Japan Drowns In Food, Energy Inflation; China's Liquidity Tinkering Continues As Does SHIBOR Blow Out
Nearly one year into the Japan's grandest ever monetization experiment, the "wealth effect" engine is starting to sputter: after soaring into the triple digits due to the BOJ's massive monetary base expansion, the USDJPY has been flatlining at best, and in reality declining, which has also dragged the Nikkei lower dropping nearly 3% overnight and is well off its all time USDJPY defined highs. But aside for the wealth effect for the richest 1%, it is not exactly fair to say that the BOJ has done nothing for the vast majority of the population. Indeed, as the overnight CPI data confirmed, food and energy inflation continues to soar "thanks" to the far weaker yen, even if inflation for non-energy and food items rose by exactly 0.0% in September. Oh, it has done something else too: that most important "inflation", so critical to ultimately success for Abenomics - wages - is not only non-existant, in reality wages continue to decline: Japanese labor compensation has been sliding for nearly one and a half years!
Goldman breaks down last night's inflation numbers:
The national core CPI (excluding fresh foods) was up 0.7% yoy in September. Despite slightly narrowing from +0.8% in August, the figure remained high. The breakdown continues to shows high positive contribution from energy costs, which were up 7.4% yoy (contribution: +0.64 pp), but the figure was slightly lower compared to August (+9.2% yoy; +0.78 pp).
Aside from energy costs, foods (excluding fresh foods) turned positive at +0.1% yoy (August: 0.0% yoy) for the first time since July 2012, while prices of clothing/footwear continued to rise steadily (September: +0.7%, August: +0.8%).
Cultural/recreational durables (e.g. TV), which has been a significant driver of price decline, rose 0.1% yoy in August for the first time since January 1992, and continued to rise in September, at +0.4%. The September core-core figure (excluding foods and energy) pulled out from the negative territory for the first time since December 2008, at 0.0% (August: -0.1%).
China’s central bank starts system for a loan prime rate, orLPR, today in order to “further promote interest rate liberalization; LPR is 5.71% today
The idea is that sustained increases in consumer prices after 15 years of deflation should lead to a cycle of growth, brisk business expenditures and higher wages. While growth has picked up this year, business investment and wages have not.
"The core-core CPI is a good sign, but it is a little strange to say things are doing well simply because prices are rising," Economics Minister Akira Amari told reporters.
"What we need is to ensure that rising wages accompany price gains to ensure healthy economic growth."
Similarly, Finance Minister Taro Aso cautioned that it would take more time to escape deflation due to uncertainties including sluggish exports and China's economic outlook.
And therein lies the rub: the higher input costs soar - and thay have soared quite high - the less wages companies can afford to pay, and a result wages have been falling since early 2012, oblivious of what Abe wishes or demands. The only question is how much longer can ordinary Japanese citizens afford to get squeezed between soaring food and energy prices, and flat wages. Even if, one assumes, all said citizens are perfect traders and generate a few thousand pips every day fading Tom Stolper's JPY FX recos.
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Elsewhere, overnight the People’s Bank of China took another step towards interest rate liberalisation – introducing of prime lending rates (LPR) that are based on the reporting from nine commercial banks. SocGen notes that the first reading is 5.71% for 1-year lending, below the current benchmark rate of 6%, which is reasonable given that LPRs are offered to the best corporates. We expect no immediate impact from this change, but introducing LPRs means that the PBoC has pretty much given up the benchmark lending rates as policy rates. Liberalising deposit rates, however, will be a gradual process. The next moves are likely by end-2013, including initiation of CDs and implementation of the deposit insurance scheme as well as the bankruptcy lawfor financial institutions.
Qu Hongbin, chief economist of HSBC in a Bloomberg interview, added the following: PBOC’s decision to start loan prime rate is next important step towards market-based interest rates in China. Smaller commercial banks will be able to use market-based loan prime rate, which is determined by commercial banks, as a reference for pricing of corporate loans, instead of using China’s ’managed’ lending rate, which is determined by PBOC. Loan prime rate extends tenor of market-based benchmark rates to longer maturities from existing short-term Shibor rate.
Whether or not this is merely more lip service by the PBOC to feign reform when in reality nothing has changed - as has been the case with all other recent such "initiatives" will be made clear soon. For now, the market doesn't care about rate liberalization. The only rate it does care about is Shibor, or the various tenors of short-term repo rates, which have continued their surge: one-month Shibor rises 102 bps, most since June 25, to 6.4220%, highest since July 1. Three-month Shibor increases to 4.6910% from 4.6876% yesterday, seventh gain in a row, while the all important 1 Week Shibor rose to 4.891% from 4.60%. For now, all the hopes that the PBOC is just bluffing, have been squashed.
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