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"The government should not tell the BOJ what to do but the BOJ instead needs to take the government's stance into consideration.”

-Japanese Finance Minister Hirohisa Fujii

Position: Short Japan via EWJ

Globally, central bankers are beginning to phase out emergency liquidity measures that were implemented beginning last fall.  While only two of the G20 countries have started raising rates, Norway and Australia, other nations are beginning to follow suit.  Japan followed suit today.

Bank of Japan policy makers met today and discussed the merits of ending their three programs aimed at easing credit.  Specifically, the Japanese implemented a commercial paper buying program, a corporate bond buying program, and unlimited collateral backed lending to banks to offset the credit crisis.  Reports today suggest that the first two programs will likely be ended at year end, with the lending program set to expire in March.  Kirin Holdings, a Japanese brewer, raised $1.1BN yesterday in bonds to support the company’s acquisition of Australian Brewer Lion Nathan, which suggests the corporate bond markets are open for business and support the decision to end corporate bond buying.

The immediate impact of this action is being seen this morning with the Yen up against all but one of the 16 most-traded currencies.  This objectivity in fiscal policy is being noted by currency markets, as is the quote above from Japanese Finance Minister Fujii.  Obviously a primary issues with the U.S. dollar is a concern over the politicization of the Fed and the Japanese, even if in verbiage only, seem to be aggressively defending the independence of their central bank.

I had a coffee with a client in New Haven yesterday and he asked me what I thought it would take to strengthen the U.S. dollar- certainly the Japanese Yen is speaking to that this morning.  Specific policy action, or an indication of policy action to come, that reverses the current loose monetary policy tract in the U.S. will be required.

Longer term, Japanese interest rate of 0.1% will likely remain in place, and continues to provide an overhang on its currency and potential investment in Japan.  As a supporting fact, the Japanese government reported today that consumer prices, excluding fresh food, slid 2.3% today, which continues to provide support for a low interest rate in the mind of the Bank of Japan to offset deflationary pressures.  This is also the seventh straight month of sliding consumer prices in Japan.

Despite this seemingly rational fiscal policy move by Japanese central bankers, we continue to have a negative bias on Japan.  We are of the view that the new leadership of the Democratic Party of Japan is suspect on the economic front.  In addition, as wrote in our ETF summary on the Early Look today:

“We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.”


Daryl G. Jones
Managing Director