B O J Say No I R Hike

[Realistbear]

http://www.iht.com/articles/2006/03/09/bus...b.0309japan.php

TOKYO The Bank of Japan on Thursday abandoned the super-easy monetary policy it has kept for five years, saying it will gradually raise interest rates and start to cut the excess cash in the banking system amid signs of economic recovery.

But the central bank sent a clear message that the transition will be slow, saying benchmark interest rates will remain near zero for some time and that it will only gradually reduce the amount of liquidity in the banking system over several months.

"Interest rates will stay at zero for some time, then stay extremely low and go through an adjustment period," Bank of Japan Gov. Toshihiko Fukui said a press conference. "It's up to the economy how much and when."

In essence, the central bank made it clear changes were coming but left policy largely unchanged for the immediate future - a move economists praised for showing decisiveness without alarming global markets.

"The bank did a splendid job," said Yasuhide Yajima, senior economist at NLI Research Institute. "The market had expected an end to the policy, but the bank still left interest rate rises open to interpretation."

Investors cheered the decision, lifting the Nikkei 225 index 2.6 percent, partly because it alleviated weeks of uncertainty.

The implications were too great for them to hike IR. Just shows how super sensitive the markets are to slight changes these days? Looks like the B o E is in the same boat--they are trapped because of over inflated interest sensitive assetts. They know the HPC is .25% away from happening!

[Scooter]

http://www.iht.com/articles/2006/03/09/bus...b.0309japan.php

TOKYO The Bank of Japan on Thursday abandoned the super-easy monetary policy it has kept for five years, saying it will gradually raise interest rates and start to cut the excess cash in the banking system amid signs of economic recovery.

But the central bank sent a clear message that the transition will be slow, saying benchmark interest rates will remain near zero for some time and that it will only gradually reduce the amount of liquidity in the banking system over several months.

"Interest rates will stay at zero for some time, then stay extremely low and go through an adjustment period," Bank of Japan Gov. Toshihiko Fukui said a press conference. "It's up to the economy how much and when."

In essence, the central bank made it clear changes were coming but left policy largely unchanged for the immediate future - a move economists praised for showing decisiveness without alarming global markets.

"The bank did a splendid job," said Yasuhide Yajima, senior economist at NLI Research Institute. "The market had expected an end to the policy, but the bank still left interest rate rises open to interpretation."

Investors cheered the decision, lifting the Nikkei 225 index 2.6 percent, partly because it alleviated weeks of uncertainty.

The implications were too great for them to hike IR. Just shows how super sensitive the markets are to slight changes these days? Looks like the B o E is in the same boat--they are trapped because of over inflated interest sensitive assetts. They know the HPC is .25% away from happening!

Hence why my Jap funds rebounded yesterday...

[Ted D. Bear]

More on FT.com.

The bank said it would take “a few months” to bring massive levels of liquidity back down to levels consistent with keeping overnight rates at zero.

Teizo Taya, a former bank board member, said the bank was probably targeting an interest rate rise of ¼ per cent this calendar year and more than ½ per cent next year.

[timmy_30]

The BOJ said in effect

"We are going to turn the cheap money tap off within the year, if you could please unwind your carry trades in an ordered fashion then you can still make a tidy profit, without causing a sharp market correction in which no one will be a winner, we are giving you plenty of warning so please form an orderly que and don't rush fo rthe exit there's plenty of time yet"

[Scooter]

The BOJ said in effect

"We are going to turn the cheap money tap off within the year, if you could please unwind your carry trades in an ordered fashion then you can still make a tidy profit, without causing a sharp market correction in which no one will be a winner, we are giving you plenty of warning so please form an orderly que and don't rush fo rthe exit there's plenty of time yet"

All quite predicatable-Japanese banking decisions, like any Jap business decision that I have ever seen, will rely on slow, consensual action, not individual acts of leadership that others may disagree with or without due accord to others views.

[Realistbear]

The BOJ said in effect

"We are going to turn the cheap money tap off within the year, if you could please unwind your carry trades in an ordered fashion then you can still make a tidy profit, without causing a sharp market correction in which no one will be a winner, we are giving you plenty of warning so please form an orderly que and don't rush fo rthe exit there's plenty of time yet"

First class analysis. IMHO you are 100% correct. The Japanese know how much even a small incremental increase in IR will have. Its a message to the B o E to get their house in order and turn off the easy credit tap. Are you listening Gordon? T

This is also a heads up for leveraged BTLers--the selling window is open for a short while longer provided everyone is not thinking alike.

