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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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Thu, 05/23/2013 - 14:25 | 3592983 ApollyonDestroy
ApollyonDestroy's picture

Look out, KAMIKZEEEEE!!!

Thu, 05/23/2013 - 14:50 | 3593087 BraveSirRobin
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."


Thu, 05/23/2013 - 15:02 | 3593154 MillionDollarBogus_
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."


Thu, 05/23/2013 - 15:23 | 3593252 Thought Processor
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.

Thu, 05/23/2013 - 15:29 | 3593283 They trynna cat...
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.

Thu, 05/23/2013 - 15:37 | 3593297 GoNavy
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...


Thu, 05/23/2013 - 15:16 | 3593221 Go Tribe
Go Tribe's picture

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

Thu, 05/23/2013 - 15:46 | 3593352 madcows
madcows's picture

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

Thu, 05/23/2013 - 21:17 | 3594313 BigInJapan
BigInJapan's picture

You mean "fart"? In Japanese?


Thu, 05/23/2013 - 14:25 | 3592984 The Heart
The Heart's picture

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

Thu, 05/23/2013 - 14:37 | 3593028 Cognitive Dissonance
Cognitive Dissonance's picture

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

Thu, 05/23/2013 - 14:47 | 3593035 Fuku Ben
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.

Thu, 05/23/2013 - 14:27 | 3592992 fonzannoon
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?


Thu, 05/23/2013 - 14:35 | 3593021 NotApplicable
NotApplicable's picture

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

Thu, 05/23/2013 - 14:38 | 3593033 pashley1411
pashley1411's picture

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

Thu, 05/23/2013 - 14:45 | 3593059 Poetic injustice
Poetic injustice's picture

Punchline is "Do not worry".

Thu, 05/23/2013 - 15:35 | 3593209 Mine Is Bigger
Mine Is Bigger's picture

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

Thu, 05/23/2013 - 15:26 | 3593263 Kiss My Iceland...
Kiss My Icelandic Ass's picture



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

Thu, 05/23/2013 - 15:30 | 3593289 debtor of last ...
debtor of last resort's picture

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

Thu, 05/23/2013 - 14:29 | 3592998 EscapeKey
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.

Thu, 05/23/2013 - 14:34 | 3593012 viahj
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?

Thu, 05/23/2013 - 14:34 | 3593015 Fuku Ben
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.

Thu, 05/23/2013 - 15:18 | 3593231 Go Tribe
Go Tribe's picture

You forgot:


Twitter Drafts Complete: check

Thu, 05/23/2013 - 14:37 | 3593030 realtick
realtick's picture

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

Thu, 05/23/2013 - 19:36 | 3594073 WonderDawg
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.

Thu, 05/23/2013 - 14:37 | 3593032 eatthebanksters
eatthebanksters's picture

So Kyle Bass was right again!  Go Kyle!

Thu, 05/23/2013 - 14:52 | 3593100 kito
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..................

Thu, 05/23/2013 - 14:58 | 3593129 fonzannoon
fonzannoon's picture

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

Thu, 05/23/2013 - 15:18 | 3593228 Clowns on Acid
Clowns on Acid's picture

kito - Agreed. The Japanese invented the color printer.

Thu, 05/23/2013 - 14:54 | 3593109 bank guy in Brussels
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 »

Thu, 05/23/2013 - 15:11 | 3593194 otto skorzeny
otto skorzeny's picture

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

Thu, 05/23/2013 - 15:24 | 3593258 Go Tribe
Go Tribe's picture

It's Gozer's portal.


Quick, cross the proton pack streams!

Thu, 05/23/2013 - 15:12 | 3593196 Thought Processor
Thought Processor's picture

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

This is getting ridiculous.......


Thu, 05/23/2013 - 15:16 | 3593222 Mine Is Bigger
Mine Is Bigger's picture

So, this means you are connected. Right?

Thu, 05/23/2013 - 15:30 | 3593290 Thought Processor
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.

Thu, 05/23/2013 - 15:43 | 3593332 seek
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.

Thu, 05/23/2013 - 17:36 | 3593777 Thought Processor
Thought Processor's picture

You mean like WTC 7 ?

Thu, 05/23/2013 - 15:46 | 3593354 Chief_Illiniwek
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.....

Thu, 05/23/2013 - 16:15 | 3593479 eatthebanksters
eatthebanksters's picture

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

Thu, 05/23/2013 - 22:12 | 3594357 BigInJapan
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!

Thu, 05/23/2013 - 14:41 | 3593040 kchrisc
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.

Thu, 05/23/2013 - 14:52 | 3593098 cougar_w
cougar_w's picture

Please do not worry.

Thu, 05/23/2013 - 15:41 | 3593324 imbtween
imbtween's picture

and maintain fiscal discipline.

Thu, 05/23/2013 - 15:45 | 3593346 This just in
This just in's picture

QUick! Moar cards!

Thu, 05/23/2013 - 16:19 | 3593496 eatthebanksters
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!

Thu, 05/23/2013 - 14:42 | 3593046 Goldbugger
Goldbugger's picture

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

Thu, 05/23/2013 - 14:42 | 3593047 gatorengineer
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.

