Wednesday, 19 December 2012

Japan's New Carry Trade Reflation - Evans Pritchard

From Evans Pritchard's Column.

 The profound shift in economic strategy by the world’s top creditor nation could prove a powerful tonic for the global economy, with stimulus leaking into bourses and bond markets - a variant of the "carry trade" earlier this decade but potentially on a larger scale.......more

"We think this could be the beginning of a fresh reflation cycle for the global system, combining with the US recovery to mark a turning point in the crisis," said Simon Derrick from BNY Mellon.
"It is tremendously important for global growth, and markets are starting to take note," said Lars Christensen from Danske Bank.
Mr Abe’s Liberal Democratic Party (LDP) won a landslide victory on Sunday, securing a two-thirds "super-majority" in the Diet with allies that can override senate vetoes.
Armed with a crushing mandate, Mr Abe said he would "set a policy accord" with the Bank of Japan for a mandatory inflation target of 2pc, backed by "unlimited" monetary stimulus.

Opinion is split over the wisdom of ultra-loose money. Although Japan is trapped in chronic deflation, it is a stable - almost comfortable - equilibrium. The "real" value of savings is rising, in stark contrast to the West.
Stephen Jen from SLJ Macro Partners said the Bank of Japan is right to fret that a return to inflation could set off a spike in debt costs and a flight from Japanese government bonds (JGBs).
"Any meaningful sell-off in the JGBs could trigger a serious problem in Japan’s banking system. The holdings of JGBs by Japanese banks account for 900pc of their Tier I capital," he said. Better the Devil you know.

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