Nikkei 225: Follow The Trail

Lior Alkalay - INO.com Contributor


Since the start of 2017, the Nikkei 225 has lagged in performance; with a 2.8% return since 2017 began, it lagged the S&P 500'S 2.8% RETURN, and it lagged its Asian peers, the Hang Sang and the South Korean KOSPI, which gained 16% and 16.7%, respectively, year to date. Despite all that lagging, however, the future trend for the Nikkei 225 might be the most promising. The reason? The BoJ’s monetary policy, and how it is trailing the performance of the Japanese economy.

BoJ Policy vs Reality

In a recent speech at the University of Oxford, Bank of Japan Governor Haruhiko Kuroda stressed that, despite the latest improvement in Japan’s economic performance, inflation (the rise in prices) is still far from the BoJ’s target of 2%. As the official statistic released from Japan’s statistic Bureau suggests, Kuroda is right. Japan’s headline inflation hit 0.4%, still persistently close to 0%. Add to that the risk of another sell-off in oil and the downside risk for Japanese inflation seems very present. Together, that makes it incumbent upon the Bank of Japan to keep its ultra-loose policy. Nonetheless, something about Japan’s official data doesn't add up. Continue reading "Nikkei 225: Follow The Trail"

Fed Tightening Will Unleash U.S. Growth

Lior Alkalay - INO.com Contributor - Forex


The Federal Reserve, the only central bank in the G7 economies and China to raise rates and the only central bank to lead a tightening cycle, is also the only central bank to get it right. As counter-intuitive as that may sound, higher rates in a world of negative rates and massive monetization is the only viable solution to stimulate growth. To understand the irony, we must delve into credit markets and assess what’s broken.

Cheap Credit Expensive Growth

One of the arguments espoused by critics of monetary stimulus, whether it’s negative interest rates or quantitative easing, is inflation. But in reality the real cost of a ultra-loose monetary policy is the exact opposite—deflation; prices in most of the world and, in fact, in most products are either falling or stagnating. The reason is that when the policy is ultra-loose inefficient sectors of the economy are kept artificially afloat. As long as interest rates are close to zero failing sectors can keep on piling debt and thus contribute less and less to growth while leaving less available capital to the more efficient sectors that really need to grow. Continue reading "Fed Tightening Will Unleash U.S. Growth"

BoJ Ready for Helicopter Money?

Lior Alkalay - INO.com Contributor - Forex


Helicopter money, that’s the big talk in the past week. The term helicopter money refers to a case where the government hands out money to citizens and funds it through printed money. The last time helicopter money was relevant was back in 2009. That’s when Ben Bernanke, then Federal Reserve Chairman, literally opened up the printing press and poured massive amounts of liquidity into the bond market, in tandem with a massive fiscal stimulus plan from the US government. Now, investors are speculating that the BoJ is ready to unleash a similar move, in coordination with the Abe government. And with the BoJ monetary policy meeting scheduled for this Friday, investors have high hopes. Are these hopes in place?

Kuroda Vs. Abe

In the past several months, BoJ watchers have been routinely underwhelmed by the BoJ’s statements. The BoJ slashed deposit rates to -0.5% and increased its QE program to a whopping ¥80 Trillion. But since those two announcements deflation has returned, yields on Japanese Government Bonds plunged to record lows and Japan’s GDP growth marked a modest 0.1% annually. And still, no monetary bazookas have been announced. Continue reading "BoJ Ready for Helicopter Money?"

What's Really Happening With The Japanese Yen?

Lior Alkalay - INO.com Contributor - Forex


The Japanese Yen is making headlines, again. The Dollar-Yen trade pierced through the 110 support level and the Bank of Japan's credibility is at stake. It's only a matter of time before the BoJ swings its "sword" and slice rates again, or at least, so it seems. But while Yen strength has caused quite a stir in Japan, its origins, this time around, are rooted elsewhere.

Wall Street is flat, European bourses are falling and China isn’t out of the woods just yet. Japanese corporates keep hoarding cash and, of course, they need to park it somewhere. That “somewhere” is their default choice; i.e. repatriate the cash and buy into the safety of Japanese Government Bonds.

Chart of the Japanese Yen
Chart courtesy of Bloomberg Press

As illustrated in the chart, when comparing the Bloomberg Japan Sovereign Bond Index with S&P500 and Nikkei 225, demand for Japanese Government Bonds has been strong. Japanese Government Bonds beat both the S&P500 and the Nikkei 225 for the passing year. And that’s even more interesting when you consider the negative yields—it actually costs to hold Japanese Government Bonds.

How long can Japanese corporates keep repatriating funds and pay for the "privilege" to hold Japanese Government Bonds? Continue reading "What's Really Happening With The Japanese Yen?"

Bank of Japan To Release More Stimulus?

Lior Alkalay - INO.com Contributor - Forex


Yep, it's the same old story; once again, Japan is just muddling through. Private consumption is weak and inflation is practically non-existent. And inflation could get worse with the latest plunge in oil prices. And with Japan barely slogging through, investors' call for the BoJ to amp its efforts are on the rise.

So what's the problem? In the eyes of the BoJ, the situation isn't really bad enough to require further intervention.

What The BoJ Sees

So why wouldn't the BoJ want to add any more gunpowder to an already aggressive stimulus plan? The answer comes in two parts.

The first part was covered extensively in my last article and thus needs little elaboration. That is the BoJ wants the Abe government to shoulder some of the burden. It needs to fulfill its own side of the bargain and push forward much needed financial reforms.

And the second part? The BoJ wants to hold some gunpowder in its arsenal... just in case things get worse. With the Chinese stock market meltdown radiating across the world, the BoJ wants to make sure it has enough "weapons" to unleash. But so far, in the eyes of the BoJ, it's not yet bad enough to risk the economy.

Graph of Japanese Annual Inflation
Chart courtesy of The Statistic Bureau of Japan

Let's take a quick look at the latest key data. November's inflation figure (annualized), albeit rather low, still wasn't the textbook definition of deflationary pressures. From a total of 10 various segments, from food to energy to housing, only transportation and energy fell on an annual basis while Housing prices were unchanged at 0%. Despite the dismal numbers, for deflation to be a risk, prices of most items need to fall. And as the chart below shows, that has yet to happen. Continue reading "Bank of Japan To Release More Stimulus?"