Friday, May 24, 2013

"The Bank of Japan must crush all resistance, and will do so"

Ambrose Evans-Pritchard at the Telegraph:
Kudos to Kyle Bass at Hayman Advisers for warning that the Bank of Japan would lose control of its ¥70 trillion bond buying blitz. The spike in the 10-year yield to 1pc on Thursday was certainly shocking to behold.

His point is that the BoJ faces a “rational investor paradox”. The authorities are trying to drive up the inflation to 2pc and therefore to devalue Japanese government bonds (JGBs), so why on earth would you want to own them?

“If JGB investors begin to believe that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy foreign bonds or equities,” he told Bloomberg
He says the scramble to sell has “overwhelmed” buying by the BoJ. Governor Kuroda will now have double down with a huge increase in the scale of QE.

The argument is similar to warnings by Nomura’s Richard Koo, Japan’s most famous economist and an arch-Keynesian. The two men reach the same conclusion coming from diametrically opposed theoretical starting points.

As I reported last night, Mr Koo thinks the Abenomics plan of monetary reflation is madness. “Once inflation concerns start to emerge the BoJ will be unable to restrain a rise in yields no matter how many bonds it buys.” This could lead a “loss of faith in the Japanese government” and the “beginning of the end” for Japan’s economy.

Mr Koo said the BoJ faces a “time inconsistency problem”, a variant of Mr Bass’s paradox. Markets react more quickly to events than the economy. “The Japanese authorities are trying to generate inflation first and then hope for recovery, which means debt service costs will increase before tax revenues do.”...MUCH MORE