Japan

Moody's Investors Service has today placed the Government of Japan's Aa2 local and foreign currency bond ratings on review for possible downgrade. The review has been prompted by heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government's ability to fashion and achieve a credible deficit reduction target. Without an effective strategy, government debt will rise inexorably from a level which already is well above that of other advanced economies. Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale. Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.

A month ago, we reported that the Japanese public pension fund, which holds JPY152 trillion in total reserves, would for the first time withdraw 6.4 trillion yen in order to cover pension payouts, a process which once started, eventually ends up with the "Illinois" conclusion where it has to issue bonds to pay accrued pension obligations. The reason why the Japanese pension fund is particularly important for japan is that not only does it have implications for the welfare system of the land of the rising sun, any future dispositions will explicitly affect the supply and demand of JGBs, of which pension funds have traditionally been a major buyer. Not only that, but as Dylan Grice reminded us some time ago, a liquidation process would also impair US Treasury holdings: " As Japan's retirees age and run
down their wealth, Japan's policymakers will be forced to sell assets,
including US Treasuries currently worth $750bn, or Y70 trillion "eight
months" worth of domestic financing." Today, another SocGen analyst, Takuji Okubo, presents a realistic outlook of what will happen when one takes government projections to the pension system and applies realistic assumptions. In a nutshell, instead of a build up of JPY100 trillion over the next 15 years, pension reserves will likely decline by JPY36 trillion, a swing of almost 140 trillion, or nearly $2 trillion in incremental and very marginal JGB and treasury demand actually becoming supply. And in a world in which the Fed is suddenly (allegedly) pulling out as the biggest source of sovereign paper demand, this swing factor out of Japan will have substantial implications for the bond market, especially when coupled with a Japanese economy that suddenly finds itself on the rocks.

Already some of those who said that the Japanese disaster would lead to a surge in global GDP (since disproven) are trying to validate that 3rd worst 2 months drop in the Philly Fed in history (43.4 in march, 3.9 in May) can be attributed to, you guessed it, Japan. Sorry. You can't. Goldman explains why: "We have no information on how much of the drop in the Philly survey over the past two months could have been related to supply chain issues associated with the Japanese earthquake, but this is not a region with an especially high concentration of vehicle manufacturing." So while other Fed districts that do have a substantial manufacturing exposure will likely collapse even more, but at least have a validation for their drop, the Philly Fed is indicative of nothing more or less than wholesale economic contraction, absent the "one-time" impact from Japan.

When we discussed yesterday's miss in April Industrial Production, and noted the plunge in the vehicle assembly rate, we merely said what anyone with half a brain would have seen as glaringly obvious ever since the Japan earthquake in March. "The immediate impact: the drop in the industrial production already
seen, but the bulk of it due to delayed aftereffects, will likely impact
the May number, as the follow through from the Japanese supply chain
halt starts ringing a loud alarm bell across Wall Street. Of course,
this is another thing that all those calling for a 4% H2 GDP could have
absolutely not foreseen (and in fact it was originally supposed to be
positive for the economy, eh Deutsche Bank?). Expect to see drastic
downward cuts to May Industrial Production and next, to Q2 GDP." Fast forward to today when we read in Reuters precisely what was predicted less than 24 hours ago: "here are fears auto production, which added 1.4
percentage points to growth in U.S. gross domestic product in the first
three months of the year, may now be a drag." And irony of ironies: "Some financial
institutions, including Deutsche Bank, are already trimming their second
quarter GDP estimates." But, but, wasn't it Deutsche Bank's very own Joe LaVorgna who first said that the disaster would actually be beneficial for world GDP, and subsequently that the world is "overreacting." Guess not: "Before Tuesday's industrial production data, Deutsche Bank had been expecting economic growth to accelerate to a 3.7 percent annual pace during this quarter after a sluggish 1.8 percent rate in the January-March period. "We lowered it by half-a-percentage point to 3.2 percent. We are going for a more conservative narrowing because other manufacturing activity is still expanding despite the supply disruptions in the auto sector."  And there you have that very dirty NC 17 three word phrase: "Wall Street Strategist."

