Japan

The ramifications of the “set up” are rather significant.

Japan’s six reactor Fukushima Daichi nuclear complex has inadvertently become the world’s bell-weather poster child for the inherent risks of nuclear power ever since the 11 March Tohoku offshore earthquake, measuring 9.0 on the Richter scale, triggered a devastating tsunami that effectively destroyed the complex. Ever since, specialists have wrangled about how damaging the consequences of the earthquake and subsequent tsunami actually were, not only for the facility but the rest of the world. The Fukushima Daichi complex was one of the 25 largest nuclear power stations in the world and the Fukushima I reactor was the first GE designed nuclear plant to be constructed and run entirely by the Tokyo Electric Power Company, or TEPCO. Needless to say, in the aftermath of the disaster, both TEPCO and the Japanese government were at pains to minimize the disaster’s consequences, hardly surprising given the country’s densely populated regions. But now, an independent study has effectively demolished TEPCO and the Japanese government’s carefully constructed minimalist scenario. Mainichi news agency reported that France’s l’Institut de Radioprotection et de Surete Nucleaire (Institute for Radiological Protection and Nuclear Safety, or IRSN) has issued a recent report stating that the amount of radioactive cesium-137 that entered the Pacific after 11 March was probably nearly 30 times the amount stated by Tokyo Electric Power Co. in May.

I had to come see for myself. What does the worst radiation and natural disaster in history look like? Chaos. Devastation. Cataclysm. Right? Actually… none of the above. Fukushima and the surrounding prefecture is as quaint and picturesque as ever. Eight months on, there are hardly any signs of a nuclear accident or major earthquake, at least on the surface. I was half-expecting the town to have a permanent decontamination facility… with radiation detectors as far as the eye can see, and legions of workers in biohazard suits. After all, this town of nearly 300,000 is now the world’s largest dirty bomb. But riding through the surrounding area and walking around the streets today, Fukushima looks like any other small(ish) town. Schools, temples, shops, and restaurants… everything is normal. In fact, it’s almost eerily normal, like something out of an old Hitchcock film.

Chaos theory states than in complex systems, a butterfly flapping its wings in Japan can cause tornadoes in California. Whether or not that is true, a Banker in Belgium buying Greek bonds can impact the lives of factory workers in Germany. Europe continues to head down the path of making the system more complex than ever and ensuring that no bad lending, investing, or borrowing decision is ever punished.

Deflation phobia has broken out again, and Japan's "deflation spiral" is held up as sheer horror. So here is my experience with that horror. Alas, in one category, deflationistas have been right.

Remember all those daily rumors (prmarily courtesy of the FT) that either China, or Japan, or Europe itself would bailout Europe (yeah, don't ask). Well we can put them all to rest...for at least a few more hours. Because in the battle of inverse counter disinformation, it is important to refute the rumors you yourself have created just so next time the same rumor is spread it has some impact.... Unfortunately said impact will be less, much less, with every single iteration, until just like central bank intervention, its impact is lost in the noise. Per Businessweek: "Officials from China and Japan, the world’s second- and third-biggest economies, indicated that their support for Europe will have limits  and the region needs to solve its own debt crisis. Japanese Finance Jun Azumi said in Washington today that while his nation can buy European Financial Stability Facility bonds if needed, there is no blank check. “At the margin we can do quite a bit to help,” Chinese central bank Deputy Governor Yi Gang said in a panel discussion yesterday at the International Monetary Fund in the same city. At the same time, “the real solution of the European sovereign debt crisis has to be done by Europeans themselves." Good luck in that whole Europeans coming up with a solution: after all it was mere hours ago that France’s Baroin said that the Eurozone is "open to support from others." Translation: "Show us the money." In other news, the countdown for the latest European bailout rumors from the FT is now on.

The Japanese quagmire has been getting deeper and more perilous for years, but now the unique factors that supported its catastrophic indebtedness have reversed. The endgame has started.

Once upon a time, there were a bunch of banks that said “Hey, forget balance sheets.  If they have collateral give them a loan.”  For a while it was good money.  As long as they got payments, it was OK.  So there were more loans, which in turn bid up the value of the collateral. Then the worm turned, because what goes up must come down.  When collateral values collapsed, so did lending.  It got real hard to keep up with the loan payments.  Banks started looking like they came straight out of Goodfellas. This isn’t an American story at all.  All of these types of issues are about debt resolution.  It has happened for centuries, probably further back in history.  You know the story, but perhaps there are some details here that may open eyes.  Like why you heard about Japanese CEOs committing suicide.  Often it was because to keep their businesses running, they had to pledge all their personal possessions for a loan.  The insurance benefit was all that was left for their families when their businesses went bankrupt. This collateral value collapse implies banking crisis implies real problems for a lot of voters.  Anywhere this happens, it is a political crisis, and governments have to step in.  This is where the story goes from bad to worse.

