Richard Koo Warns Of "Beginning Of The End" For Japanese Economy

Tyler Durden's picture

The surge in Japanese long-term interest rates is likely causing some lost sleep among bond market participants and policymakers (despite their ignorance of the moves in the BoJ minutes) as Nomura's Richard Koo notes, if this trend continues (now added to by the collapse in stock prices) it could well mark the “beginning of the end” for the Japanese economy.

Although the stock market has (until now) welcomed the yen’s continued slide against the dollar, Koo warns that this trend needs to be carefully monitored, as simultaneous declines in JGBs and the yen can be interpreted as a loss of faith in the Japanese government and the Bank of Japan. The biggest concerns are that the extreme volatility in Japanese stocks and bonds is occurring at a time when the BOJ was buying large quantities of government bonds.

Until the recent events there was an expectation in the JGB market that bond prices would not fall substantially even if the Bank’s aggressive easing program depressed the yen and lifted inflation expectations as long as the BOJ remained a major buyer. It is now clear that even large-scale BOJ purchases of JGBs cannot stop yields from rising.


Via Richard Koo, Nomura,

The lies are working (too well)...

Mr. Kuroda’s psychological tactic of repeating a lie often enough that it becomes the truth has succeeded brilliantly.


The problem is that it works on lenders as well as on borrowers. Moreover, borrowers are agents in the real economy and need time to react, whereas lenders are financial sector entities that can respond instantaneously, creating the possibility that lenders will react sooner than borrowers.


The fact that the BOJ has also reversed the traditional order of things and is trying to spark an economic recovery by generating inflation has increased the possibility that higher long-term rates driven by inflation concerns will emerge sooner than higher long term rates rooted in a recovery in the real economy.

But that is leading to a 'bad' (uncontrollable) rise in rates...

If we refer to higher interest rates driven by an economic recovery as a “good” increase and higher rates sparked by inflation concerns as a “bad” increase, I think there is a significant possibility that the latter will emerge first in this case.


That would not only weigh heavily on the first shoots of private loan demand to arise in a long time but could also focus attention on the banks’ and the government’s financial health, damping the positive momentum in the economy and markets seen over the last four months.


This kind of contradiction in timing is called the “time inconsistency problem,” and it will continue to hang over the policies of the Kuroda BOJ.

Simply out, Koo's perspective is that the BoJ needs to rein itself in...

BOJ needs to declare it will not tolerate overshooting of inflation


What can the BOJ do? To begin with, the Bank and the government could make it clear that they are targeting a 2% rate of inflation but at the same time, they will not under any condition tolerate a significant overshooting of that rate.


By stating that they will not accept an overshooting of the target, the Bank of Japan and the government could reassure the markets that there will be no plunge in the yen and no bouts of uncontrollable inflation.

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ApollyonDestroy's picture

Look out, KAMIKZEEEEE!!!

BraveSirRobin's picture

Japan is a ripe to step into a debt trap. A relatively small increase in interest rates will result in an explosion in interest costs and kill the value of bonds held in banks and by the public.

"Japan is a bug in search of a windshield."


MillionDollarBogus_'s picture

A contrary view;

"Rising (BOJ) interest rates would of course raise debt service costs for all borrowers, and especially the hugely indebted government.  But they would enable lenders–including household depositors–to charge higher rates on new debt and raise returns on non-fixed rate debt.   Since net stock of private savings is larger than the net stock of public sector liabilities, Koll reckons that the overall effect on the economy would be positive."


Thought Processor's picture

Yeah, this will end well.   Forbes is like the flight attendant who reassures the people on the airplane that everything is fine as the plane's engines begin emitting smoke.  

Forbes wouldn't dare hurt the market with a pessimistic article lest they piss off the last of their ad clients.

The most they will do is tell you to put your head between your legs as things may start to get a little..... turbulant.  And while that will not save you from the coming crash, it might keep you from panicking on the way down, which of course is the reason it is suggested in the first place.

