Japan's Nikkei Free-Falling, -1143

(UPDATE) It is ugly in Europe, with Germany's DAX down 223 points (2.62%). US stock futures are ugly, too. Dow futures down 159. Ben's Fed has some work to do before the cash market opens.

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The stock market in Japan is supposedly disliking the contracting Chinese economy and the US Fed comment about "tapering" down the QE4EVA, but I think it's about another botched day in the JGB (Japanese Government Bond) futures market which was halted (yet again) when the price dropped and yield spiked. 10-year JGB's yield hit 1%, almost triple the yield right before the Bank of Japan intervention in early April.

Nikkei is now minus 940...still 5 minutes to trade.

I wonder if Governor Inose now has second thoughts about advancing the Japan Standard Time. He wouldn't want to start the financial day for the entire world with disaster after disaster in Japanese financial markets, would he?

It is now minus 976, one minute to trade...

...and just ended the day with minus 1,143. That's an intraday swing of 1,459 from the high of 15,942, or over 9% swing.

Now their stock market is catching up with the bond market in terms of extreme volatility.

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Bloomberg News: Kuroda's Antics Backfire, as Mortgage Rates and Corporate Lending Rates Go Up in Japan

You will never see an article like that in today's Japan on any paper. How dare you call Governor Haruhiko Kuroda's action a failure? It's all for us, our well-being, our future!

Volatility in Japanese Government Bonds (JGB) that Kuroda has unwittingly introduced in April is causing the investors to demand premium to compensate for the volatility, thus the rates rise. That's not what Kuroda or his boss Prime Minister Abe intended.

Federal Reserve's Ben must be chuckling, and saying under his breath, "Amateurs..."

Bloomberg News (5/7/2013; emphasis is mine):

Kuroda Stimulus Backfires as Mortgage Costs Rise: Japan Credit

By Masaki Kondo, Mariko Ishikawa & Yumi Ikeda

Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.

While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ, according to Mizuho Securities Co. Federal Reserve Chairman Ben S. Bernanke’s monetary easing almost halved 30-year U.S. mortgage rates since 2008 to 3.35 percent on May 2.

The BOJ’s April 4 announcement that it would double bond buying to generate 2 percent inflation unleashed the highest government-debt volatility in a decade and pushed 10-year yields up by 4 1/2 basis points. The benchmark lending rate for large corporations, known as the prime rate, increased five basis points from its record low to 1.2 percent on April 10, despite the BOJ’s aim of stoking the economy through cheaper funding.

“It makes little economic sense for rates to decline when the BOJ says it will raise consumer prices,” said Toru Suehiro, a market economist in Tokyo at Mizuho, one of the 24 primary dealers obliged to bid at government debt auctions. “Yields are higher than before the monetary easing to reflect the volatility risk, and lending rates have risen because they are set based on bond yields.”

Volatility, as measured by the gap between the 10-year yield’s daily high and low, jumped to 30 1/2 basis points on April 5, the most since July 2003, after Kuroda unveiled a plan to buy more than 7 trillion yen ($70.7 billion) of Japanese government bonds a month, accounting for more than half of the total amount that the government plans to sell in the market this fiscal year.

“The BOJ’s buying is reducing the liquidity of government bonds, preventing market participants from finding appropriate yield levels,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-largest financial group by market value. “That situation will make the market dependent on the BOJ’s purchases just like a morphine addict.”

(Full article at the link)

The US primary dealers wouldn't be able to do without that morphine from the Fed.

4 and a half basis points is 0.045%. What's the big deal, you may ask? Well, if Japan's 10-year bond yield was 0.5% before Kuroda's intervention, it was 9% jump in the yield. That's huge for bonds.

By the way, after breaking just about every financial market with his enormous liquidity, Federal Reserve Chairman Bernanke won't be attending the annual Jackson Hole confab of world's central bankers this year. Rumors is that he won't be seeking the next term.

(If and when SHTF, Kuroda will get the blame, I suppose.)

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Extreme Gold Sell-Off Caused by Extreme Volatility of Japanese Government Bonds?

Gold and silver crashed on no apparent reason whatsoever on Friday, and it continues in Asia on Monday.