While the easily amused were obsessing with choosing the best one line punchlines to describe the status quo posturing on TV in the form of another highly irrelevant political spectacle, Japan's economy imploded, only this time for real. Unlike back in Q2 when every downtick in the economy was blamed on the Tsunami and on the Fukushima explosion, we just got, 6 months later, the report for Japanese machinery orders which collapsed 8.2% in the month of July, for the biggest drop in 10 months, over and above anything seen during the Fukushima days. This is exactly 100% worse than the 4.1% drop predicted. The reasons according to Reuters: "companies are delaying investment due to worries about a strong yen, slackening global growth and slow progress in reconstruction from the March earthquake." Of these the Yen is by far the most relevant. And thanks to the SNB, the Bank of Japan, whose currency has suddenly become the only safe risk haven, will have no choice but to add balance sheet insult to economic injury and resume JPY interventions, only this time the duration will be even shorter than the last such episode which lasted all of 3 days (see below). This in turn will force all other central banks to do more of the same until relative devaluation, and the biggest currency lower, is the name of the only game in a few weeks. As for the winner: the only real currency which can not be printed, well, that story is very well known by now.

What is it that the successful in the investment community see that policy makers in the US and Europe don't? Let's walk through the evidentiary building blocks of a US balance sheet recession and query why everyone has forgotten about the very real real estate depression.

Minutes ago we saw the following headlines flash, describing Japan's latest attempt to kill the Yen, following the earlier already failed attempt by Moody's which while probably being paid well for its downgrade of Japan, did not achieve its true purpose - to weaken the Yen:

• MOF: Will Require Banks To Report FX Trading Positions - a nice little appetized to FX capital controls...
• Fin Min Noda: Will Set Up Maximum $100B Facility To Deal With Yen Rise - yet another attempt at central planning of FX crosses
• MOF: Will Strengthen Monitoring Of Currency Markets - Noda will be watching... even more

What is highly entertaining, is that as Bloomberg's Michael McDonough, going forward we will need to measure the halflife of Japanese intervention not in days, not in hours, not even in minutes, but in actual ticks.

What was that word Freud used when you are a weak, pathetic, corrupt, powerless, piece of anacrhonistic filth and instead of doing the right thing (for fear of losing your job or worse), you lash out at a weaker and irrelevant substitute? Oh yes, projection.

Bloomberg's Mike McDonough has put together the simplest, and thus best, chart of the latest epic collapse in the BOJ's attempt to intervene and keep the Yen from appreciating. The chart needs no explanation, and shows that the half life of BOJ interventions is not only exponentially shorter but now, outright laughable. What does need an explanation, however, is the prevailing quandary of just what sleeping medications Noda and Shirakawa will have to take once USDJPY touches on 75, then 70, then 65, then 60 and so on, and they watch, watch, watch, the "one-sided" moves in the USDJPY, helpless to do absolutely anything as the Chairman drop kicks yet another monetary opponent into a permanent knock out.

70 years after rice futures trading was halted on the Tokyo Grain Exchange, it was finally reopened today... only to be halted immediately. The reason: concerns that Fukushima radiation would destroy rice crops and collapse supply sent the contract price soaring from the reference price of Y13,500 to a ridiculous Y18,500 at which point it was halted. Note the tick chart below which puts any of our own stupid vacuum tube-induced HFT algos to outright shame. That said, the move should not come as a surprise at least to our readers after we predicted the day Fukushima blew up (and even before) that very soon rice prices would surge to record highs. Little by little, that realization is dawning on everyone.

Headline flashing now openly warning that the BOJ is preparing to intervene:

• JAPAN PREPARES FOR CURRENCY INTERVENTION, NIKKEI SAYS
  
• COORDINATED INTERVENTION MAY FOLLOW JAPAN ACTION: NIKKEI

We call complete bullshit on this. Never do central banks preanounce when they intervene. Never. This is merely more posturing by the toothless and completely powerless BOJ which now has resorted to spreading rumors in order to get the USDJPY higher. Ref: Philipp Hildebrand who has been crouched in a fetal position for the past 6 months in a continuous PTSD daze.