Speculation Over the Next BoJ Governor Intensifies

Australian December home loan approvals declined by -1.5% M/M, worse than the unchanged expected and the 3rd consecutive monthly decline;

There are reports (Dow Jones Newswires) that the choice for the next BoJ governor will be between 2 candidates, namely Mr Kazumasa Iwata and Mr Toshiro Muto, both former BoJ deputy governors. Credit Suisse/J P Morgan suggests that Mr Haruhiko Kuroda, the current head of the Asian Development Bank is another possible candidate – indeed, Credit Suisse and JPM suggest he is the favourite for the job. Mr Iwata is the most radical. He is the head of a think tank and has proposed buying foreign debt, in size.  Mr Muto is the Head of the Daiwa Institute of Research and a former civil servant and proposes buying longer term Japanese debt. Mr Kuroda is in favour of the BoJ embracing further monetary stimulus, with a view to reaching the 2.0% inflation target within 2 years – he once proposed a 3.0% inflation target. Mr Kuroda has the international exposure that the Japanese PM considers important, being the current head of the Asian Development Bank. My friends in Asia have plumped for Mr Iwata, though this is Japan and anything can happen, including the prospect of another candidate being selected. However, if its Mr Iwata, the Yen is will decline and the Nikkei will rise further, as opposed to the selection of Mr Muto – which will result in the opposite. The appointment of Mr Kuroda will be more positive for the Nikkei (Yen?) than Mr Muto’s selection, but not as positive as the appointment of Mr Iwata;

Japanese press suggest that a number of opposition parties (including Japan Restoration Party, Your Party, Japan Renaissance Party, together with the ruling LDP Party) are proposing changing the BoJ law, yet again. In effect, they want to make the BoJ less independent. The BoJ has been pretty complacent in the past, but to neuter the independence of the Central Bank – pretty bad news in my humble opinion;

Total new credit issuance in China in January soared to Yuan 2.5 trn (US$ 405bn), which was some 50% higher than December and more than double the corresponding lending in January 2012. The majority of the new credits came from corporate bonds, so called ‘wealth management products” , company to company lending and bankers acceptances.  These forms of alternate financing are largely unregulated, though this is denied by Chinese regulators. However, when have regulators got it right, ahead of time. Part of the increase in credit can be explained by the Chinese New Year holidays. However, by no means all and the large increase in lending will raise fears that inflation will rise. As you know, I believe that inflation will rise, in any event due to the increase in commodity costs, in particular energy. The PBoC has also warned of potential inflationary problems – monetary tightening coming?. However, the surge in lending will increase GDP in the short term. A number of brokers recommend going long the mining sector. I disagree – as you know, I am short the sector and continue to increase my short positions;

I was reading the history of the disputed islands in the South China seas this weekend. Actually, contrary to my initial impressions, China does indeed have some reasonable claims. However, the issue remains. Threats of military action (the Japanese are considering releasing info on the alleged targeting of their ships by Chinese warships, following China’s denials) and lets just say aggressive acts, are particularly dangerous. However, some good news. It looks as if both China and Japan are trying to defuse the situation. I really do hope so;

The FT reports that EU officials have prepared proposals which include the prospect that sovereign debt holders, bank bondholders (including senior bondholders) and uninsured depositors take hits, if Cyprus/Cypriot banks are to be rescued. The proposal (1 of 3 options) is mainly to appease German concerns that alleged money laundering by Russian’s, using Cypriot banks, is not rewarded. The EZ had previously stated that debt w/offs would be a 1 off and only in respect of Greece. Such a course of action does involve the (high) risk that investors and depositors will worry about contagion risk spreading across other EZ countries. EZ/EU finance ministers are to meet starting today to discuss this and other issues;

The Spanish PM has released records of his tax returns to try and deal with corruption allegations. However, cynics will suggest that he would hardly have declared illegal receipts. The FT had a great article on Spain. Basically its the Greek problem – far too much non transparent political patronage with little oversight. A few ago, I was staying with friends just outside Malaga. At dinner parties, attended by both expats and Spanish, people talked openly about politicians/government officials taking bribes in respect of property deals. The sums involved were huge. It was considered common practice. As a result, far, far more of such matters will come out in Spain, as these practices have been widespread.

