Japan: Echoes on the cliff edge - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the last few days have seen yet another bout of global financial market volatility marked by falling equities and rising sovereign bond yields.

Key Quotes

“The principal cause was Japan, where bond selling has been marked in relative terms. In just four trading sessions 2-year JGB yields rose by 18bp to -0.17% and 10-year yields by 19bp to -0.08%, even flirting with a move back above zero intra-day. What was the proximate cause of such violent price action?

In short, the BoJ’s July 29 meeting failed to meet market expectations of a further increase in QQE, or indeed of hopes in some quarters of a start of ‘helicopter money’, i.e., direct monetization of expansionary fiscal deficits. Although the BoJ acknowledged risks to its sustainable 2% y-o-y CPI target and also downgraded its economic outlook, it nonetheless only marginally increased its USD lending and ETF purchase programmes, while leaving its negative interest rate (-0.1%) and its JPY80trn in annual QE unchanged. As we’ve seen elsewhere, markets do not like central banks that disappoint them.

At the same time, the government’s latest fiscal stimulus also undershot expectations. The need for fiscal stimulus is clear: while the fiscal deficit remains enormous in absolute terms (6.7% of GDP in 2015), this still represents a tightening from 7.7% run in 2014. In fact, Abenomics has seen an overall shift towards relative austerity. Initial murmurs were of a new JPY7trn fiscal package, worth 1.3% of GDP, were then quadrupled by the government to a ’shock and awe’ JPY28trn; but details show only JPY7trn in new spending, and spread over several years. In short, the right direction, but not enough to boost sentiment of a recovery, or to suggest Japan is ready to embrace the idea of radical ‘helicopter money’ on the fiscal front.”