BOJ's Shirakawa Lowers Japanese Growth Outlook, Prepares For More QE, Blames "Mrs Watanabe" For Yen Surge

It is one thing for sellside research, caught in its traditional lemming frenzy, to cut national GDP outlook. In the case of Japan the resistance to reality provide futile early on and based on the average of 43 economists' forecasts, economic growth is now expected to post a 0.22% GDP decline in Q1 and a whopping 2.83% in the April-June period. As had been predicted this is not surprising. What is surprising, is that the head of the BOJ, Shirakawa-san himself has now indicated that Japanese growth is stalling. Per the WSJ: ""We are now expecting production and GDP will decline in the first quarter and the second quarter," Mr. Shirakawa said in an interview on Friday. It is rare for the central bank governor to make such forecasts and is the first time that Mr. Shirakawa officially admitted the likelihood that the economy may shrink in the first two quarters of the year, in line with many private-sector economists' predictions." So for those wondering who will take the temporary lead in money printing in the brief period between QE2 and QE3, look no more: "given high uncertainties surrounding the Japanese economy, many analysts expect Japan's central bank to be eventually forced to take additional easing steps." And just how much money printing are we talking here? "The central bank currently buys ¥1.8 trillion of long-term JGBs every month from financial firms as part of its regular market operations. The bank's hands are tied by the so-called banknote rule, which limits long-term JGB buying to the amount of banknotes in circulation. But the central bank still has capacity to purchase around ¥20 trillion of long-term bonds, according to the central bank's latest account data." In other words, lots.

From the WSJ:

The BOJ's policy board will meet April 28 to discuss forecasts for Japan's economy and is scheduled to release its semiannual outlook report, including numeric forecasts for real GDP.

Given the cloudy outlook, Mr. Shirakawa said the central bank stands ready to take further easing action if economic conditions worsen.

"We are always carefully monitoring the situation and if we think it is necessary to take additional action, we as central bankers are ready to take such action," Mr. Shirakawa said.

In addition to expanding asset purchases, the BOJ has supplied ample liquidity to the money market amid growing concerns about the ability of banks to meet a surge in demand for funds from companies and households.

As a result of aggressive fund provision, the current account balance--the funds that financial institutions in Japan keep at the central bank, which they can use for lending or other needs--had expanded to more than ¥42 trillion in late March. That significantly exceeds the previous high of ¥36 trillion recorded during the BOJ's quantitative-easing program in the early 2000s.

To support reconstruction efforts in the affected areas, the central bank also introduced a special lending facility that makes ¥1 trillion of low-cost funds available for banks in the affected areas, and started considering accepting a broader range of collateral to make it easier for financial institutions to secure funds.

In other words, throwing the kitchen sink at the problem this tie will truly be different.

Or not.

In a statement that puts Shirakawa's perception of reality starkly into question, also on Friday the BOJ head blamed the massive surge in the JPY in mid-March not on repatriation and heavy trading desk margin liquidation, but on, wait for it, Mrs. Watanabe.

In a rare reflection of wild currency moves following the March 11 earthquake, Bank of Japan Gov. Masaaki Shirakawa said it was not the widely anticipated selling of overseas assets by Japanese insurers, but rather moves by the Mrs. Watanabes that propelled the yen to an all-time high against the dollar.

In an interview on Friday, the BOJ chief said actions by investors engaged in margin trading—the favorite game among the herd of small Japanese investors represented by a mythical housewife, "Mrs. Watanabe"—were mainly to blame for the yen's rise to 76.25 against the dollar in the early hours of March 17.

"The most promising explanation was such loss-cut trading," Mr. Shirakawa said, referring to yen buying by the retail investors that accompanied their compulsory loss-cut sales of foreign currencies in margin trading.

Japan's central bank, like the U.S. Federal Reserve, is not in a position to comment on the currency market, but in a lengthy analysis on the causes of the dollar's fall on March 17, Mr. Shirakawa cited two other reasons: expectations of fund repatriation by Japanese insurers and unwinding of the so-called yen-carry trade.

"First was the alleged repatriation by the institutional investors such as life insurers," Mr. Shirakawa said.

But he said the insurers didn't have strong reasons to sell their foreign assets because insurance resulting from the earthquake were not large, and as they have a sizeable amount of liquid assets in yen.

Well at least he didn't blame CDS traders or Citigroup bond runs. And the explanation would have been wonderful if only there was not this one glaring fact to the contrary (read about this here).

So yes, even as the clueless finally accept reality, they unfortunately still remain clueless. But that is a key job requirement of any central banker it would appear.



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