The Baddest Bad Bank Of Them All

Over at The Telegraph, Ambrose Evans-Pritchard either did not get the email, or ignored the postscript: "And for Amaterasu's sake, do not let on to what it is that we are doing!" (Link)

Once in an exchange with a noted Japan expert I described Japan Government Bonds as toxic assets. Evans-Pritchard clarifies what I mean.

What is peculiar is the mention of bond vigilantes. More curious still is the mention comes from BNP Paribas chief economist Kono Ryutaro.

What bond vigilantes? Over 90% of JGBs held by domestic investors and most of that, when not by  the Bank of Japan, is by Japan's largest financial institutions. Anyone demanding yield -- a.k.a, lower of bond prices - would open up craters in the capital bases of every major participant in the financial system. So everyone has had an incentive to play nice, especially since the financial system has continued to gorge itself on real income (thanks to deflation) producing JGBs long after the national debt-to-GDP-ratio made any sense.

Exit was kept in check by both the lack of reasonable investment alternatives (see the graphs of Japan's equities markets and real estate prices since 1989) and mutually assured financial destruction if any big player tried to opt out of the game.

So no vigilantes. Instead, a genteel Mexican standoff -- no participant having the ability to get out fast enough to make up for the losses on its hoard of JGBs.

What Bank of Japan Governor Kuroda Haruhiko is offering -- and what made the interest rate volatility in May so inexplicable -- is an orderly and gradual exit from the standoff for non-government market participants. The Bank of Japan promises to expand its balance sheet without limit, under the aegis of doing everything it can to create inflation. Japan's financial giants, not working in sync but not being disharmonious either, sell their JGBs to the BOJ, reducing the riskiness of their portfolios.

Of course, if the BOJ is successful in triggering inflation, then the pressure will be on the financial system players to get out of JGBs all the faster -- faster perhaps than the BOJ can buy the securities on offer.

At that point reported increases in government tax revenues had better be spectacular. If they are not, the JGBs in the portfolios of Japan's financial system will indeed be toxic, transformed into poison by the loss of credibility of the ultimate cover story of the Japanese government's being able to pay JGBs off.

So good luck with that asset switchover, everyone.

As for idle cash appearing on the balance sheets of Japanese megabanks and insurance giants, some of it is going to flow into the equities markets and possibly real estate, reinforcing the emerging bubbles there. However, the financial giants, which employ at least a few individuals who remember the 1980s, are going to direct a lot of the BOJ-printed money overseas. Which means global asset reflation and a tumbling yen. Higher import prices, primarily of energy and raw materials, from the lower yen, yes -- but also more competitive export prices and enormous profits for exporters, at least in their debased accounting currency. Which in turn would mean higher government tax receipts.

Where does the virtuous, BOJ-inspired cycle break down? In competing devaluations of the won and the yuan? Too stupid am I to say.

About That Revolution You Are Fearing

The insurgency began
And you missed it...

- REM, Begin the Begin (1986)

On April March 15, this summer's House of Councillors election became irrelevant. On that Friday, the House of Councillors approved, with coalitions shifting on every vote, the appointments of Kuroda Haruhiko as Governor of the Bank of Japan and Iwata Kikuo and Nakaso Hiroshi as deputy governors.

With these nods, the House of Councillors ceased to have a part to play in governing Japan. High appointments are the only matters requiring the approval of both Houses of the Diet. All other governance issues can pass into law via the supermajority the ruling Liberal Democratic Party/New Komeito coalition holds in the House of Representatives.

The only function the House of Councillors now serves is as a brake upon constitutional revision. The LDP and the Japan Restoration Association will be campaigning hard on the issue of revision in July. However, it is impossible for the two parties to win the necessary 2/3rds of the seats in the House of Councillors.

The existing state of legislative tyranny creates the conditions for some strange requests. Last week, Prime Minister Abe had a meeting with Osaka City mayor and JRA co-leader Hashimoto Toru at the Prime Minister’s Residence. In the course of the meeting, the prime minister asked Hashimoto for JRA support of the government’s budget, stating:

"If the JRA supports the budget bill, we will earn the public’s approval, even if the bill is rejected by the House of Councillors and has to be passed using the override."

