AsiaPac Calm Before BoJ Storm, Japanese Household Spending 'Unexpectedly' Drops As China Releveraging Continues

As all eyes, ears, and noses anxiously await the scantest of dovishness from Kuroda and The BoJ tonight (despite numerous hints that they will not unleash moar for now), the data that was just delivered may have helped the bad-news-is-good-news case. Most notably Japanese household spending dropped 0.4% YoY (with tax hike issues out of the way) missing expectations by a mile as the 'deflationary' mindset remains mired in Japanese heads. AsiaPac stocks are hovering at the week's lows unable to mount any bid as China fixed the Yuan notably stronger and instigated a new central pricing plan for pork prices (which suggests concerns about inflation domestically). Once again Chinese margin debt reaches a new 8-week high as 'stability' has prompted releveraging among the farmers and grandmas.


Japanese household spending dropped.. again... way more than expected...


Well done...


So, while expectations have been set that traders should not expect too much excitement tonight, Bloomberg lays out some of Kuroda's options...

The governor said earlier this year there were “many options" available for more stimulus and that the central bank may need to get creative in the case of any further expansion.


The easy road would be more government bond purchases, though more radical ideas such as buying stocks or debt from local governments have been suggested by economists.


Japanese Government Bonds


Purchases of Japanese government bonds are already the mainstay of Kuroda’sstimulus program. The BOJ is snapping them up so that its holdings increase at an annual pace of 80 trillion yen ($664 billion) to expand the size of the monetary base and encourage a decline in real interest rates. Boosting JGBs is something it turned to in October 2014. Eleven economists in the latest Bloomberg survey point to another increase in JGB purchases.


While Kuroda has indicated there’s still plenty of room to buy more JGBs, traders in the bond market complain that liquidity is drying up. BNP Paribas SA has estimated the central bank will hold 43 percent of outstanding government bonds at the end of 2016, up from 28.5 percent through the end of June. Another possibility is changing the average maturity of bonds bought from the current 7-10 years to options including 9-12 years.


Commercial Paper and Corporate Bonds


Kuroda’s target is to hold CP and corporate bond purchases at 2.2 trillion yen and 3.2 trillion yen a year, respectively. Unlike other parts of the current stimulus program, this was left unchanged during the surprise boost in October last year. The BOJ moved into this market after the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. Stepping up purchases again could raise the question of fairness in choosing which companies’ bonds and CP to buy.


Exchange-Traded Funds and J-REITs


The BOJ is purchasing ETFs at an annual rate of 3 trillion yen, and Japanese real estate investment trusts at a pace of 90 billion yen a year. Economists at Nomura Securities have suggested the BOJ could load up on ETFs -- boosting purchases to 6 trillion yen a year -- and then pare its bond buying. This could propel the Japanese stock market from a slump in August and extend a recent rally to set new highs.


Purchases of J-REITs have buoyed this key market, helping breathe life back into the property industry. But the BOJ’s strict investment criteria could see it run out of securities to buy over the next year as it tripled the pace of purchases in October 2014. A boost here may require the central bank to dive into securities rated lower than AA.


Local Government Debt


This would be one of the more creative solutions to boosting stimulus. Several economists have suggested this idea as a fresh way to help adjust the composition of asset purchases. DBS Research said the BOJ could consider increasing the amount of “risky assets” to be purchased, including ETFs and J-REITs and incorporating new choices like local government bonds. This option has the advantage of helping revitalize regional economies but risks debates over favoritism if some areas benefit more than others.


Buying Shares


While this unconventional idea would raise issues of fairness, Credit Agricole has floated it as a possibility. Purchasing a composite of stocks based on a gauge like the JPX Nikkei Index 400 amounting to as much as 10 trillion yen a year could be used to raise the annual pace of monetary base expansion to 90 trillion yen, according to Credit Agricole’s Kazuhiko Ogata.


Cutting Interest Rates


Economists at Mizuho Research and Mitsubishi UFJ Securities predict the BOJ will cut the interest rate it pays private banks on excess reserves that they hold at the central bank when it next boosts stimulus.


The BOJ wasn’t considering lowering the rate from the current 0.1 percent, though the option hadn’t been taken permanently off the table either, people familiar with discussions at the bank said in May. Kuroda said more recently that the BOJ wasn’t considering a reserve rate cut for the time being.


Some economists say the BOJ could even implement a negative-interest rate policy, as has been seen in Europe.


Raising the Inflation Target


Consumer prices as measured by the BOJ’s main gauge stood at -0.1 percent in August, and no economists in the Bloomberg survey expect it to reach its 2 percent goal in the six months through September 2016, Kuroda’s latest time frame.


To reignite inflation expectations, the governor and his colleagues could aim to overshoot the target and establish a longer time frame. One option, says JPMorgan Chase & Co. economist Masaaki Kanno, is to target 3 percent inflation and push out the horizon to 2018.


Long-Term Bond Yield Target


Ryutaro Kono, an economist at BNP Paribas Securities in Tokyo, has said it’s possible that the BOJ will set a target for long-term bond yields, aiming to drive rates lower. Since the BOJ began unprecedented asset purchases in April 2013, the benchmark 10-year JGB yield has swung between 1 percent and 0.195 percent. It was at 0.3 percent on Tuesday in Tokyo.

Perhaps the most interesting (and terrifyingly tyrannical) suggestion now is that Kuroda is going to start accumulating a controlling stake in individual companies and then once he has that, demanding wage hikes and capex. As Bloomberg puts it, "if the macro didn’t work, maybe you do it on a super micro level."

In other words, they're going to make Abenomics a success by decree.

*  *  *

For now, 121.00 seems like the tractor beam and NKYis not having any of USDJPY's US session excitement...


AsiaPac stocks have been limping lower all week and early gains tonight are fading...


Then China stepped in with a significant Yuan strengthening:


And more importantly, is inflation creeping in?


And margin debt keep screeping back up...



  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.1% TO 3,530.22

So now we wait... Get back to work Mr Kuroda.

Charts: Bloomberg