By Claus Vistesen: Copenhagen
Quantitative easing is certainly all the rage at the moment after this week saw the Bank of England move interest rates down 50 basis points to the level of 0.5% and, effectively, into QE. Over at Morgan Stanley, Manoj Pradhan talks about a new global QE scheme even if we are not quite there yet, and David K. Miles and Melanie Baker talk about the UK version. In the Eurozone, it appears that something fundamental has happened at the ECB with this week's decision to lower interest rates from 2% to 1.5%. At least, our good governor Trichet now seems to concur that the risks of inflation have receded (for now) and that a subsequent risk of deflation is present. This also means that me and Edward's stab at the ECB earlier might have been a bit unfair although I see the communications stream from the ECB is still quite volatile. Consequently, council members Jürgen Stark and Lorenzo Bini Smaghi were both quoted of saying that one should be weary of cutting interest rates too much since the impact of such measures would be limited. One wonders whether it is the blind leading the deaf or the other way around, and quite frankly I would, at this point, settle for a coherent message from the ECB, be it in favor of QE measures or not.
Meanwhile and on a brighter note, Cassandra approaches QE from a slightly more semantic and, as it were, historical perspective.
And in Japan ...
In Japan QE has arguably been in play since November 2008 or perhaps as some would smugly note; Japan never came off the tap having only been able to raise rates to 0.5% during this famed and so-called recovery which abruptly ended little less than a year ago. Whichever the version you prefer it appears that the BOJ will have to step up its efforts in the market for risky assets. The news is attached to Deputy Governor Hirohide Yamaguchi's comments that the BOJ have to increase its purchases of corporate bonds to alleviate the credit crunch.
Bank of Japan Deputy Governor Hirohide Yamaguchi said the central bank may need to expand its purchases of corporate debt to prevent a credit shortage from worsening the recession. “We can’t deny corporate financing will become even more difficult” toward the fiscal year end on March 31, Yamaguchi said in an interview in Tokyo yesterday, his first since joining the board in October. “If that happens, we’ll consider whether we can enhance operations already implemented and act if necessary.”
Yamaguchi is the first member of the board to hint at further policy actions since it unveiled the plan to purchase corporate bonds from banks last month. Having cut interest rates close to zero, the central bank is buying assets to channel funds to businesses whose profits are falling the most in more than 30 years as demand dries up at home and abroad.
The problem is of course a well known one; on the one side big companies are finding it difficult to raise capital (through equity as well as debt) and for small companies the credit crunch is ever present as their credit lines and facilities with banks are getting squeezed. In terms of the former, Bloomberg reports that three of Japan's biggest automakers Toyota, Mazda, and Honda publicly stated last week that they might need government funds as demand for their products have collapsed. Especially, the mounting problems for Toyota are preoccupying as it is bound to send ripple effects through its big network of suppliers As for the latter in the form of small businesses the current credit crunch marks a multi decade low point for financing condition.
SFCG Co., a bank focused on lending to small businesses, collapsed last month in Japan’s biggest bankruptcy by a publicly traded company in almost seven years. Chairman Kenshin Ohshima said getting funding had become “almost impossible.” Small companies, which employ about 70 percent of the workforce, said access to finance is the harshest it’s been in at least 23 years, according to a survey published by Shoko Chukin Bank last month. As I noted in my last entry on Japan and as Bloomberg elaborates one way in which the problem is being handled is for the BOJ to engage in direct purchases of corporate debt (A1 rating). At the time the BOJ committed itself to the purchase of 33 trillion Yen worth of corporate debt alone in Q1 2009. The immediate goal for the BOJ is however not narrated as re-capitalisation per se, but merely to narrow the widening spreads between government bonds and class A corporate paper. Apart from buying corporate paper the BOJ has naturally also been involved in the purchase of government paper to ease the funding requirements of the government in its effort to use fiscal stimulus as a tool to alleviate the crisis. The comments from Yamaguchi in this regard are interesting; When asked whether the bank would increase the purchases to fund economic stimulus spending, Yamaguchi said buying bonds for that reason would spur concern that public debt will rise, driving yields higher and compounding Japan’s fiscal woes. This is of course the eternal headache faced by Japanese policy makers in their attempt to use the fiscal weapon since the simple point is that they don't have the money or the future revenues to mount anything remotely resembling a credible fiscal jolt. As an alternative the Finance Minsitry has been working with the idea to capitalise (well, cover the potential losses) and subsequently allow the Development Bank of Japan to enter the market for equities and preferred shares in order to prevent a wave of corporate bankruptcies. Of course, the problem for the MOF lingers if anything simply because they will have to issue a considerably amount of IOUs in the coming months and quarters. As one could imagine, markets have not been oblivious to this trend. Japanese 10-year bonds completed the biggest weekly decline in a month on speculation that governments in the U.S., Japan and Europe will increase spending to help counter a deepening recession. Benchmark yields held near the highest level in four weeks after Chief Cabinet Secretary Takeo Kawamura said the government needs to make the “utmost effort” to manage policies to prevent stocks from collapsing, spurring concerns that the nation’s debt burden will worsen. Sales of government bonds will rise to 113.3 trillion yen ($1.2 trillion) in the year starting April 1 from 106.3 trillion yen this financial year, the Ministry of Finance said in December. “Given the severe state of the Japanese economy, the government may need to boost budget spending by an additional 15 to 20 trillion yen,” said Hirokata Kusaba, a senior economist in Tokyo at Mizuho Research Institute Ltd., a unit of Japan’s second-largest bank. “The issuance of new bonds may increase by 30 trillion yen, boding ill for the debt market.”
It is interesting to note the opposing trends here. One the one hand yields should be coming down to reflect the fact that interest rates are about to go lower, but since interest rates are virtually zero it is not at all unimaginable that yields will go up to reflect the increased supply of bonds in the market (and the general public debt situation in Japan). It is of course because of this that the MOF needs the BOJ and one would be tempted to argue other domestic cash rich investors to buy the debt. At this point I would not point to a heightened concern for the government's financing possibilities if anything because the game of issuing IOUs is turning global. Yet, it should be watched as we move forward.