(Link - J video)

Put into less convoluted terms, the prime minister's request reads, "We are going to pass the budget using our 2/3rds majority in the House of Representatives if the House of Councillors rejects it. Can you provide the political cover for our steamrolling of the legislation?"

What is the really weird part about Abe's gambit? Not that Abe is asking the Hashist to provide a fig leaf for the ruling coalition's naked use of power. No, what is weird is that under Article 60 of the Constitution, the passage of a budget does not require an override – the budget becomes law effective 30 days after the House of Representatives gives its approval, no matter what.

True, Abe could be talking about the full package of the budget and its enabling legislation, particularly the bond issuance bills to which Democratic Party of Japan prime ministers Kan Naoto and Noda Yoshihiko both had to sacrifice their premierships. Passing the enabling legislation will require the approval of both Houses, and barring the approval of the House of Councillors, the use of the 2/3rds override majority in the House of Representatives.

Of course, that Abe even asked Hashimoto for cover reveals an interesting lack of self-confidence on the part of the prime minister and his party. This could be because the use of the override is constitutionally suspect, the product of the LDP's and the New Komeito's margin of victory in the tainted December 2012 election.

However, reticence toward use of the override extends back before the courts made clear their disgust with the inequalities of the House of Representatives voting districts. Back in 2007-08, prime minister Fukuda Yasuo and the LDP embarrassed themselves repeatedly by failing to use the override majority to keep vital pieces of legislation from becoming defunct.

Some have argued a cultural distaste for the bald use of constitutional powers. Such a proclivity may indeed exists.

A self-interest explanation for earlier restraint would be that the smart elements of the LDP sensed that the party could not use the override without triggering questions about the legitimacy of House of Representatives elections. Had earlier LDP governments used supermajorities again and again to railroad controversial or blatantly self-serving legislation through the Diet, the courts might have stepped in earlier to rectify imbalances in the sizes of the districts -- something the LDP really wanted to avoid.

Later - Thanks to reader PW for alerting me to the error in the first line.

Flammis Acribus Addictis

Okumura Jun remarked several weeks ago that Kuroda Haruhiko, the new Bank of Japan governor, would have to make "a quick kill" following his confirmation. (Link)

Okumura's post was prescient but it looks as though the timetable has been accelerated. Weak Tankan numbers, softening of the labor demand for labor, unexpected dips in prices and industrial production have made the target of 2% inflation and economic growth look less achievable, leading to some ominous backtracking. (Link)

Kuroda is in a bind. The markets have already priced in the most obvious changes in policy direction, making, for example, a stronger commitment to purchases of longer maturity securities a far more expensive proposition (Link). Coming out of this peculiar "last-meeting-of-the-Shirakawa-term-with-Shirakawa-gone" with no new proposals, just a big dose of anti-deflationary attitude is a possibility -- but who wants to start off the first big public event at one's dream job with "nothing important to say now, please wait until next time"?

Politics and Poetry: Senryu For The Week Of March 23, 2013 - The Shrieking Begins

It is hard not to applaud, if only while shaking one's head, at the performance of the Abe Administration and the Liberal Democratic Party. Against all odds and all expectations they have steamrollered all opposition to their policy program. The equities, bond and currency markets have sung a tune that the an informed but uncritical lay person can hum, with the unsurprising result of public support for the Cabinet and the party rising ever higher in public opinion polls. (Link - J)

Every single thing Abe and his party have sought to make happen has happened. Unless there is some extraordinary reversal of fortune between now and election day, Abe's LDP will sweep the district and the proportional races, leaving out of courtesy – not necessity—a smattering of seats to their electoral allies, the New Komeito.

With the seeming inevitability of a landslide and the prospects of an Abe administration unleashed following a massive victory in the July elections, the tone of the comic verse published in my Saturday newspaper have taken a decidedly uncomic turn.

