With All Eyes On Tonight's BOJ Announcement, A "Minor" Snag Emerges

With all eyes on the BOJ's decision in several hours, an announcement which is expected to contain some component of government deficit funding attached to it, or helicopter-lite, a "minor" snag has emerged in what Japan has affectionately titled the "emergency, peace of mind realization, overall spending measures" fiscal package...

 

... namely that only about a quarter of the total JPY 28 trillion in new stimulus is in the form of actual spending... assuming of course one would call JPY 7 trillion "minor."

As Bloomberg reports, "about one quarter of Japanese Prime Minister Shinzo Abe’s new 28 trillion yen ($267 billion) economic stimulus includes actual spending, according to a person familiar with the matter."

The person, who asked not to be named as the discussions are private, didn’t specify the period of time over which the 7 trillion yen would be spent. The money will be part of 13 trillion yen of "fiscal measures," with the rest of that sum covered by so-called zaito financing that’s used to raise money for projects at state-run companies, according to the person. The remaining 15 trillion yen in Abe’s total package is unclear; he has yet to offer a breakdown on the plan.

An Abe has aggressively talked up the upcoming stimulus, investors have been looking for details of what it will actually contain and, more imporantly, how much of it will be new spending ahead of tonight's BOJ policy meeting, with economists expecting further monetary stimulus. The Nikkei newspaper reported earlier on Thursday that more than 6 trillion yen will be actual spending. Abe said the cabinet will review the overall plan next week.

Such a small spending component means that any matched component to tonights BOJ's announcement will likely lead to disappointment. That is what Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities in Tokyo, believes. According to him Abe’s plans for more than 28 trillion yen ($265 billion) in stimulus may have a limited impact on the economy.

“The point is how much real spending the government will have, and it looks the real fiscal spending could be about 5-6 trillion yen over several years,” he said. Or 7 trillion according to the latest disclosure. Maruyama said because “actual spending” may not be as large as the 28T yen number, “there may be limited impact on boosting the economy.” He concludes that “the size of the package looks magnified."

Others agreed.

Cited by Bloomberg, Yasunari Ueno, the chief market economist at Mizuho Securities in Tokyo said the package is "all padding."

“Tax revenues aren’t rising, and the funds for an extra budget are limited,” Ueno said. “This is all padding,” with the government pretending it has resources even though it doesn’t, he said. Ueno also said he doesn’t think this is the right time for such a spending package, given the nation’s high debt burden.

In short, Abe wants his cake and to eat it too, as he realizes that any dramatic increase in Japan's debt load may be frowned upon by the rest of the world, and certainly by rating agencies. However, he also wants to crush the Yen and send the Nikkei soaring with another "shocking" liqudity injection.

Finally, the FT summarizes all the various points of tension as follows:

Haruhiko Kuroda is set to dash market hopes for ”helicopter money” on Friday but there is a high chance the Bank of Japan governor will deliver more stimulus as he battles with falling inflation. According to surveys conducted by Bloomberg and TV Tokyo, about 80 per cent of analysts expect easing at the BoJ’s July meeting, although they are widely split on what form it will take.

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A ¥28tn package would be 5.6 per cent of gross domestic product, a massive stimulus, but analysts said it will be spread over several years and much of it will not be “fresh water”, or actual new spending.

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Currency traders have driven the yen down from ¥100 to ¥107 against the dollar in recent weeks, with a recent visit by former US Federal Reserve chairman Ben Bernanke fuelling speculation about a radical shift in Japan’s monetary policy.

 

But while the odds of easing are higher than at any time since the adoption of negative interest rates in January, BoJ officials say there is no chance of helicopter money, leaving them with a dilemma: they fear whatever they do will now disappoint markets.

And that is the punchline, because having soared as much as 700 pips from its recent pre "helicopter money" rumor lows, the Yen has now priced in far more than the BOJ will be able to deliver tonight. It is also why, according to Reuters, the Ministry of Finance is lobbying hard for BOJ to ease further and has prepared a statement it’ll publish if BOJ eases.

The worst case for Yen shorts would be if the BOJ simply does what both the ECB and the Fed did in recent days and punts to September:

From the BoJ’s point of view, the fiscal stimulus should boost growth and inflation. That gives it less reason to act itself and also argues for waiting until September, when the size of the package will be clear. But the BoJ also wants to show that monetary and fiscal policy are working together.

Alas, absent helicopter money, and assuming only 7 trilion yen, or $67 billion, in actual spending spread over several years will be unveiled, that will hardly allow the BOJ to substantially boost the amount of bonds it purchases any given month without hitting the biggest limitation of all: running out of securities to purchase and/or willing sellers.

Here is the FT's conclusion:

Leaving helicopter money aside, the options in the central bank’s toolkit are deeper cuts in interest rates to below minus 0.1 per cent; an increase in the pace of asset purchases from ¥80tn a year; or buying more equity and real estate funds.

 

Although the BoJ still believes its move to negative interest rates was highly effective, it is yet to overcome a strong backlash from the public and the financial sector, making another cut less tempting for now.

 

Buying more exchange-traded equity funds is an easy option but would be likely to disappoint markets by itself. That leaves the possibility of upping government bond purchases to ¥90tn or ¥100tn a year.

 

Buying more assets at the same time that the government mounts a new fiscal stimulus would show co-operation from the BoJ and look, on the surface, quite similar to helicopter money.

 

The BoJ thinks such a policy is completely different — it is already buying more bonds than the government issues every year — but if purchasing still more assets can convince markets of its determination to drive inflation to 2 per cent, it may be an attractive choice.

 In any case, it is difficult to envision an announcement by the central bank that does not disappoint a market which as recently as a week ago was expecting for money to literally fly out of helicopters.