After reading the article at Zero Hedge (4/12/2013), at least now it all makes sense to me. Instead of unwinding the JGB positions in the new-normal extreme volatility because of the Bank of Japan meddling, financial institutions are selling other assets to raise cash for margin calls for their JGB holdings. And those assets of choice seem to be gold and silver.

Gold investors can thank Haruhiko Kuroda, the ex-Finance-Ministry-bureaucrat Governor of Bank of Japan, for doing everything he can to create inflation which he calls "price stability" (1984, anyone?) for the opportunity to add to their positions at an extremely low price considering the money printing that has been going on for the past 4 years by the central banks in the US and Europe.

Japanese financial media like Nikkei Shinbun is all excited with Kuroda's regime, calling it "different dimension (異次元)", as in Twilight Zone. Indeed.

From Zero Hedge, emphasis is original:

Japanese Bonds vs Gold: Is This Why Commodities Are Selling Off?

Japanese bond volatility appears to have crossed the Rubicon. As we noted here, the Japanese Ministry of Finance warned that a rise in JGB volatility could cause a significant sell-off in JGBs (since banks will be hampered by their VaR models-driven risk limits, which have literally gone off the charts in recent days, and be forced to reduce holdings to meet those risk limits). It seems however, that since the BoJ is set to buy more JGBs than will be issued in the next several years as noted yesterday, that financial institutions are chosing to live with the record vol noted previously, opting to raise cash buffers and liquidity reserves instead of selling bonds in order to meet surging margin demands on their JGB holdings.
 The synchronicity between the price of gold (and other commodities) and the volatility of Japanese bonds makes this risk-driven perspective very clear. This leaves the question, what happens when the Japanese (or in fact global - since front-running the BoJ has been a big winner until a week ago) banks run out of 'other' assets to sell and their VaR models continue to demand more capital in reserve?

Since QE2, gold (and other commodities) have moved in inverted-lockstep with Japanese interest rate implied (and realized) volatility as the JGB margin demands oscillate.

For some reason unknown to mere mortals, Kuroda and his boss Shinzo Abe seem to think they can control everything, achieve just the results they order.

That confidence is definitely not coming from their experience at Fukushima, that's for sure. For that pesky problem that's leaking all-beta water, they are setting up a committee to study the problem so that people, particularly those in Fukushima, are assured, in the fine comical tradition of Sir Humphrey Appleby.

(I actually burst into laughter when I read the news about this committee. Every single word of the news I have heard and watched in episodes of Yes (Prime) Minster...)

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Bloomberg English News "Japan's Government Pension Fund to Diversify to Avoid Erosion of Asset Value"; Bloomberg Japan "Government Pension Fund Will Have Positive Return This Year"

It's about the same news, written by the same reporters.

It was quite common for both the Japanese news outlets that also have English language service and the US news outlets that also have presence in Japan to report different stories for their Japanese audience in Japan and for their foreign audience in English language when reporting on the Fukushima I Nuclear Power Plant accident.

When it comes to bad news for the economically clueless Japanese citizens, Bloomberg News seems to be doing the same as it reports on the decision by the Government Pension Investment Fund (GPIF) to start planning for diversification of their JGB-heavy portfolio.

I first saw the article in English at Zero Hedge, and looked for the same article in Japanese Bloomberg News to tweet to my Japanese followers. I found the Japanese article, written by the same reporters based in Tokyo, but I was completely confused. Instead of quoting the manager of GPIF warning the potential erosion of asset values because of the new LDP administration's policies as in the English article, the Japanese article starts out by saying:

The return will be positive two years in a row due to cheaper yen, says the manager of GPIF.

Huh?

So, here are the opening paragraphs of Bloomberg English (2/3/2013) titled "Japan Pension Fund’s Bonds Too Many on Abe Plan, Mitani Says", by Anna Kitanaka, Toshiro Hasegawa & Yumi Ikeda:

Japan’s public pension fund, the world’s biggest manager of retirement savings, is considering the first change to its asset balance as a new government’s policies could erode the value of $747 billion in local bonds.

