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In this case, I was thinking of the Bank of Japan, which is the key to this “market’s” recovery. As we’ve maintained for the past six months, the yen carry trade has provided nearly all of the upside since 2011. And, since USDJPY flat-lined last December, stocks have gone nowhere.
There’s a natural reticence on the part of the BoJ to further devalue the yen. It’s producing inflation (food and energy, which are not counted) but zero growth. Even Abe’s closest advisor admitted last night that QQE has been an utter failure. This was right before he went on to recommend expanding QQE. From the Financial Times:
Japan needs more economic stimulus to stave off a serious shock from China, according to one of Prime Minister Shinzo Abe’s closest advisers.
Etsuro Honda, an architect of Abenomics in his role as special adviser to Mr Abe, said passing a supplementary budget to boost the stagnant economy was an “urgent task”.
“I don’t think we should call it a technical recession yet, but generally speaking, the Japanese economy is in a static situation,” Mr Honda said in an interview with the Financial Times. “It is not growing positively.”
As we discussed last month in Japan’s Equity Trap, Japan has no options other than expanding QQE.
They have amassed too much leverage, and used much of that leverage to accumulate ¥80 trillion in stocks — essentially on margin. They are unwilling to write off those losses, so must do whatever they can to recoup them.
As the Nikkei reached our target zone yesterday [see: Update on NKD] the BoJ and GPIF were collectively sitting on losses of approximately $150 billion — about 3% of Japan’s GDP.
At yesterday’s low, NKD was testing the midline of a channel that goes all the way back to Aug 2010. Each and every leg up has been driven by yen debasement or BoJ stock purchases. Should it fail, it’s a long way down.That’s a big incentive to act, and to act quickly before things get even worse. The BoJ has a Monetary Policy Meeting next Tuesday and Wednesday, and another on October 30. What will it take for them to pull the trigger?
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