[karhu]

A jump from 0.02% (or whatever the effective rate was) to 0.25% is a huge step. Once they are there, 0.25% to 0.5% will seem easy in comparison .

[Realistbear]

We all need to understand that the change in Japan's IR policy marks the end of an era:

http://money.iwon.com/jsp/nw/nwdt_rt_top.j...ias/money/cm/nw

Global stock markets struggled in recent days because of worries that the Bank of Japan, Federal Reserve and European Central Bank might all be in monetary tightening mode, but relief at Japan's recovery and its measured approach has dispersed some of the clouds.

"We are a long way off a BOJ rate rise yet,

this is just the first step of the biggest undertaking of monetary policy in our era.

I would say November or December are the most likely for a rate move," said Peter Dixon, economist at Commerzbank.

The cycle is turning and we are about to enter many years of higher rates to pay for the spending that Gordon "Miracle Economy" Brown has facilitated. There is NEVER something for nothing and now is the time to start paying for all those inflated house prices and MEW toys.

[RobertPaulson]

Some nice commentary by reuters. I don't believe that rates are the key issue at the moment, the beginning of the end for quantitative easing is the big (if widely expected) news.

My favourite line

Fukui had wanted to scrap quantitative easing because sticking to it when the economy is heating up could spur inflation and create bubbles in property and stock markets.

sadly for Toshihiko Fukui this policy has created bubbles in property and stock assets just about everywhere else in the world. The BOJs short-sighted stance has seen this liquidity flow out of Japan via. global banking groups and hyperinflate just about every market going.

BOJ ends unique super-loose monetary policy

Thu Mar 9, 2006 5:52 AM ET

By Ritsuko Ando and Chisa Fujioka

TOKYO (Reuters) - Japan's central bank scrapped its super-loose monetary policy on Thursday but -- reflecting concerns about fallout for world markets and the domestic economy -- said it will keep short-term interest rates around zero for now.

The decision to end a unique five-year policy of flooding the banking system with excess cash is a first step toward higher interest rates in a country where borrowing has been virtually free for years.

It reflects the Bank of Japan's confidence that a seven-year battle against deflation has been won.

With the U.S. Federal Reserve and the European Central Bank already raising rates, the shift by the BOJ also signals that an era of cheap money is ending worldwide, boosting the risk of volatility in global financial markets.

Analysts had been divided over whether the BOJ would move this month or next.

But political pressure from Prime Minister Junichiro Koizumi on down to hold fire to avoid hurting a hard-won economic recovery may have strengthened the central bank's resolve.

"Remember, the Bank of Japan has to establish its credibility as an independent player in the financial markets and this was an opportunity they could not resist," said Arjuna Mahendran, chief economist at Credit Suisse Private Bank in Singapore.

BOJ Governor Toshihiko Fukui, a 70-year-old career central banker who has dreamt of normalizing policy since he took the job in 2003, said the decision was not meant to defy the government.

"If we were to have delayed the move, we would have turned certainty into uncertainty," he told a packed news conference.

In fact, Tokyo share prices extended earlier gains and the benchmark Nikkei average <.N225> closed up 2.62 percent on relief that uncertainty was over. The yen fell to a two-week low against the dollar <JPY=> but later recovered.

Koizumi told reporters he respected the central bank's decision. But in a subtle warning to avoid raising rates too fast, he added: "I hope the BOJ will cooperate with the government to let the economy emerge from deflation and take a normal monetary policy in that direction."

The "quantitative easing" policy was adopted as an emergency measure in 2001 to prevent a credit crunch that had threatened to further damage an already shaky economy.

The BOJ said it would no longer set a target for the amount of surplus funds in the money market, but instead adopt a more conventional tactic of guiding the unsecured overnight call rate, which has been pinned at around 0.001 percent for several years.

"I'm glad that we're switching from a policy that's hard to understand to a policy that's easy to understand," Fukui said.

"EPOCH-MAKING MOVE"

The central bank said it would gradually adjust the overnight call rate from zero percent but that if inflationary pressures were restrained it would keep rates low for some time.

"Interest rates will stay at zero for a while, then move to extremely low levels before being adjusted according to economic conditions," Fukui said.

The BOJ joined a trend among central banks globally to telegraph their intentions to markets by adopting a "reference rate" of 0-2 percent for inflation.