Managers of the Government Pension Investment Fund, which oversees about 108 trillion yen ($1.16 trillion) in assets, will begin talks in April about reducing its 67 percent target allocation to domestic bonds, President Takahiro Mitani said in a Feb. 1 interview in Tokyo. The fund may increase holdings in emerging market stocks and start buying alternative assets.

The GPIF, created in 2006, didn’t alter the structure of its holdings during the worst global financial crisis in 80 years or in response to the 2011 earthquake and nuclear disaster. Prime Minister Shinzo Abe and the Bank of Japan (8301) have pledged to restore economic growth and spur inflation, which will mean higher interest rates, Mitani said.

“If we think about the future and if interest rates go up, then 67 percent in bonds does look harsh,” said Mitani, who was appointed in 2010 after serving as an executive director at the Bank of Japan. “We will review this soon. We will begin discussions for this in April-to-May. Any changes to our portfolio could begin at the end of the next fiscal year.”

GPIF, one of the biggest buyers of Japanese government bonds, held 69.3 trillion yen, or 64 percent of total assets, in domestic debt at the end of September, according to its latest quarterly financial statement. That compares with 12 trillion yen, or 11 percent, in Japanese stocks; 9.6 trillion yen, or 9 percent, in foreign bonds; and 12.6 trillion yen, or 12 percent, in overseas stocks.

The fund, which took over management of government employee retirement savings when it was set up, returned to profit in the three months ended Dec. 31 from a 1.4 percent loss in the first six months of the fiscal year, Mitani said. He declined to be more specific. It needs to raise about 6.4 trillion yen this fiscal year through March 31 to meet payments.

And here's my translation of the opening paragraphs of the Japanese Bloomberg article (2/4/2013) by the same reporters:

世界最大の資産規模を持つ日本の年金積立金管理運用独立行政法人（ＧＰＩＦ）は、昨年12月以降の円安進行や株高基調を背景に、今年度の運用収益率が２年連続でプラスとなる見通しを明らかにした。

Japan's Government Pension Investment Fund (GPIF) that holds the world's beggest assets revealed that this fiscal year's return will be positive, two years in a row, thanks to cheaper yen and higher stock market since December last year.

三谷隆博理事長は１日、ブルームバーグとのインタビューで、2012年度の運用状況について、「昨年12月以降、株価が上昇し、円安方向に振れたのでかなりプラスが出ているのではないか。７－９月期までの年度収益率はマイナスだったが、これを取り戻してプラスになっていることは間違いない」と語った上で、11年度の2.32％に続いてプラスになるとの見通しを示した。

President Takahiro Mitani said in a February 1 interview with Bloomberg about the fund performance in the fiscal 2012 [which ends in March 31, 2013], "Stock prices have gone up and Japanese yen has gone down since December last year, so I assume the return has turned positive in a significant way. The annualized return up to the July-September quarter was negative, but I have no doubt that the return has turned positive." In the fiscal 2011, the return was 2.32%.

ＧＰＩＦの今年度の収益率は、４－６月期にマイナス1.85％だったが、７－９月期は外国株式の上昇が寄与してプラス0.49％。４－９月累計ではマイナス1.39％だった。

The rate of return at GPIF this fiscal year was minus 1.85% in the April-June quarter [1st quarter of the fiscal year], but in the July-September quarter the rate turned positive to 0.49% thanks to the rise in foreign stocks. The cumulative rate of return from April to September was minus 1.39%.

Rejoice, the government pension fund will make money this year!

Later, the Japanese article talks about Mr. Mitani's concern about the Japanese Government Bonds which makes up more than 60% of their portfolio, but in a much more subdued way; there is no talk of change in portfolio possibly starting at the end of the next fiscal year.

Let's see, GPIF has 108 trillion yen, and Mr. Mitani says the fund will make money. How much money will be the question, as Bloomberg English article says the fund has to raise 6.4 trillion yen to meet the payment obligations. That would be the equivalent of almost 6% return on the total asset.

Instead of focusing on writing the grammatically correct English devoid of meaning or on native-like pronunciation of English words and sentences (native in where is a good question, but), the Japanese people should really study English, so that they can read and understand the Bloomberg English article.

But even before their English lessons, they probably need economic lessons (and need to stop adoring Krugman, for a start).

