Money Monitor entitled “A Quadrillion Yen Here, a Quadrillion Yen There” …

… and … most recently, in our September 4th “Sky Tree” Monitor, written just two weeks ago, in which we stated …

… “The macro-economic data released in Japan since the middle of last week was decidedly one-sided in its ‘negativity’, and deflationary elements … and another expansion in their (BOJ’s) Asset Purchase Program will likely be called for by the 1Q of next year, if not sooner.”

And sooner it was, with Wednesday’s announcement.

Further, the BOJ eliminated the minimum interest rate on the Government securities it is willing to purchase, which was only 0.1 percent … paving the way for a move into ‘negative’ territory by Japanese interest rates.

And, MOST telling was the following text from the BOJ Policy Statement …

… “Japan’s economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability. It will proceed with the monetary easing in a continuous manner by increasing the amount outstanding of the Asset Purchase Program.”

Indeed, the BOJ has specifically and transparently left the door open for FURTHER expansion to the APP.

Indeed, EXPECT it.

While Wednesday’s move was “unexpected”, at least by the “market”, and, it does represent a $125 billion increase in debt monetization …

… it was NOT likely to be powerful enough to be the final stage of quantitative easing for the BOJ. Indeed, the amount of monthly purchases was NOT increased, and remains at 1.8 trillion yen in securities ($23 billion). In fact, the total of the APP will not increase at all, through the end of this year, and into June of 2013 … and … the ten trillion yen expansion will apply only to 2013, with 5 trillion in additional Discount Bill purchases planned for the first half of the year, and another 5 trillion yen to be spent on Japanese Government Bonds, during the second half of the year.

In other words, we ‘could say’ … that the BOJ did NOT “expand” the monthly total of purchases conducted by the APP, they ‘extended’ it, into next year, and, they did so at a SIGNIFICANTLY REDUCED pace, relative to this year. Indeed, next year’s total planned monetization of 15 trillion yen is well below this year’s 40 trillion. Indeed, it is less than HALF this year’s total.

We focus on the chart below plotting the total of Japanese Government Bonds held outright by the BOJ, with the projections mapped out going forward based on the last three expansions announced by the Central Bank.

Also, the additional purchases of JGB will push the total assets held by the BOJ on their balance sheet to a new all-time high of 165 trillion yen, or $2.11 trillion.

While it is ‘all good’ for the BOJ to purchase more JGB, a major potential problem remains. As it stands, the Bank of Japan will purchase another 21.3 trillion yen of JGB and Discount Bills between now and the end of next year BUT, the Japanese Ministry of Finance faces the following tsunami of maturing debt:

Thru end-2012 … 149.11 trillion yen

2013 … 135.29 trillion yen Editor: Japan faces a serious problem with its maturing debt, but it’s by no means alone. Between them the top ten most indebted nations, which include Japan, the US, the UK, France, Italy and Germany, will have to find buyers for more than $15 trillion of debt by the end of 2015.

In total, over the next fourteen months and a week … 284.4 trillion yen of Japanese government debt will mature, of which the Bank of Japan will purchase approximately 21.3 billion, meaning that 92.5% of the government’s debt coming due by the end of next year, will need to be sold into the open market.

By the end of 2014, that total will rise to 368.33 trillion yen.

And, in total … 1.007 quadrillion yen.

In fact, with a total of 797.08 trillion in JGB outstanding, BOJ holdings of 105.28 trillion yen, meaning that the CB has ‘monetized’ 13.2% of all JGB outstanding. Relative to that statistic, the ‘take down’ of 7.5% through the end of next year is about half the historical ‘pace’ of BOJ monetization.

Evidence the chart on display below plotting the total of JGB outstanding, with focus on the renewed upside acceleration since 2007, and the surge to a new all-time high posted in the three-months ending-June.

Moreover, the increase in JGB in the 2Q alone was 16.23 trillion yen, nearly the size of the remaining APP (21.3 trillion) … meaning, that relative to the end of the 1Q, ‘net new’ monetization is whittled down to just 5 trillion yen.

And, we could ‘say’ that the BOJ has monetized EVERY YEN of new debt issued since 2007.

GEE, no wonder JGB yields have continued their plunge, to newer, new, all-time highs during 2012, pegged at 0.73% for TEN-YEAR DEBT …

… down from 1.87% in 2008, a nominal yield decline of (-) 61% …

… and down from 1.325% in the swing high set in March of this year, a move that likely provided the catalyst for April’s expansion of the APP.

Of specific interest, and supportive to our thought that the BOJ has more debt to buy is the fact that JGB prices reversed to the downside and plunged following Wednesday’s policy announcement. (We are NOT saying more debt monetization is the academically ‘correct’ policy maneuver, but if the BOJ wants to circumvent a rise in bond yields, particularly given the ongoing deterioration in the economy, they WILL buy more government debt.)

Observe the chart on display below plotting the price of the nearby futures price for the 10-Year JGB revealing the intensifying downside pressure. We observe the violation of the med-term trend-defining 100-Day EXP-MA and a violation of the 2012 uptrend line … along with the severe degree of bearish momentum divergence exhibited by the long-term Oscillator, which has turned down, directionally.

A ‘close-up’ perspective as offered in the candlestick chart on display below more clearly reveals Wednesday’s sharp downside reaction to the BOJ news.

And, we specifically focus on today’s price action, which represents a Doji” day, usually a ‘reversal’ pattern, implying that the two-day upside price correction from Tuesday’s low may be over. Monday’s action will be KEY, as a down day will complete an “Evening Doji Star” sequence, one of the most bearish of all candlestick patterns.

To continue reading ‘MACRO-JAPAN: We Expect the Unexpected – Part II’ click here.

Gregory Weldon | Weldon Financial

Greg offers a free, one-time, 30-day trial of three different research publications:
1)  Weldon’s Money Monitor (global macro);  2) The Metal Monitor (precious metals markets) and 3) The ETF Playbook. Click the link below to sign up for a free trial and gain immediate access to Greg’s latest research including this week’s Macro-Market ‘audio’ Metal Monitor which covers the Fed, ECB, Gold, Silver, Currencies, and more!

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