Standard procedure, must maintain order at all costs.

They trynna catch me ridin dirty's picture

Meaning government will have to default, unable to keep borrowing, thus unable to keep spending, social unrest, Japan winds up being bailed out by some internationalist snake pit like the IMF/BIS who will then take the opportunity to dictate terms to Japan including free trade agreements and third world immigration, effectively destroying Japan as a first world sovereign nation just as Europe and the US are being destroyed.

At least that's my prediction. I hope I'm wrong.

GoNavy's picture

The United States isn't that far behind.  You could see it in Dudley's comments Tuesday and then, again, Wednesday from Bernanke.  They have no idea how to unwind the SOMA holdings of MBS - none.  That's why there is so much talk now of letting the MBS "burn off" (mature).  But if inflation expectations occur as they are now in Japan, they're screwed. The bonds will be worth next to nothing and holding them to maturity so that they pay off in debased dollars is certainly no solution.  (They won't be able to sell, because the losses would be massive, so bad that the Fed cannot pay its annual payment to the Treasury.)

Simply put, the Fed had/has no exit strategy from QE.  There are no good options, which is why holding the MBS part of the SOMA to maturity is being considered -- let the catastrophe happen on somebody else's watch.

Is it possible for the Fed to go bankrupt?  Just a thought...


Go Tribe's picture

I noticed AK prices have come down on a bit on the online sites.  Get em while they last.

madcows's picture

Kamikaze means "divine wind".  I wonder if there is translation for "breaking wind".

BigInJapan's picture

You mean "fart"? In Japanese?


The Heart's picture

Shirt, they began the end when they ignored the real disaster of fukushima. THAT, was the beginning of the end.

Cognitive Dissonance's picture

It is always what is left unsaid that is far more instructive than what is.

Fuku Ben's picture

Not suprised in the least. In the east saving face is exponentially more important than telling the truth and losing face.

fonzannoon's picture

"By stating that they will not accept an overshooting of the target, the Bank of Japan and the government could reassure the markets that there will be no plunge in the yen and no bouts of uncontrollable inflation"

Is This a fucking joke? Where is the punchline?


NotApplicable's picture

The idea that there's still a market? Otherwise, the entire premise is the punchline.

pashley1411's picture

Or, to put it more precisely, a bond market of 280% of GNP does whatevathefck it wants.

Mine Is Bigger's picture

They say, "please."  It's important!!!

Kiss My Icelandic Ass's picture



We WILL NOT TOLERATE an overshooting of the target!! This is our last warning!! LMFAO.

debtor of last resort's picture

Punchline? Everyone has a plan, until they get punched in the face.

EscapeKey's picture

Just more shit to be brushed in under the carpet.

I'm not sure there is a floor under the carpet. It appears to be suspended just by shit.

viahj's picture

what are Japan's energy costs these days with their nuclear power plants offline?  how do you rebound economically if your manufacturing energy costs aren't getting lower?  who the fuck wants to buy irradiated rice anyways?

Fuku Ben's picture

Control grid in place: check

Printer presses primed: check

Bond issuances ready: check

Reactors back online: check

Rhetoric with China ready: check

Military on stanby: check


Announcement to public: Nothing to worry about we've got it all under control

Now back to work. Karoshi is your duty to the empire.

Go Tribe's picture

You forgot:


Twitter Drafts Complete: check

realtick's picture

nikkei futures halted for half a fucking day and no one is talking about it?

WonderDawg's picture

Isn't that amazing? All I can say is, that's a mighty dark cloud hanging out there. Better believe they've got the global PPT on the case.

eatthebanksters's picture

So Kyle Bass was right again!  Go Kyle!

kito's picture

dont get ahead of yourself................a 1 day 7% drop, while alot, is small relative to the nearly 100% yearly not sold on this being the end..................

fonzannoon's picture

Kito I get the feeling you don't get sold easily.

