Wednesday, May 8, 2013

Bloomberg News: Kuroda's Antics Backfire, as Mortgage Rates and Corporate Lending Rates Go Up in Japan

You will never see an article like that in today's Japan on any paper. How dare you call Governor Haruhiko Kuroda's action a failure? It's all for us, our well-being, our future!

Volatility in Japanese Government Bonds (JGB) that Kuroda has unwittingly introduced in April is causing the investors to demand premium to compensate for the volatility, thus the rates rise. That's not what Kuroda or his boss Prime Minister Abe intended.

Federal Reserve's Ben must be chuckling, and saying under his breath, "Amateurs..."

Bloomberg News (5/7/2013; emphasis is mine):

Kuroda Stimulus Backfires as Mortgage Costs Rise: Japan Credit

By Masaki Kondo, Mariko Ishikawa & Yumi Ikeda

Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.

While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ, according to Mizuho Securities Co. Federal Reserve Chairman Ben S. Bernanke’s monetary easing almost halved 30-year U.S. mortgage rates since 2008 to 3.35 percent on May 2.

The BOJ’s April 4 announcement that it would double bond buying to generate 2 percent inflation unleashed the highest government-debt volatility in a decade and pushed 10-year yields up by 4 1/2 basis points. The benchmark lending rate for large corporations, known as the prime rate, increased five basis points from its record low to 1.2 percent on April 10, despite the BOJ’s aim of stoking the economy through cheaper funding.

“It makes little economic sense for rates to decline when the BOJ says it will raise consumer prices,” said Toru Suehiro, a market economist in Tokyo at Mizuho, one of the 24 primary dealers obliged to bid at government debt auctions. “Yields are higher than before the monetary easing to reflect the volatility risk, and lending rates have risen because they are set based on bond yields.”

Volatility, as measured by the gap between the 10-year yield’s daily high and low, jumped to 30 1/2 basis points on April 5, the most since July 2003, after Kuroda unveiled a plan to buy more than 7 trillion yen ($70.7 billion) of Japanese government bonds a month, accounting for more than half of the total amount that the government plans to sell in the market this fiscal year.

“The BOJ’s buying is reducing the liquidity of government bonds, preventing market participants from finding appropriate yield levels,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-largest financial group by market value. “That situation will make the market dependent on the BOJ’s purchases just like a morphine addict.”

(Full article at the link)

The US primary dealers wouldn't be able to do without that morphine from the Fed.

4 and a half basis points is 0.045%. What's the big deal, you may ask? Well, if Japan's 10-year bond yield was 0.5% before Kuroda's intervention, it was 9% jump in the yield. That's huge for bonds.

By the way, after breaking just about every financial market with his enormous liquidity, Federal Reserve Chairman Bernanke won't be attending the annual Jackson Hole confab of world's central bankers this year. Rumors is that he won't be seeking the next term.

(If and when SHTF, Kuroda will get the blame, I suppose.)


JAnonymous said...

Meanwhile, Toshiba's profits race to the bottom.

arevamirpal::laprimavera said...

JA, reality ceased to matter at all a while ago... About 4 years ago.

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