The reference rate is not a binding target but makes policy-making clearer while giving the central bank flexibility.

One of the BOJ's more vocal critics, ruling Liberal Democratic Party (LDP) lawmaker Kozo Yamamoto, welcomed the adoption of the reference rate.

"I want to commend it as an epoch-making move for the BOJ that will bring transparency to its policy," Yamamoto, head of an LDP panel on monetary policy, told reporters.

Expectations in markets of the historic policy change had mounted over the past week after data showed core consumer prices had risen on an annual basis for three months in a row.

The BOJ had pledged to keep quantitative easing in place until the core consumer price index showed steady gains.

Fukui had wanted to scrap quantitative easing because sticking to it when the economy is heating up could spur inflation and create bubbles in property and stock markets.

The Japanese economy grew at an annualized pace of 5.5 percent in the final quarter of 2005, in stark contrast with its anemic performance over most of the last 15 years.

Japanese firms, aided by manageable debt levels, ample cash and solid earnings, are confident they can manage any rise in the cost of funds that follows the BOJ's decision.

Nomura Securities forecasts that recurring profit growth at Japan's 400 biggest non-financial firms will accelerate to 8.2 percent in the business year from April and 10.2 percent the following year after an expected 7.1 percent rise this year.

The BOJ is widely expected to keep interest rates around zero until the second half of this year. Some analysts said the central bank could now face a fight with the government and politicians over how quickly to raise rates.

"The BOJ may want to move early to raise rates, but they should expect a big battle. It likely won't happen until October or later," said Hiromichi Shirakawa, chief economist at UBS Securities.

News of the possible central bank move has been grabbing headlines, but despite the fuss in financial markets many ordinary Japanese were either puzzled or unimpressed.

"I'm not interested in BOJ policy at all, nor do I understand it," said pensioner Satoo Yamada, 70, as he read a magazine in the upmarket Ginza shopping area of Tokyo.

[New Bear]

I like "cautious but decisive". Yes, it's slow but steady credit tightening from now on.

[bazzzzzzz]

http://www.dailyreckoning.co.uk/article/100320062.html

"Finally the Bank of Japan has changed its tune," writes our friend Tom Tragett in a note, "abandoning the zero rate policy. It will cut the amount of cash it supplies to banks from 35 trillion yen to just 6 trillion yen - the legal minimum required - over the next few months. This is actually more aggressive than a lot of commentators had expected. But the BOJ says its will keep rates low for the time being. They're trying to wrong-foot the market's reaction, and downplay today's decision."

- "It seems to have worked – short-term," Tom adds. "The Yen weakened on the news, falling to 118.30 versus the dollar. But this is a significant sea change. Expect the yen to strengthen over time as the dust settles and the real money turns around. And watch out for the hot flows of yen carry-trade debt pulling out of overseas equities, bonds and commodities too. That money could be long gone before the BOJ actually gets round to raising Japanese base rates from zero."

- "The biggest news in a decade" - as Stephen Roach called it on Monday - makes the front-pages today. "Bank of Japan scraps 'loose' money," says the Times. "BoJ switches policy and calls for end to deflation," says the FT. "Beware the investment markets," your editor adds. Something awful's afoot, we think. But what?

- "Resource stocks have been pounded here in South Africa," said Gareth Stokes by phone from our Cape Town offices last night. "After the record foreign buying last year, the hot money's being pulled from the Jo’burg exchange. Everyone's spooked by the fear of tightening global liquidity from rising global rates...."

- First the US, then Euroland and now Japan. The Big Three central banks have all now switched from fighting deflation to raising the price of their money. That ends the era of cheap money. That means the end of cheap-money investing. And that could put an end to the global bull run in financial assets.

[Realistbear]

First the US, then Euroland and now Japan. The Big Three central banks have all now switched from fighting deflation to raising the price of their money. That ends the era of cheap money. That means the end of cheap-money investing. And that could put an end to the global bull run in financial assets

.

That, folks, is the bottom line. Time to sell speculative assetts (TTSSA) such as BTL and over-leveraged houses because they are coming down as IR spiral upwards. The economic cycle always corrects bloated assetts.

[Panda]

Can some one explain the link between the BOJ interest rate, current around 0.1% and the UK, USA interest rate. I have heard that there exist a huge amount of liquidity currently, the market is awash with cheap money etc. They will absorb this by raising there base rate.