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Senkaku Island Row May Turn into a Bond War as China Threatens to Dump Japanese Government Bond It Holds

Uh oh...now we're talking serious matters. Are Messrs Ishihara, Noda (not to mention Bank of Japan Governor Shirakawa) ready for this?

(Talk about fiscal cliff... See the chart near the bottom of the post.)

First, from Ambrose Evans-Pritchard at The Telegraph (9/18/2012):

Beijing hints at bond attack on Japan

A senior advisor to the Chinese government has called for an attack on the Japanese bond market to precipitate a funding crisis and bring the country to its knees, unless Tokyo reverses its decision to nationalise the disputed Senkaku/Diaoyu islands in the East China Sea.

Jin Baisong from the Chinese Academy of International Trade – a branch of the commerce ministry – said China should use its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to “impose sanctions on Japan in the most effective manner” and bring Tokyo’s festering fiscal crisis to a head.

Writing in the Communist Party newspaper China Daily, Mr Jin called on China to invoke the “security exception” rule under the World Trade Organisation to punish Japan, rejecting arguments that a trade war between the two Pacific giants would be mutually destructive.

Separately, the Hong Kong Economic Journal reported that China is drawing up plans to cut off Japan’s supplies of rare earth metals needed for hi-tech industry.

The warnings came as anti-Japanese protests spread to 85 cities across China, forcing Japanese companies to shutter factories and suspend operations.

Mr Jin said China can afford to sacrifice its “low-value-added” exports to Japan at a small cost. By contrast, Japan relies on Chinese demand to keep its economy afloat and stave off “irreversible” decline.

“It’s clear that China can deal a heavy blow to the Japanese economy without hurting itself too much,” he said. It is unclear whether he was speaking with the full backing of the Politburo or whether sales of Japanese debt would do much damage. The Bank of Japan could counter the move with bond purchases. Any weakening of the yen would be welcome.

(Full article at the link)

Mr. Evans-Pritchard, on-again-off-again Keynesian (currently "on"), seems to think Bank of Japan would be happy and willing to absorb the dumped JGB should it occur. But reality-based Tyler Durden at Zero Hedge has a different take:

Should this stunning recommendation be enacted, not only would it be the first time in world history that insurmountable credit is used as a weapon of retaliation, it would mark a clear phase transition in the evolution of modern warfare: from outright military incursions, to FX wars, to trade wars, culminating with "bond wars" which could in the span of minutes cripple the entire Japanese fiscal house of cards still standing solely due to the myth that unserviceable debt can be pushed off into perpetuity (as previously discussed here).

Not needing further explanation is the reality that should China commence a wholesale Japanese bond dump, it may well lead to that long anticipated Japanese bond market collapse, as creditor after creditor proceeds to sell into a market in which the BOJ is the buyer of only resort in the best case, and into a bidless market in the worst.

The immediate outcome would be soaring inflation as the BOJ is forced to monetize debt for dear life, buying up first hundreds of billions, then trillions in the secondary market to avoid a complete rout, matched by trillions of reserves created out of thin air which may or may not be halted by the Japanese deflationary gate, and which most certainly could waterfall into the economy especially if Japanese citizens take this as an all clear signal that the Japanese economy is about to be crippled in all out economic warfare with the most dangerous such opponent, and one which just defected from the "global insolvent creditor" game of Mutual Assured Destruction.

Further complicating things is that Japan has no clear means of retaliation: it owns no Chinese bonds of its own it can dump as a containment measure. Instead, Japan is at best left with the threat of damages incurred on the Chinese economy should Japan be lost as a trading parting.

Tyler's conclusion, to which I agree:

One thing here is certain: Japan picked on the wrong country when two weeks ago it "purchased" the disputed Senkaku Islands. If it thought that China would just forgive and forget with a wink, it was dead wrong.

It now has several two options: undo all that has happened in the past fortnight, in the process suffering tremendous diplomatic humiliation, leaving Senkaku in the "no man's land" where they belong, or push on, and suffer the consequences. And the consequences for the country represented by the question market in the chart below, would be tragically severe, as would they for the entire "developed", insolvent and daisy-chained world.

The world could literally collapse over some inconsequential pieces of rock in the South China Sea.

