Lowered Expectations

Just like the FOMC, analysts have consistently underestimated the power of foreign buyers, demographics and low-productivity on long-term interest rates.  10-year yield forecasts have changed dramatically from the beginning of the year:

                                Previous:          New:  
Bank of America:       2.65%          1.50%
Citigroup:                   2.30%          1.60%
Goldman Sachs:        3.00%          2.00%
JP Morgan:                2.75%         1.55%
Morgan Stanley:         2.70%         1.25%



As the BOJ concludes its historical quantitative easing, we revisit a time when it just began, March 2015:

Bloomberg data shows that a new car costing 2.5mm Yen, in $ terms:

  • with USD/JPY at 83, less than a year ago, costs $30,120.
  • with USD/JPY at 96, the current rate, costs $26,042.

This $4,000 difference highlights how the Yen decline can strengthen Japan’s exports and economy, as relatively cheaper goods encourage foreign demand.  The third largest economy behind the US and China, Japan’s exports contribute 18% of their GDP.  This export-gambit will not only help Japan, but the global economy (See Japan’s Light-Switch to Growth).  The WSJ admits “Japan’s weakness has deprived the world economy of growth during the recessions and debt crises of the past decade.  If the Bank of Japan experiment works, Japan could once again become an engine of global prosperity, as well as a more effective economic counterbalance to China.” (3/21/13)

BOJ governor Haruhiko Kuroda & Prime Minister Shinzo Abe are lockstep in execution.  Kuroda’a will shift BOJ monetary policy more aggressively, likely buying longer (10 or 30 year) bonds during his first policy meeting in April.  Similarly Abe has already pledged Y10.3 trillion in fiscal support, as emergency government spending  while also negotiating to join US led pan-Pacific free-trade negotiations.

Failure is not an option, possibly destabilizing Japan’s juggernaut bond market (already the worst of all developed countries at 237% GDP) and $23 trillion financial system.  Losing control over debt payments could undermine confidence and spark a credit crisis.  Other risks include inflation through higher import costs increasing prices for commodities and consumer goods prior to an increase in wages and profits, hindering economic growth.

Will it work?  The Yen has weakened 18% while stocks have risen 40% since mid-November.  This gain in stocks has increased household assets to their highest level in 5 years, helping Japan’s consumer confidence index gain over 10% this year.

While the Yen currently rests at Y95 / $, analyst suggest it has to depreciate to to Y155 for the country to hit its 2% inflation target in 2 years (GS).  The lower Yen has already influenced prices, with energy and electricity costs up 4% and 19% respectively.  On the same note, some business leaders have already answered Shinzo Abe’s calls for increasing wages,  boosting bonuses by 3%.

Japan exports 15% of the world goods and services, from motor vehicles (21% of total exports); non-electrical machinery (also 21%); consumer electronics and semiconductors (18%); chemicals (12%); iron and steel products (6%) and scientific and optical equipment (3%).  (World Bank Data)