Thu, 05/23/2013 - 14:53 | 3593105 Poetic injustice
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.

Thu, 05/23/2013 - 14:47 | 3593069 Yen Cross
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.

Thu, 05/23/2013 - 15:21 | 3593206 reload
reload's picture

I hope Orley is OK? --not been seen here in a while

Thu, 05/23/2013 - 14:48 | 3593074 khakuda
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.

Thu, 05/23/2013 - 14:49 | 3593079 ParkAveFlasher
ParkAveFlasher's picture

Wake me when the elephant-sized dandelions sprout in Fukushima.

Thu, 05/23/2013 - 14:50 | 3593084 electricgorilla
electricgorilla's picture

Is every central bank going to micromanage the economy and markets. Wait not to high, wait not to low, wait go, no...dont slow...up..wait..down...this is all ridiculous


Thu, 05/23/2013 - 15:18 | 3593229 SofaPapa
SofaPapa's picture

You've hit the nail on the head.  When there are markets (which there have not been for many years), price is determined by a combination of many actors making decisions based on an almost infinite range of variables.  We are now expicitly engaged around the globe in a regime where all actors are focused on one variable: central bank action.  With that much focus on such a small group of people and their decisions, the instability is incredible to watch.  These morons have put us in a position where an elephant is balanced on a plate held up by a toothpick.  They keep assuring us that the toothpick is made from the strongest superwood ever and that they can teach the elephant perfect yogi-like balance.  It has been a remarkable performance, and I acknowledge their brilliance for carrying it off as long as they have, but entropy has not gone away... When they do finally lose control, this is going to happen very fast indeed.  Not sure if the current Japan cough will be "the one", but without a doubt, it's coming.

Thu, 05/23/2013 - 14:53 | 3593106 SDRII
SDRII's picture

Koo has been with nomura for how long? Enough of this idiot already

Thu, 05/23/2013 - 15:42 | 3593330 pemdas
pemdas's picture

Koo is the japanese Paul Krugman. For years he has been for government spend, spend, spend. Gotta offset the contraction in private spending!!  Now he says be careful?

Thu, 05/23/2013 - 14:54 | 3593111 pashley1411
pashley1411's picture

But Koo's basic premise is how to save the economic players without a period of retrenchment and, for some (many), ruin.

I don't think it can done.

Thu, 05/23/2013 - 14:58 | 3593125 0b1knob
0b1knob's picture

Japan's economy was largely based on comsumer electronics which are made of silicon (sand).   A great philosopher foresaw the outcome long ago.



Thu, 05/23/2013 - 15:00 | 3593144 FleaMarketPete
FleaMarketPete's picture

What no snarky Krugman articles praising the Keynesian/Japanese model today?

I heard in Japan, he lives as a wild man inside the broken down fukushima reactor drawing dung paintings of defunct economic models on the walls and wailing maniacally about his critics.

Thu, 05/23/2013 - 15:18 | 3593230 machineh
machineh's picture

oh man ... imagine a phosphorescent-green Kurgman crawling out of a radioactive waste pit and lurching toward you with his leprous arms outstretched, yelling 'What's the frequency, Yoshi?'

Thu, 05/23/2013 - 15:02 | 3593158 Professorlocknload
Professorlocknload's picture

"no bouts of uncontrollable inflation."

Wild. They really believe they own all market functions now. That they can just turn on the economy and regulate it perfectly within their whims.

How far into absolute Statism we've come. Next up; Legislation banning recessions and depressions. 

Thu, 05/23/2013 - 15:12 | 3593198 Boeing Boy
Boeing Boy's picture

Here in the UK Gordon Brown already tried that one, "an end to boom and bust".  

Thu, 05/23/2013 - 15:18 | 3593233 reload
reload's picture

Gordon fucking Brown: where is that cunt these days anyway, worst chancellor and most useless PM ever. A stand out utter wanker in a hall of shame.

Thu, 05/23/2013 - 15:08 | 3593178 CrashisOptimistic
CrashisOptimistic's picture

Rather a lot of talk of things with no explanation.

What does "the end of the Japan economy" mean?  

Does it mean 100% population death within 6 weeks?

Does it mean 90% population death within 6 weeks?

Does it mean no one will sell them oil with which to transport food so that the population declines happen?

No, it means nothing at all like that.  All it means is some people are going lose big money, but most people will get up the next day and go to work and make money and buy food.

If there was difficulty getting oil to transport food and some people could not eat, various rescue efforts would arrive, with food.

This handwaving in the air panic phrasing is shallow.  When you say "beginning of the end", explain what the end looks like and exactly how many short term deaths result -- because if no one dies, then nothing really happened.


Thu, 05/23/2013 - 15:12 | 3593202 gridlocked
gridlocked's picture

Only the Great and Powerful Oz Bernanke can print money.

Thu, 05/23/2013 - 15:12 | 3593203 FreedomCostsaBu...
FreedomCostsaBuck-o-Five's picture

Send in the Prunge Protection Team!