Clowns on Acid's picture

kito - Agreed. The Japanese invented the color printer.

bank guy in Brussels's picture

Kyle Bass curious factoid, his address is the same as that of Craft International, the CIA-mercenary company photographed at the Boston bombing ... and who some people think are the criminal murderers:

« Craft International’s address (2101 Cedar Springs Rd., Suite 1400, Dallas, Texas) was listed in Business Week, and is the same address, including Suite 1400, for a handful of businesses, including Cayman Capital Management, LLC, a hedge fund firm headed by a J. Kyle Bass »

otto skorzeny's picture

Interesting- that building may be a portal to hell. I like VT- good stuff there.

Go Tribe's picture

It's Gozer's portal.


Quick, cross the proton pack streams!

Thought Processor's picture

WTF?   Is there anyone out there that isn't connected to the CIA somehow?   

This is getting ridiculous.......


Mine Is Bigger's picture

So, this means you are connected. Right?

Thought Processor's picture

No but sure seems like everyone else is.   As a character once said in a movie long ago "Who are those guys?"

Damned if I know.  But where there's smoke there's usually fire.  And there's a lot of smoke.

seek's picture

That's a very large "prestige" office bulding in Dallas. Anyone with money or trying to give the impression of same is likely there:


I wouldn't necessarily assume that everyone there is a CIA front, though it's certainly possible more than one front is located there.

Chief_Illiniwek's picture

Or, it could just be a virtual office address such as Regus or ServiCorp.


Unless, of course, they are part of the CIA too.....

eatthebanksters's picture

Bass runs Hayman Capital Management.  It's probably a mail forwarding center...

BigInJapan's picture

@Bank Guy

You lost me at "Craft International, the CIA-mercenary company".

Jump to conclusions much? I guess so, considering that the article you misreferenced says "For all we know, Craft could be just a dummy CIA front, like Air America during the Vietnam War era." NOT THE SAME. Try a little more skepticism, real skepticism, a dash of analysis, and a little less Dan Dierdorf-esque declarations.

There's plenty of space over at the Huffington Post for trash like that.


Countering the Craft International Boston Bombing Theory


Damn son, and I ain't even had breakfast yet!

kchrisc's picture

The banksters, in their theft and greed, have built a skyscraper of cards floating on a foundation of quicksand and now the winds are picking up and the waters are beginning to flow.

imbtween's picture

and maintain fiscal discipline.

eatthebanksters's picture

I'm not worried at all...I have lots of friends with common values....between us we can defend ourselves - if the shit hits the fan.  Money will be meaningless as will property rights laws.  As the marines put it, overwhelming firepower - it can tip the scales.  Uh oh!  I hear the black helicopters and...I know my IRS audit letter will go out in todays mail!

Goldbugger's picture

Watch the bonds when they go the whole thing will spread to all markets.

gatorengineer's picture

Plus 78 percent since last fall thats some collapse.......  7 percent down on one day is not a collapse......  Limit down tonight, well that would be different.

Poetic injustice's picture

It is big deal.

Imagine that every New Year Santa Claus was coming, and one year he did not come. End of the world...

In this case pension funds are screwed most, and indirectly all Japanese.

Yen Cross's picture

    Anyone trading the ¥ right now does so at their own peril. It's a suckers bet right now. Countless traders got taken to the woodshed last night, and it's just a bunch of deer in the headlights, trying make back their loses.

khakuda's picture

Central bankers believe in the free lunch.  Print money, create value and wealth with no negative consequences.

Listening to Benny yesterday applaud and say he was encouraged by the real economic impact of what Japan has done is yet further evidence that he has no clue.  All will look well, until that one bad day when rates spike, currencies fall, the markets drop 25% and the game is over.

And they'll say no one saw it coming.  No one foresaw that you could do dumb things for a long periods of time and there would inevitably be a negative consequence.  No one.