|Euro Area Banks Repay ECB Loans Early
In late December 2011, as the European sovereign debt crisis dried up interbank lending in Europe, the European Central Bank (ECB) issued the first of two tranches of loans to European banks — the LTROs, or long-term refinancing operations. The first tranche totaled €489 billion ($640 billion); a second followed in February 2012, with net new borrowing of €313 billion. Hundreds of banks participated. They had the option to repay early, beginning a year after taking their loans.
The first early repayments will come in on January 30, and the ECB has announced that 278 banks will be repaying €137 billion — far ahead of analysts’ expectations. This brings to mind the similar repayment of TARP funds that had been injected into U.S. banks as the financial crisis turned the corner from its worst phase. In 2010, during the repayment phase, U.S. equities surged.
Target 2 Imbalances: Starting to Rebalance?
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Abe and the Bank of Japan: Japan Has Gotten Serious
Shinzo Abe, Japan’s newly-elected Prime Minister, ran on a platform of decisive action to overcome the closely tied problems that have bedeviled the Japanese economy for decades — deflation and an overvalued Yen.
This is not Abe’s first stint as Prime Minister. He also served in 2006 and 2007, resigning due to health issues (ulcerative colitis, perhaps an occupational hazard for a job as high-stress as his). His year in office was not effective, though he had many of the same policy goals in mind; besides his health issues, he was dogged by a counterproductive international controversy over his opinions about the history of Japan’s imperial policies in Korea and China. With his campaign’s keen focus on tackling deflation and the Yen, analysts hope that his present term will be the one in which he can really put his vision into practice.
That process has started, with joint announcements of new policy measures by the government and the BOJ (Bank of Japan) on 22 January. The current actions are tantalizing, because the forces Abe is confronting are so large, and the institutional inertia blocking the effort he’s making is so great.
Nevertheless, it’s important to see these moves in context — in terms of the intention being expressed, and what that means going forward as institutional actors are replaced, and government pressure has the chance to shift entrenched conservative monetary policies and investment practices. If Abe is able to persist, there’s the potential that the changes currently underway in Japan could be momentous, not just for the Japanese economy, but for the global economy as a whole.
How will his proposed policies affect the markets?
What New Policies Have Been Announced?
What has Abe put into effect so far? First, a fiscal stimulus of about ¥10 trillion. While substantial (at current exchange rates, about $111 billion), such stimuli have been a steady component of Japanese policy for decades; in short, this is nothing new. Criticism has often been leveled against Abe’s party, the Liberal Democratic Party (LDP), that its stimulus efforts have been vehicles of corruption or cronyism, particularly with large infrastructure projects. These sentiments were part of what put the LDP out of power in 2009, after an almost uninterrupted half-century of political dominance…
How Big is the Easing?
To put the new size of the Bank of Japan’s present asset purchase program into perspective, we can compare it to the scope of the U.S. Federal Reserve’s open-ended QE program. At present, the Fed is purchasing $85 billion in securities each month — $45 billion in Treasuries and $40 billion in mortgage-backed securities. Its balance sheet now stands at $3 trillion…
The Devil is in the Details
Yet markets have shown disappointment in the announced policies. Why? One reason is the timing. Investors had hoped to see open-ended purchases start immediately, but they were delayed until 2014…
World’s Bankers React
In spite of the markets’ lukewarm initial reaction and skepticism, the reaction of other central bankers worldwide was critical, from Europe to Korea (another sign that movers and shakers believe the new psychology in Japan to be very significant). When Germany’s Bundesbank President, Jens Weidmann admonished Japan for heading towards a “currency war” by pushing for Yen devaluation, Akira Amari, Japan’s economic minister, responded sharply (and, we believe, correctly): “Germany is the country whose exports have benefitted most from the euro area’s fixed exchange system. He’s not in a position to criticize.”…
This is Only Act One of a Larger Drama
Which view is correct? That the easing is large and significant, or that it is carefully calculated to make an appearance, while not fundamentally challenging the habitual hawkish posture of the BOJ, which remains protective of its independence?…
Liberating the World’s Biggest Cash Pile
The possibility of the BOJ’s asset purchase program more aggressively buying Japanese equities will be key. Another crucial player beginning to be pressured to play along is Japan’s huge GPIF, or Government Pension Investment Fund. It holds over ¥108 trillion in assets — $1.3 trillion. More than two-thirds of that amount is invested in domestic bonds, by law. Less than a quarter is invested in domestic and foreign equities. Returns have been less than stellar, and the fund desperately needs to improve those returns as Japan’s population ages. Overall, the fund returned 2.6 percent annually from 2003 to 2011, and in the period from 2006 to 2011, the fund generated losses in three years…
The Basic Goal…
Japanese Equities: Trial by Fire…
The Effects: Japan and the Globe…
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