“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS

Takeaway: Stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”.

SUMMARY BULLETS:

 

  • The Bank of Japan did not disappoint in Haruhiko Kuroda’s first meeting as BOJ Governor unlike consensus had been incorrectly calling and positioning for. Right on target with what we have been expressly calling for since early 4Q12, the BOJ has completely jumped the shark with respect to monetary policy and Japan is now officially (as opposed to rhetorically) home to the G10’s most dovish central bank.
  • In true “shock and awe” manner, the BOJ introduced “quantitative and qualitative monetary easing” (details below). In addition to these seismic shifts monetary policy operations, the BOJ also introduced a few other noteworthy housekeeping items (details below). Lastly, the BOJ responded directly to near-consensus expectations that its anti-deflation campaign would continue to structurally disappoint (statement below).
  • We were appropriately loud on Monday afternoon calling for clients to get long both the dollar-yen cross and the Nikkei ahead of today’s announcements and, far more importantly, we continue to anticipate further price appreciation in both asset classes over the intermediate term as our structural thesis plays out
  • To recap our bearish thesis on the yen, borrowing a quote from the title of our 3/15 research note following the confirmation of Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the BOJ, we think Japan’s Inverse Volcker Moment is upon us
  • In confirmation of our thesis, the USD has appreciated +23.9% vs. the JPY since we authored the bearish thesis on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Additionally, the Nikkei 225 Index is up +44.3% since our 11/9 note explicitly calling for Japanese equity reflation – though, admittedly, we have purposely avoided pounding the table on Japanese equities in ethical disgust of Policies To Inflate.
  • All told, the one is simple folks: stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”. Just pray that the JGB market doesn’t wake up to the threat of hyperinflation over the long-term TAIL.

 

All eyes were on the Bank of Japan this AM, which did not disappoint in Haruhiko Kuroda’s first meeting as BOJ Governor unlike consensus had been incorrectly calling and positioning for. Right on target with what we have been expressly calling for since early 4Q12, the BOJ has completely jumped the shark with respect to monetary policy and Japan is nowofficially (as opposed to rhetorically) home to the G10’s most dovish central bank. To recap their monetary policy phase change (all quotes from the accompanying BOJ statement; emphasis is our own):

 

In true “shock and awe” manner, the BOJ introduced “quantitative and qualitative monetary easing”:

 

  • “The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases.”
  • “With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base… The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.” [unanimous vote]
  • “With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen.” [unanimous vote]
  • “… JGBs with all maturities including 40-year bonds will be made eligible for purchase, and the average remaining maturity of the Bank's JGB purchases will be extended from slightly less than three years at present to about seven years – equivalent to the average maturity of the amount outstanding of JGBs issued… The monthly flow of JGB purchases is expected to become 7+ trillion yen on a gross basis.” [unanimous vote]
  • “The Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively.” [unanimous vote]
  • “The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” [8-1 majority vote; board member Takahide Kiuchi dissented against the firm two-year commitment]

 

“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS - BOJ Balance Sheet Projections APR  13

 

In addition to these seismic shifts in monetary policy operations, the BOJ also introduced a few other noteworthy housekeeping items:

 

  • The Asset Purchase Program will be terminated. The purchases of JGBs conducted for facilitating money market [rinban] operations – including the amount outstanding of JGBs already purchased – will be absorbed into the aforementioned JGB purchases.
  • The aforementioned JGB purchases are executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits. In addition, the government – in the joint statement released with the Bank in January – stated that "in strengthening coordination between the Government and the Bank of Japan, the Government will steadily promote measures aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of fiscal management." Based on such recognition, the Bank will temporarily suspend the so-called banknote principle as it pursues the quantitative and qualitative monetary easing.”
  • The terms and conditions under the Securities Lending Facility (SLF) will be relaxed for the time being in order to ensure that the market liquidity of JGBs is maintained.”

 

Lastly, the BOJ responded directly to near-consensus expectations that its anti-deflation campaign would continue to structurally disappoint:

 

  • “The quantitative and qualitative monetary easing, introduced by the Bank today, will underpin the Bank's commitment, and is expected not only to work through such transmission channels like longer-term interest rates and asset prices but also to drastically change the expectations of markets and economic entities.”

 

Evidence of muted expectations among consensus can been seen in the USD/JPY cross and Nikkei 225’s respective intraday bounces on the BOJ announcement(s). The former jumped from a low of 92.76 to today’s high of 96.40 and the latter swung from being down -1.8% on the day to closing up +2.2%! Again, the JPY is down over three full percent vs. the USD intraday! It’s hard to express in words how truly remarkable that is in the context of G3 currency fluctuations.

 

We were appropriately loud on Monday afternoon calling for clients to get long both the dollar-yen cross and the Nikkei ahead of today’s announcements and, far more importantly, we continue to anticipate further price appreciation in both asset classes over the intermediate term as our structural thesis plays out.

 

To recap our bearish thesis on the yen, borrowing a quote from the title of our 3/15 research note following the confirmation of Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the BOJ, we think Japan’s Inverse Volcker Moment is upon us

 

In confirmation of our thesis, the USD has appreciated +23.9% vs. the JPY since we authored the bearish thesis on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Additionally, the Nikkei 225 Index is up +44.3% since our 11/9 note explicitly calling for Japanese equity reflation – though, admittedly, we have purposely avoided pounding the table on Japanese equities in ethical disgust of Policies To Inflate.

 

More from that 3/15 note:

 

  • “Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past ~20 years. Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come."
  • "In a research note on Monday, we detailed exactly why we think consensus among the buy side, the sell side and Japanese corporations is not even in the area code of being bearish enough on the Japanese yen." 
  • "... What people like Mr. Sakakibara are missing is that the BOJ now has the baton as it relates to being the most aggressive DM central bank. Currencies crosses are inherently relative, so as Japan accelerates its easing measures, keep in mind that the US will be doing the exact opposite – both fiscally and monetarily – as #GrowthStabilizes in the good ol’ U-S-of-A.”

 

All told, the one is simple folks: stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”. Just pray that the JGB market doesn’t wake up to the threat of hyperinflation over the long-term TAIL.

  

Darius Dale

Senior Analyst

 

“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS - 2

 


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