Thu, 05/23/2013 - 15:13 | 3593204 FreedomCostsaBu...
FreedomCostsaBuck-o-Five's picture

Send in the Prunge Protection Team!

Thu, 05/23/2013 - 15:15 | 3593217 Clowns on Acid
Clowns on Acid's picture

"BOJ needs to declare it will not tolerate overshooting of inflation"....... Oh ya mean just like the Bernank ?

This should be fun....

Thu, 05/23/2013 - 17:07 | 3593689 SHRAGS
SHRAGS's picture

Hedonics....of course inflation will be "contained".

Thu, 05/23/2013 - 15:16 | 3593220 delivered
delivered's picture

That's the problem with CB's, governments, and economists. They always think that they are in and can "control" the markets (or everything for that matter). That somehow theory or how it is taught in the classroom and/or discussed in the board room (or deep in the bowels of government) is how it should play out in the real world. I can't tell you how many articles I've read, penned by another economist who doesn't have a clue how businesses operate, that are worthless or how many times politicians have openly lied about the state of economic affairs to "assure" the masses and the financial community that all is well. Complete and utter bullshit and a sure tell sign that we are fast approaching the day of financial reckoging. That is, the more "assurances" provided by politicians and the more "advice" provided by economists (especially from every corner of thinking) simply means that nobody has any idea how to address the structural root of the problem.

Maybe this would be the best chart of all. That is, to measure the volume of CB, politician, and economist statements in relation to the state of the economy to see if a direct coorelation is present. My guess is yes but having some hard data would certainly be interesting. 

In the end and over the short-term, government/CB control of markets is probably doable but over the long-term, Adam's Smith theory on the invisible hand at work will reign supreme. Or in the words of Tim Robbins who played Andy Dufresne in the movie The Shawshank Redemption when asked about the science of geology (as quoted by Red played by Morgan Freeman), it is simply just the study of time and pressure. So to for the economies of countries like Japan, the US, most of Europe, etc. as time and pressure will eventually cause these economies to collapse as a result of one simple concept - Too much debt with inadequate assets supporting the debt. 

Thu, 05/23/2013 - 15:34 | 3593300 Jack Burton
Jack Burton's picture

How does the Great Game change is the North West Pacific if Japan really tanks, and China maintains a reasonable growth? America is pushing Japan to rearm. How does rearming fit with a Japanese economic crisis, I assume they would have to print the yen to build the weapons and pay the troops. Sure, this works for the USA, but Japan is not the world reserve currency.

Thu, 05/23/2013 - 15:43 | 3593339 omi
omi's picture

I think Japan will be alright, I've heard that after the slow down of exports to China after anti-Japan conflicts, spurred mostly by farmers, Chinese purcahses of Japanese goods have surpassed previous levels. Japan, on the other hand, slowed down purchasing of Chinese exports due to the conflict and is more persistnet in the protest. I don't vouch that this is correct as I haven't checked the numbers personally, but this is what I've heard.

Thu, 05/23/2013 - 15:45 | 3593342 NipponMarketBlog
NipponMarketBlog's picture



"BOJ needs to declare it will not tolerate overshooting of inflation".

I don't believe the market as a whole has had any real confidence in Kuroda-san's plan. I think 'investors' have simply been playing the musical chairs liquidity game.

Has the music stopped? Possibly not quite yet, but the band is looking tired here.... 

Thu, 05/23/2013 - 16:50 | 3593633 Never One Roach
Never One Roach's picture

Time for the Fed to step in and help buy those bonds, yes?

"A friend in need is a friend indeed."

Thu, 05/23/2013 - 17:31 | 3593761 q99x2
q99x2's picture

Bass says everything is fixed and now Koo says it is the end.

Warning the global pole shift is underway. Beware of tears in the fabric. Synchronicity is beyond good and evil. The sequences align according to the laws of change. Be ready when the door opens.

Thu, 05/23/2013 - 19:07 | 3593998 world_debt_slave
world_debt_slave's picture


Thu, 05/23/2013 - 23:32 | 3594749 Element
Element's picture



Relax folks, this is what's called, "a beautiful deleveraging".

Fri, 05/24/2013 - 00:46 | 3594911 BuckShotJones
BuckShotJones's picture

I am envisioning Krugman, eye twitching, writing the word "keynesian" with his foot on the padded walls of his cell.

Sat, 05/25/2013 - 00:25 | 3597896 bill1102inf
bill1102inf's picture

"Print money, create value and wealth"

opposite - destroy wealth, value and eliminate debt


This is what will actually happen.  What expanded will contract with the stroke of keys just as it was created it will be taken away.  Those with the most debt will be freed as the debt is simply wiped out - both government and private. Those hoarding cash whether it be a few Trillion in South America from the drug trade, a few trillion in China from the wage arbitrage and our desire for junk, or companies that can not find anything better to do with it (like AAPLE) will find their dollars worthless as we switch from a green dollar to a red white and blue one.


There would be a mad scramble to restock the warehouses in Saudi Arabia with new fiat amongst the 'who here as a bigger dick' crowd.  


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