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Former "Legendary Trader" of JP Morgan Warns Japan May Default By 2017

Mr. Takeshi Fujimaki, CEO of Fujimaki Japan, was one of the top traders at J.P. Morgan worldwide for over a decade, earning the moniker "legendary trader" from the chairman of J.P.Morgan (according to wiki). He was also an advisor to George Soros.

He has some extremely dire predictions for Japan, much more so than those by Kyle Bass.

In the Bloomberg News article, Fujimaki warns:

• Japan may default sooner than Europe, by 2017;

• Japanese yen may trade 400 to 500 yen per US dollar;

• 10-year bond yield may shoot up above 80%.

In other words, he says Japan may become "Greece". What is he doing to hedge the risk? He says he's buying US dollars.

From Bloomberg News (6/14/2012):

Ex-Soros Adviser Fujimaki Says Japan to Probably Default by 2017

Investors should buy assets in U.S. dollars and other currencies of strong developed nations because Japan may default within five years, said Takeshi Fujimaki, former adviser to billionaire investor George Soros.

“Japan is likely to default before Europe does, which could be in the next five years,” the president of Fujimaki Japan, an investment advising company in Tokyo, said in an interview yesterday. Japanese should hold foreign-currency products, such as those denominated in the greenback, Swiss franc, sterling, Australian and Canadian dollars, Fujimaki said.

Should the Japanese government default, the yen may weaken to 400-500 per dollar, and the yields on benchmark 10-year bonds could surge above 80 percent, according to Fujimaki. “I’m buying dollars in case of an emergency,” he said.

The yen fell 0.2 percent to 79.48 per dollar as of 9:14 a.m. in Tokyo from its close in New York yesterday. The currency touched the post war high of 75.35 per dollar on Oct. 31 and has averaged about 103 over the past decade. Japan’s 10-year yields were little changed yesterday at 0.86 percent. Rates on June 4 dropped to 0.79 percent, the lowest since June 2003.

Five-year credit-default swaps that insure Japan’s debt from nonpayment were at 90.9 basis points yesterday, up from a seven-month low of 90.1 on March 27, according to CME Group Inc.’s CMA. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Ballooning Debt

Japan’s public borrowings, the world’s biggest, will balloon to 245.6 percent of its annual economic output in 2014, up from 67.3 percent in 1984, an estimate by the International Monetary Fund shows. Japanese Prime Minister Yoshihiko Noda is struggling to gather support for his plan to double the 5 percent sales tax by 2015 to help reduce debt.

“The yen and the JGB market are in a bubble,” Fujimaki said. “With the gigantic debt Japan has accumulated, a thin needle, or even a gentle breeze may pop this. Events in Europe can possibly trigger this to blow up.”

Greeks vote in a general election on June 17 after balloting in May failed to produce a coalition government. The result may determine whether Greece abides by spending reductions imposed upon it to receive two international bailouts and stay in the euro. The euro currency bloc may break up in the next 5 to 10 years, Fujimaki said.

“There’s no way out of Japan’s crisis,” Fujimaki said. “The only option left for Japan is either default or print money into hyper-inflation.”

(Entire article at the link)

There are many, both in Japan and outside, who say "Japanese sovereign debt is not like that of Greece, or the US, because the debt is almost all held in Japan by the Japanese". Well, that's precisely the problem.

Fujimaki says in a Nikkei Shinbun article (6/14/2012) that:

• Japan's financial institutions have been investing the deposit money in the Japanese government bonds (JGBs). In the case of Japan Post Bank, 80% of the deposit money is invested in JGBs.

• Life insurance companies used to lend out more than 50% of the money from the insurance premiums collected from the policy holders; now, it's only 13%, and the rest of the money goes to the JGBs.

• Ratio of loan to deposit at private banks was 98% 10 years ago; now it is only 73% and the difference has gone to the JGBs.

If the Japanese government defaults and the JGBs become worthless, there will be no deposits, no pensions, no insurance payout, he says.

He also cites the example of wartime bonds issued during the World War II in Japan. The ownership of the bonds was 100% Japanese, but that didn't prevent the bonds from becoming worthless in the post-war inflation.

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