The Big Picture |
- Bullard: The Tapering Debate: Data and Tools
- Japan’s Missing Wall of Money
- 10 Monday PM Reads
- Don’t Sweat Margin Debt
- 10 Monday AM Reads
- Welcome to My First Bloomberg View Column
- Stratospheric Views — and Prices — for Billionaires
- History of Audio Apparati
| Bullard: The Tapering Debate: Data and Tools Posted: 05 Nov 2013 02:00 AM PST |
| Posted: 04 Nov 2013 10:30 PM PST Japan’s Missing Wall of Money
The Bank of Japan announced an open-ended asset purchase program in January 2013 and an unexpectedly ramped-up version of the program was implemented in early April. Market commentary at that time suggested that flooding the economy with liquidity would lead to a "wall of money" flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan's wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift. Why is this? Here we explain that while economic theory does not offer clear guidance on how financial outflows might respond to the injection of cash from central bank asset purchases, it does point to an important constraint on the potential size. In particular, monetary expansion will not cause a surge in financial outflows unless it also induces a similar surge in capital flowing into the country. The Bank of Japan decided at its April meeting that it was introducing an aggressive asset purchase program to “drastically change the expectations of markets” concerning inflation and output after fifteen years of deflation. To have the desired effect, the Bank believed the program's scale would have to be unprecedented—and it was. In particular, the Bank said it would double the monetary base from ¥135 trillion ($1.35 trillion using an exchange rate of 100 yen per U.S. dollar) to ¥270 trillion by the end of 2014. Commentary at the time shows that markets were indeed surprised. Since the announcement, the Bank's asset purchase program has been injecting substantial amounts of liquidity into the economy. The program involves buying ¥7 trillion ($70 billion) in government bonds each month, along with smaller purchases of exchange-traded funds (¥1 trillion per year) and real estate investment trusts (¥30 billion per year). A key stated aim of these purchases is to put downward pressure on long-term interest rates and risk premia, thereby pushing investors into alternative assets such as equities and bank loans. The chart below shows the monetary base has surged since April, putting the Bank of Japan well on its way to doubling it by the end of 2014. (The jump in early 2011 reflects liquidity injections in the aftermath of the Tōhoku earthquake.) It should be noted that the program is open-ended, with the Bank stating that it will continue buying assets as long as necessary to achieve its 2 percent inflation target. Market commentary suggested that much of the liquidity injected into Japan’s economy might find its way abroad as Japanese investors searched for higher yields. Bank of Japan board members anticipated this possibility, with comments in the April meeting minutes noting that lower yields in Japan might prompt flows into foreign currency bonds. Some analysts went further, suggesting that some markets, particularly in the Emerging World, might have trouble absorbing the funds likely to flow out of Japan, potentially leading to excessive credit growth and asset price bubbles. A review of simple balance-of-payments accounting identities points to limits in how much a shift in monetary policy can affect cross-border financial flows. To start with, a country such as Japan, where domestic saving exceeds investment spending, lends its surplus saving to the rest of the world. For another country where saving is less than investment spending, the saving shortfall must be made up for by borrowing from abroad. The scale of this borrowing or lending is the current account balance, a broad measure of the trade balance. After all, a country where imports run ahead of exports is also spending more than it produces and must borrow from abroad to make up the difference. The financial account is the mirror image of the current account in balance-of-payments accounting. If a country is lending to the rest of the world by running a current account surplus, financial flows going out of the country must exceed financial flows coming in. Thus, a current account surplus corresponds to an equal net financial outflow: the current and financial accounts should sum to zero. (This accounting identity abstracts from data discrepancies and the generally trivial capital account which records debt forgiveness and other asset transfers.) In Japan, net private and official financial outflows have narrowed in recent years along with the current account surplus, which is depicted in the chart below. Both have gone from almost 4 percent of GDP in 2010 to just over 1 percent in the first half of 2013, for an average of roughly ¥500 billion ($5 billion) in net cross-border outflows per month. This balance of payments accounting means the asset purchase program could not produce a sudden wall of money flowing out of Japan unless it causes exports to jump substantially above imports or elicits a sudden wall of money flowing into Japan. The next chart shows that recorded financial outflows from Japan have consistently exceeded inflows, with the difference equal to the current account balance (again, plus net data errors and the capital account). There was a substantial unwinding in Q1 2013, with cross-border sales of both Japanese investments abroad and foreign investments in Japan. Cross-border sales continued in the second quarter with the April start of the asset purchase program. (Data errors explain why measured net outflows were negative in recent quarters when the current account surplus would have them be positive.) The Bank's asset purchase program set off no wall-of-money outflow from Japan. Instead, funds were brought back into the country. Cross-border inflows and outflows typically move in tandem because net financial flows are tied to the current account balance. There could be a surge in outflows if the current account surplus were also to surge, but current account balances tend to be sticky. The weakening in the yen since the April meeting will boost exports, but it will also boost import prices in yen terms, leaving Japan's current account balance largely unaffected. Given the stickiness of the current account, there can be no wall of money flowing out of Japan without a wall of money flowing into Japan. The international impact of the April announcement fell largely on exchange rates rather than volume of financial flows. In particular, the yen fell after the unexpectedly dramatic loosening in monetary policy, as theory would suggest, from ¥93 per U.S. dollar before the April announcement to near ¥100 per U.S. dollar. But this swift repricing in currency markets did not require any meaningful change in net cross-border flows. Disclaimer
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| Posted: 04 Nov 2013 01:00 PM PST My afternoon train reading:
What are you reading?
Breaking Down Big Banks’ Bargaining |
| Posted: 04 Nov 2013 09:00 AM PST One data point that has found a home among the bearish community is the total amount of New York Stock Exchange margin debt. It is at record highs, and this supposedly means the end of the bull market is nigh. The cyclical bull that began in March 2009 may be getting long in the tooth, but margin debt is not what is likely to do it in any time soon. Margin debt has been one source of fuel that drives equity prices higher. Continued at Bloomberg View
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| Posted: 04 Nov 2013 06:30 AM PST |
| Welcome to My First Bloomberg View Column Posted: 04 Nov 2013 04:37 AM PST Well now, let's have a look around here. Hmmm, nicely typeset. Headline, URL, date are in the usual places; sidebar for other articles off to the right. Hey, this doesn't look very different than it did at my blog, the Big Picture. What's different? Oh, you out there. I see, you are a somewhat different audience than what I have been used to previously. You appear to be more of a professional investor, oriented toward shorter, pithier readings, but still intolerant of nonsense. Good, we will get along just fine.
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| Stratospheric Views — and Prices — for Billionaires Posted: 04 Nov 2013 04:00 AM PST A new crop of ultra-luxurious New York high rises are vying to be the next hot "it" building and are attracting billionaires from nearby as well as abroad. See also Stratospheric Views, and Prices |
| Posted: 04 Nov 2013 03:00 AM PST It is missing the Nakamichi Dragon and the Bang & Olufson BEO1500, but other than that . . . click for ginormous graphic |
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