Albert Edwards On What Happens Next: "More QE - Everywhere!"

Overnight the Bank of Japan disappointed liquidity addicts everywhere when instead of boosting its QE by a modest JPY 10 trillion (why not: it already monetizes 100% of net issuance, what is another 15%, or 50%, or more?), it did nothing, sending the JPY briefly higher, until the GPIF came right along and proceed to sell a few yards, buy USD and then go ahead and buy more stocks.

But even more disappointing for liquidity addicts was that, as Goldman put it, the BOJ "unexpectedly, the BOJ significantly rolled back timeframe to achieve 2% inflation." This is what Goldman said:

For us, the biggest surprise in today’s Outlook Report was that the BOJ rolled back the timing for achieving 2% inflation to “around the first half of fiscal 2016” (ie, end of September 2016), from “in or around fiscal 2015”. We had expected the bank to hold off revising its target timing until the July interim assessment on the grounds that rolling back the timing just as the new fiscal year had begun was not desirable from the standpoint of potentially fostering expectations for inflation.

 

Governor Kuroda repeatedly mentioned that the underlying inflation trend is one of improvement, based on the oil price, which is tracing an upward path as envisaged by the bank since the January interim outlook, developments in output gap and inflation expectations, and observations on this year’s spring wage negotiations. Furthermore, Governor Kuroda reiterated that he has no intention to change the bank’s “commitment to achieve 2% inflation in 2 years time”. These messages are clearly inconsistent with today’s BOJ decision to roll back the timing of attaining 2% inflation. Our reading of the situation is that, due to a lack of confidence in inflation developments going forward, the BOJ has decided to buy itself additional time, at a relatively early stage, ahead of being pressed to do so by the market, even though it may impact its credibility.

As a result, Goldman concludes that "we plan to revisit our monetary policy outlook after closely examining March macro data that are starting to come out. However, we see a risk that the BOJ’s unexpected shift to a later timeframe for achieving 2% inflation may push back additional monetary easing from our baseline scenario of the July interim assessment."

In other words, bearish for buyers of Nikkei, and USDJPY, because without the BOJ's helping hand what else is there really?

Well, one person for whom the BOJ's "efforts" to destroy its currency should not be discounted, and whose further easing is not only inevitable but imminent, is SocGen's Albert Edwards.

This is what he wrote earlier today:

"one area though where Abenomics has undoubtedly failed is that the Bank of Japan has not achieved its 2% core inflation target. When the BoJ started QE in April 2013 they stated that they wanted to hit their 2% inflation target for core CPI at the ?earliest possible time, with a time horizon of about two years?. Well that is now! Yet most key measures of CPI inflation are set to crash to, or even below, zero in the months ahead as the estimated 2% effect of last year?s VAT hike is set to drop out of the yoy calculations. Core CPI inflation that the BoJ targets, which excludes just fresh food, has been running at 2% yoy in February (March data out this Friday). But I prefer to focus of the readily available CPI ex food and energy (known in Japan as core core CPI), which for some peculiar reason does not get followed that closely by the market. At the same time as the March national CPI is published, April?s CPI data for the Tokyo area also will be released. The headline and core (ex fresh food) CPI will be just above zero yoy. But the core core Tokyo CPI (ex food and energy) is likely to have dipped below zero as VAT drops out as the rate in March was already only running at 1.7% (see chart below).

 

It gets worse: "The national CPI will follow the Tokyo measure back down to zero or below in the months"ahead. This is likely put tremendous pressure on the BoJ to ?do something!?." Well, not if the BOJ gives itself more runway as Goldman is suggesting ti has.

To this Edwards says, hogwash, and points out - quite accurately - that once you start QE, you can't stop, especially not if everyone else is doing it, as you will end up right where you started but with massive balance sheet losses to boot (like the SNB).

Regular readers will know that I am pretty horrified by the global Quantitative floodgates that have been opened since the 2008 Great Recession. Once an emergency measure of dubious effect, it is now a never ending stream of confetti money being thrown around the world to inflate asset prices. QE has now become the policy variable of first resort. Personally I think this will all end very badly. But why, I often asked, am I so much more positive about the Japanese outcome than I am the US, UK or eurozone?

 

To be sure I would agree with the Japan sceptics like my former colleague Dylan Grice, John Mauldin and Kyle Bass. But I am bullish because I believe that the Japanese fiscal situation is so bad that the authorities had no option but to begin their QQE in April 2013 and there is indeed, as Peter Tasker says, no turning back. Russell Jones is also correct that the BoJ will become more and more aggressive and inventive for the simple reason that Japan is bust.

Or, to paraphrease, loosely, Fight Club, it's only after you've lost everything that you are free to do endless, unlimited QE. After all, what's the downside?

Personally I have little doubt in my own mind that the Japan government is bust. Many other countries are too, but Japan is much further down the road. Japan?s lamentably low trend growth rate means it cannot possibly pay off its 260% of GDP debts (or even its 140% net debt). That is why it needs to default. That is why it needs to create inflation. And that is why, as John Mauldin puts it, Japan is a bug looking for a windshield. The easiest way of demonstrating the Japanese government problem is the chart below which shows just how massive Japan?s avalanche of bond issuance was in 2013. The problem is not the ongoing deficit at 10% of GDP (now down to 7% of GDP). It?s about the rapid roll-over of existing debt with a short average maturity, which means that the government has to come to the market with near 60% debt issuance relative to GDP each year (apologies for not updating the chart but it still makes the key point). That is why there is no alternative to QQE in Japan.

 

Edwards is again correct when he points out that "Unlike Switzerland, for better or for worse, there is no turning back, for in Japan they are all in. Peter Tasker and Russell Jones are right, but so too are the sceptics like Dylan Grice, John Mauldin and Kyle Bass."

His conclusion on Japan:

Ultimately the pressure point remains the yen and in a currency war race to the bottom I have little doubt that Japan will be the unintentional winner. Our bold end March forecast of Y145/$ may have been missed (I was advised at the time never to give a point forecast with a date attached), but once we break the key Y122/$ multi-decade support level I think we will get to Y145 in a flash. With CTFC data showing speculative net shorts in the yen at the lowest level since QQE was mooted in the autumn of 2012, and with the market having moved sideways between Y118-122 since the start of December 2014, the speculative and technical excess has been unwound, readying the currency for another major move. Most likely the trigger will be another surprise BoJ move...

 

So while the US may be on a verge of a recession that will shock markets, Japan is just exiting its third downturn since the 2008 Great Recession, with a new round of QQE beckoning and a wage/price spiral now within the BoJ and Abe?s grasp (whatever its merits). Personally, like Dylan and the sceptics, I believe the Japanese authorities will probably lose control of the inflationary situation and that is why I am so bullish. In that context we must highlight our 2010 note calling for the Nikkei to hit 63,000,000. Who says I?m an über bear?

But don't worry: Japan won't be alone, because as soon as Japan reignites the printer, the rest of the world will have no choice but to follow:

The Q1 US GDP data was a major disappointment to the market as business investment declined due to the intensifying US profits recession. Only the biggest inventory build in history stopped the economy subsiding into a recessionary quagmire. The US economy is struggling and the Fed will ultimately re-engage the QE spigot. Talk is growing that China will soon be doing the same as local authorities struggle to issue debt.

His conclusion: "Low growth (and inflation) to prompt more QE - everywhere!"

Now, about that "imminent" Fed rate hike...