[jonpo]

Can some one explain the link between the BOJ interest rate, current around 0.1% and the UK, USA interest rate. I have heard that there exist a huge amount of liquidity currently, the market is awash with cheap money etc. They will absorb this by raising there base rate.

Money is a market, an not just any market it is really THE market.

Everywhere around the world there are suppliers of money. central Banks, commercial lenders etc etc.

There is also demand for money, to buy Plants, equipment, consuption. Millenium domes, capital goods ,gold copper, Invesments in Equities, mortgages etc etc. after all the world runs on money.

Generally speaking the more the supply the lower the price ( Interest rate to you and me ).

The more the demand the higher the prices (risk premium etc. )

The Bank of Japan is without peer in being the worlds number 1 cheapest supplier of Money in the world. they have been giving away totally free money for years and years. this money has been put to use being lent out into the world economy.

basically they are saying the money is still free but don't expect the previously limitlees quantities to keep rolling. were not giving it away anymore, and one day the prices will go up.

BoE and the Fed have been undercut in the global marketplace for years. but when BoJ rates go up liqudity dains away and suddenly the BoE and the Fed have altogether more potency.

[bazzzzzzz]

Can some one explain the link between the BOJ interest rate, current around 0.1% and the UK, USA interest rate. I have heard that there exist a huge amount of liquidity currently, the market is awash with cheap money etc. They will absorb this by raising there base rate.

This article is brilliant at explaining how Japan's monetary tightening will impact on rates globally:

http://www.moneyweek.com/file/8842/how-sto...al-economy.html

If Japan raises interest rates, the carry trade will become less attractive, and eventually end. Currencies like the dollar will no longer be propped up solely by the fact that they offer a higher interest rate. Attention will turn once again to the fundamentals - like the massive twin deficits in the US. And once that happens, a slide in the dollar looks a very likely prospect.

And what about all the other massively inflated asset bubbles around the world? David Bloom, HSBC currency strategist tells The Telegraph: "The carry trade has pervaded every single instrument imaginable, credit spreads, bonds spreads: everything is poisoned.

"It's going to come to an end later this year and it's going to be ugly."

[Panda]

Thanks friends, much appreciated.

It seems our base rate in the UK will eventually return to the long term nominal or even higher due to the tightening policy of the Japs.

[Badlad1967]

The BOJ are being very open about what they are doing. Must be a Japanese "honour" thing which is why most Western bankers with their snouts in the trough won't understand this approach

Will people listen now and start preparing themselves? I doubt it. Will people leave it until it's too late and start screaming frm the rooftops "IT'S NOT MY FAULT - BOOO_HOOOOO WAHHHHH" and look for someone else to blame?

Probably.

If Heineken did real estate and debt bubbles it would probably just like it is now

God I'm in a bad mood today! Time for an early bevvie I think!

[time 2 raise interest rates]

I wonder what impact all this is likely to have on the derivatives market,

interesting article in last week's standard.

Down the derivatives mine without a canary by Anthony Hilton

Warren Buffett, the legendary investor and America's second richest

man, has used previous editions of his annual letter to shareholders to

label derivatives as "financial weapons of mass destruction". His latest

missive, released this weekend, not only returns to the theme but also

produces some pretty chilling facts to support it.

Buffett got into derivatives by accident when he bought General Re, an

insurance company that had been in the business since 1990. When he

acquired the company, it had more than 23,000 contracts outstanding,

but by the beginning of 2005 this had been cut to 2890, reflecting his

desire to close out the positions. Reducing this inventory further last

year to 741 contracts cost $104 million (£59 million) and brought the

firm's total losses to date to $404 million.

Buffett blames no one but himself. What worries him, though, is that

his company is just a small player in derivatives, operating in benign

markets with no financial pressures to make it a forced seller. Its

accounting was conservative and, he believes, it employed no

fraudsters or rogue traders. With everything going the right way, it

ought to have been possible to exit gracefully and profitably. But

instead it was stuffed.

This prompts Buffett to make an interesting point. If his business

found it impossible to sell without loss when conditions were good,

what is going to happen when markets are chaotic, the difficulties are

obvious to all and the sellers have positions that are a lot larger than

his were? It hardly bears thinking about. But that, says Buffett, is

exactly the problem. His experience is like the canary in the mine -

a warning to others.

The trouble is the bird has died but nobody seems to care.