In Ireland, politicians/officials took brown paper envelopes to rezone agricultural land into development property – huge sums were made, which eventually lead to the bust, following the resulting overbuilding. Indeed, the practice was so common, the cost of brown paper envelopes soared !!!. This weekend, 10’s of thousands of protesters marched in Ireland to protest against the austerity measures – in spite of the “deal” on the promissory notes that Ireland achieved. The police put the numbers at 50k, whereas organisers suggested 110k. Whatever, a large number for Ireland, in particular as its still winter. If so many Irish protest, you can be sure than many, many more in the Mediterranean countries will do so, come spring.

The only bit of good news is that these practices will become far far more difficult in the future. In addition, as the EU progresses, the Central authority (Big Brother) will become far more important than local politicians/officials. This is the German vision, by the way;

I’m here at my place in Goa, India. Last week I met a former senior adviser to a UK PM, a German diplomat and a French banker – can’t understand why I was invited – probably to fill up the last seat. A summary of their views are as follows.

• Germany (Merkel) is definitely trying to get closer to the UK and drifting further apart from France each day;
• The recent EU budget deal was 90% due to Mrs Merkel;
• The German’s rejected a French call to depreciate the Euro;
• The French banker suggested that whilst he believed that President Hollande (sort of) understood the serious problems in the country, his hands were tied due to the views held by a number in his party and the French attitude generally. Generally, he was tres pessimistic;
• The UK will not leave the EU. Unfortunately, a view I share, though I hope it was different.

Quite frankly no great surprises, but its always good to get confirmation;

Wolfgang Munchau has penned a great article in todays FT, entitled “Ireland’s debt deal shows the way”. Essentially, he argues that the recent deal over the promissory notes is monetary financing, though in these circumstances the right thing to do, in spite of the obvious negatives associated with monetary financing, which we all know. Interestingly, I have not heard too much from the German camp about the Irish “deal”, though if this scheme is used as a precedent (likely at some time in the future) the Bundesbank will speak out. However, post the September elections in Germany, no matter who wins, this kind of scheme will be have to be introduced – there is no other alternative. It is also one of the major reasons that I am and will be negative of the Euro in the medium term. Effectively, the EZ will go for money printing;

The UK newspaper (Daily Telegraph) suggests that the BoE will reduce its growth forecast this week, when it releases its quarterly inflation forecast. Oops. I had thought that UK economic data/sentiment was improving – actually I still do;

Bloomberg reports that the G7 countries are trying to release a joint statement ahead of the G20 meeting on the 15/16th February, which allegedly states that exchange rates are to be set by markets and, in addition, that governments will not use either monetary and/or fiscal policies to impact their currencies. Well thats interesting. Japan is set to embark on monetary and fiscal policies to weaken the Yen, though I’m sure they will deny that at the G20. France has called for a weaker Euro etc, etc.

Interesting comments by the new head of the EuroGroup. Mr D stated that the EZ finance ministers would discuss the Euro, but refused to comment as to whether the EZ needed a currency policy – what on earth does that mean !!!! – I would have thought he would have said that it did not

The WSJ reports that individual G7 countries will make their own statements. Who knows, we will find out shortly;

Outlook

Quiet week in Asia due to Chinese New Year celebrations. European markets are generally higher with futures suggesting that US markets will open flat.

The Yen is weakening materially on prospects that the next BoJ governor will wish to see a weaker Yen.

Spot gold is trading marginally lower at US$1657, with April Brent sharply lower from Friday’s US$119 levels – currently around US$117.

Markets are awaiting EZ Q4 GDP, together with EZ/G20 statements later this week.

Kiron Sarkar
11th February 2013