(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)
"Straight from the shoulder " by Toshio Masuda July 10, 2013
( Free of charge to the people I met)
‘The Fate of the Economy is Determined by Interest Rates’, but Japan…?
In June 2012, about one year before the European debt crisis had settled down, the Bank of Japan announced a private agreement that 100 trillion yen of the total of Japanese government bonds issued had become foreign held. This was a rate of 8.3%, the highest foreign ownership rate since 1979. The foreign ownership rate of Japanese government bonds has risen ever since then.
On April fourth of this year, Kuroda, the new governor of the Bank of Japan, announced different dimensions to the monetary easing policy, and for the bond market the next day, the ten year government bond yield dropped to a record low of 0.315% during a morning of chaos; in the afternoon, it soared to 0.62% or so, and a circuit break (trading suspension) occurred countless times.
After that, since the Japanese bond market continued to have unstable trading, the market expected calming measures to be released at a monetary policy meeting on June 11, but was, however, disappointed. But, since then, because the Bank of Japan increased the number of times it operates (the operations of buying and selling unsecured debt) each month (from six times to more than eight times) in the call market (interbank funding market), the marketplace regained its calm, but the standard 10-year government bond yield has remained high, in the vicinity of 0.85%.
The purpose of monetary easing is to increase financial assets (stock prices etc.) that provide surplus funds in the marketplace, and to guide capital investments that lower interest rates with bond purchases to economic growth while improving business confidence.
In the economy, there are ‘good rising interest rates’ and ‘bad rising interest rates’.
For the current American economy, house prices that had risen due to the influence of an increase in financial assets are connected to an increase in assets including households and, in addition, are headed towards a positive cycle referred to as driving up consumption.
In the current marketplace, the increase to 2.7% of ten year government bond yields has been discussed, but, as mentioned earlier, because the American economy is headed for autonomous economic growth, an increase in interest rates with this kind of a growth processes are ‘good rising interest rates’.
If economic growth becomes reliable, it is natural for loan yields from interest rates that are transferred (asset sale) from the bond market, which is a safe market, to the stock market, which is a risk market, to have an increased rise in interest rates; because risk money return (return on investment) is increased, it is referred to as a healthy rise in interest rates.
On the other hand, the IMF revised the 2013 European economic growth prospects (announced on July 9) downward to a minus 0.6%. Most importantly, Portugal had an opportunity when the Foreign Minister and the Minister of Finance suddenly resigned; as it became clear that the performance conditions of the financial support (78 billion Euros= about 12 trillion yen) from two years ago and economic autonomy up until June of 2014 were not possible, it became difficult for funding from the future bond market to jump up to an F of 8%. For Portugal, these are ‘bad rising interest rates’.
But what about Japan?
Ever since these different dimensions of monetary easing occurred, the Nikkei Stock Average has rapidly risen; On May 23, it reached an all-year high of 15,942 yen, but continued to fall after a crash of over 1,000 yen that occurred on the afternoon of that same day. It entered July, rebounding from a bottom of 12,800 yen (in the middle of June) to a recovery of 14,400 yen, and came to be 15,000 yen.
Based on the Nikkei’s announcement of the Bank of Japan’s quarterly Short-term Economic Survey of Principal Enterprise in Japan (July 1), the business confidence of major companies/manufacturers became positive for the first time since the study began in September of 2011. In addition, even though an increase in Japanese real estate prices similar to America’s came to be seen, it is understood that the Japanese economy, too, is headed towards a self-sustaining recovery.
After that, the Japanese 10-year government bond yields rose by 1.0-1.2%, but once prices together with nominal interest rates (real estate interest rates + predicted interest rates) approached 2%, government bond interest payments accounted for half of the staggering revenue of 20 trillion yen and could end up eating away a portion of the consumption tax increase.
When the Abe administration neglects financial discipline, foreigners who have increased the ownership rate of government bonds turn towards a mass sale of their Japanese government bonds; a 2% interest rate will not necessarily turn into a 5% one. When this occurs, capital investments decrease sharply and could lead to a financial collapse where 100% of the revenue will go to government bond interest payments.
A growth strategy is essential, but restoring fiscal health is more important.
However, if you try to make the GDP ratio 240%, a reduction to the deficit is next to impossible.
In other words, if it gets to that point, I understand that the Ministry of Finance will ‘want to hide it for the people”; stop increasing the debt by manipulating the books like they have up until now. Soon, ‘gold reserves’ will be revealed, and isn’t it time that they confess that ‘actually, the national debt is zero and there are nothing but loans’? Until ‘opposite taxes’ (surplus assets of the country to the public are handed out with cash) are not paid each year to the people, in the very least, the income tax should be able to be zero.
Since this is the globalization era, we don’t say, “I think this doesn’t suit my tastes’ or anything like that; I think that we should say ‘this is a delicious candy world’- what do you think?
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Written by Toshio Masuda