Following the report of the leaked HP memo which indicated much more weakness in the current quarter than expected, the firm was forced to scramble and released earning early, with the full number coming out at 7:30 EDT. And neither the market, nor John Paulson who recently bought a $1 billion stake in the company, is happy with the disclosure. While the company beats on current quarter top line and EPS, ($31.63 billion vs $31.55 billion exp. revenue, $1.24 EPS vs $1.21 EPS expectation), it was all about the outlook. The firm said it is "revising full year GAAP diluted earnings per share outlook down to at least $4.27 and non-GAAP diluted earnings per share outlook down to at least $5.00." This is a problem as previously it had seen the full year EPS range at $5.25-$5.28, and the outlook was $5.24. It also said that for Q3 "HP estimates revenue of approximately $31.1 billion to $31.3 billion, GAAP diluted EPS of approximately $0.90, and non-GAAP diluted EPS of approximately $1.08." For the full year HP now expects revenue in the range of $129 billion to $130 billion. Previously this was $130-$131.5 billion. And for all those scratching their heads how long before the Japan get out of jail free card is used, here it is: "HP’s revised outlook for the third quarter and the full year fiscal 2011 reflects an expected near-term impact from the Japan earthquake and related events, continued softness in sales of consumer PCs, and reduced operating profit expectations for Services. "

In a free market, we wouldn't have unsafe nuclear reactors ...

In the Department of "You Can't Make This %$!* Up" ...

You just can't make this up: proving that Japan can outdo even the Russians when it comes to nuclear crisis "response", Dow Jones reports that the latest scheme to come out of TEPCO is to cover Fukushima with a giant tent. It is unclear if it will have a circus coloration yet. From DJ: "Giant polyester covers will soon be placed around the damaged reactor buildings at Japan's Fukushima nuclear complex to help contain the release of radioactive substances into the atmosphere, the plant operator said Friday. Tokyo Electric Power Co. (TEPCO) will install the first cover at the No. 1 reactor, the focus of recent stabilization efforts, starting next month." This probably means that Japan looked long and hard at the concrete shell option and realized it was impossible, which is true. The problem is that by now the melted cores are not in the complex, but deep beneath it and the radioactivity is actively seeping directly into the soil. And since the polyester tent idea is doomed to failure, it is only a matter of time before the Simpsons dome is firmly in place over a ragion with a radius of about 20 kilometers. Impossible you say? Just wait.

For those wondering what is causing today's most recent commodities drubbing look no further than the PBOC, which a few minutes ago announced it was hiking the RMB deposit reserve ratio by 50 basis points. Following the hotter than expected CPI print from Tuesday night, this is not unexpected, yet it merely makes the stagflationary outcome even more possible, as aside from inflation all other economic indicators pointed to a sharp slow down. And while China is tightening, Europe, as we predicted, will soon be forced to undo its most recent foolish rate hike, and likely loosen substantially following a crunch in the continent's industrial production. "Production in the 17-member euro area slipped 0.2 percent from February, when it advanced 0.6 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 0.3 percent, the median of 25 estimates in a Bloomberg News survey showed. Production rose 5.3 from March 2010 after increasing an annual 7.7 percent in February." As a result, the EUR drop is causing the USD to jump yet again, causing futures and commodities to tumble. Simple. Or is it?

Just because 1,000,000,000,000.00 is so 2011, Japan brings you 1,000,000,000,000,000.00 just in time for 2012.