国あげて
あとはしらぬと
花見酒

Kuni agete
Ato wa shiranu to
Hanamizake

All over the country
No knowledge of that which is to come
The sake of cherry blossom viewing

It is cherry blossom viewing season (at an unseasonably early time, yet another brick in the wall of worry for those of us wishing a livable planet for our children) and indulging to excess on alcohol is a part of the festivities. However, the oblivion described is far from blissful. The lack of knowledge of the future refers not just to loss of fear of the future from drunkenness but also to the quick scattering of the cherry blossoms, who know no future because they have none. The "All over the country" furthermore does not refer just the geographical space but the people of Japan, who are drinking themselves into a stupor because they do not want to know the future.

労組より
鶴一声で
勝ち取れる

Roso yori
Tsuru hitokoe de
Kachitoreru

Rather than the labor unions
From the voice of ultimate power (one call of the crane)
Comes conquest

It has been the time of the ritualized spring struggle (shunto) in between the labor unions and the managements of the major corporations. The remuneration rate rises won by the major unions become the standard for remuneration in all businesses.

As has been the case for longer than anyone wishes to contemplate, labor union requests for dramatically higher wages – i.e., a sharing of the profits the corporations have made through long term cost-cutting and the recent fall of the yen – have been turned down by corporate executives, even with the Abe government encouraging corporations to be more generous. (Link)

The crane voice of Tsusu hitokoe de is not the crane’s cry of classical poetry, which is associated with a love of one’s children and one’s homeland. Instead it is the voice of ultimate, unquestionable authority (in this cases, the CEOs of the corporations). With a single utterance, it ends all conversation.

オスプレイ
頭上に祝う
主権の日

Osupurei
zujo ni iwau
shuken no hi

Ospreys
overhead celebrate
the day of return of our sovereignty

The LDP in its December 2012 election manifesto promised to establish a national day of remembrance of Japan’s Occupation. On March 12, the Cabinet ratified the establishment of a public commoration, choosing April 28, the anniversary of the entry into effect of the San Francisco peace treaty, as the day. While shuken no hi will not be a national holiday, there will be a formal government ceremony with the emperor in attendance
.
The establishment of this day of national liberation has understandably infuriated Okinawans, for whom April 28 is a day of shame. (Link)

The author of the senryu mocks the pretentions of the Abe administration, pointing out that the same week the Cabinet established a day celebrating the end of the Occupation, U.S. Forces Japan began conducting training flights of the highly controversial V22A Osprey tilt-rotor aircraft over Japan’s main islands.

公約と
詐欺と分かるも
時遅し

Koyaku to
sagi to wakaru mo
toki ososhi

Even if you can differentiate
campaign promises from fraud
it's too late

One cannot get more negative than insinuating the campaign promises of the ruling party are fraud (sagi).

The negative view of the author is nevertheless one very much of the minority. Cabinet approval is riding high at over 70%. When voters who support the Cabinet are asked why they are doing so, an overwhelming (possibly historic) majority say, "faith in the Cabinet's policies."

The popularity of the government's programs and the reality that the election has already happened prompt the bitter final line of toki ososhi -- translatable as "It's too late for that now" or "That ship has sailed."

The sense of hopelessness reached its apogee this week in the poem that the editors of my local paper published at the top of their weekly feature of poems sent in by readers.

あんなにも
反対したのに
もう賛成

Anna ni mo
hantai shita no ni
mo sansei

After opposing it
So much
You are now agreeing to it

In contrast to the topicality of most senryu, the lead poem is transcendent, without a clear link to a specific incident or government act. It might be a reference to the Democratic Party of Japan's voting in favor of the appointment of former Finance Ministry bureaucrat Kuroda Katsuhiko as Governor of the Bank of Japan five years after the DPJ provoked a major crisis in rejecting two Finance Ministry old boys for the post. Then again, the author may be referring to another betrayal of conscience.

Very possibly the author is making a sweeping accusation of all, cursing all for surrendering to the new regime, abandoning principles and beliefs without a fight.