While it will not surprise anyone that Japan, which for the past 3 decades has been a monetary policy basket case caught in what bankers like calling a deflationary spiral (yet which others like Sean Corrigan merely define as prices re-indexing to a fair value absent endless cheap credit crutches), has constantly had to resort to a record loose monetary policy coupled with endless episodes of quantitative easing, some may not know that over the past month Japan has seen its current account balance swell by $250 billion, or nearly half the entire Fed QE2 monetization mandate. And as the BOJ continues to disclose the full extent of the Japanese economic devastation following March 11, we are confident that very soon the most recent episode of Japanese “printing” will surpass the $600 billion that the Fed is injecting into the US economy (in addition to the roughly $250 billion in Treasury bonds monetized by the BOJ each year): an amount roughly 5 times greater than America's when expressed as a ratio of GDP. It is thus no surprise then that Bernanke does not seem too concerned with the purported end of QE – after all money printing is merely moving from developed world point A to developed world point B. And thanks to monetary linkages of “globalization” all this brand new money will once again find its way into speculative assets, and thus, Fed mandate #3 favorite - Russell 2000. Below we provide a closer look at what exactly the current and future, Japanese QEasing will look like.

S&P revises Japan's AA- credit rating outlook to negative. The culprit: the Japan earthquake that just as predicted, has become the scapegoat to excuse another quarter of "non-recurring" EPS misses. And while according to Wall Street the economic devastation is GDP positive, Japan may soon be a single A credit, which of course will send it 10 year bond trading with a 0 yield handle. From S&P: "The negative outlook signals that a downgrade is possible if Japan's public finances weaken further over the next two years in the absence of fiscal consolidation to offset them. We believe that uncertainty over the country's fiscal and economic outlook will lessen over the next six to 24 months. If the government's debt trajectory remains on its current course or begins to erode the nation's external position, the long- and short-term ratings could be lowered. If reconstruction costs place less burden on public finances than we expect–either because of lower outlays or increased revenues to cover them–and the government makes progress in strengthening Japan's fiscal profile, we could revise the outlook back to stable."

While we have yet to independently verify the following piece of news which originally appeared in the April 18 edition of the Asia Pacific Journal, we can see how this could be very true. If so, it has very disturbing implications about the "real" truth behind the Fukushima devastation, because outright censorship, Cease and Desist notices, and preemptive takedowns are always the purvey of the "last resort" crew. To wit: "The project team has begun to send “letters of request” to such organizations as telephone companies, internet providers, cable television stations, and others, demanding that they “take adequate measures based on the guidelines in response to illegal information. ”The measures include erasing any information from internet sites that the authorities deem harmful to public order and morality." Of course, if this directive had been in place from the very beginning, nobody would know any of the truth behind the dire catastrophe (which started at sub-3 Mile Island severity and is now equal if not worse than Chernobyl), which has seen enough coverup and lies to make Stalin look like Wikileaks.

TXN which is merely the latest company to post weaker than expected earnings in a quarter which so far has been a major disappointment across the board, also has the dubious distinction of being the first company to blame its outlook cut on Japan:

Outlook

For the second quarter of 2011, TI expects: 

• Revenue:  $3.41 – 3.69 billion
• Earnings per share:  $0.52 – 0.60

This estimate includes a negative impact of about 5 cents for costs resulting from the earthquake and its aftermath in Japan. 

As the street was expecting $0.63 this is not good, but the market will promptly forgive this weakness now that every company will start using the Japanese wildcard.

While we were scouring the latest directives disclosed by the Chinese Ministry of Truth, conveniently leaked on a weekly basis by China Digital Times, we encountered this oddity:

State Council Information Office: Plans for Japanese to Immigrate to Hainan Island, China

April 2, 2011

From the Ninth Bureau of the State Council Information Office: All websites are asked to monitor interactive spaces and immediately delete rumors similar to the following: “Breaking news: Japanese elites discussing plan to emigrate to Hainan Island, China.”

Questions arise: why is China so focused on removing any trace of this rumor? Is it because it is false (probably not the smartest thing, as anyone disseminating it would merely discredit themselves)? Or, perhaps, because it is true?