Please Take Note ...

My regular postings and data watching from the Eurozone and Japan have been somewhat absent as of late. However, I am going to take it up again now and I will begin with Japan. There are many aspects here and one of them is of course the recent rate hike in the overnight lending rate from 0.25% to 0.50% where Edward so eloquently reminded us to look to the past in order to adequately analyze the situation and crucially Edward also voiced his criticism towards those who are so fast and sure in their of the sustainable Japanese recovery. Now, let me put this into some kind of time frame, the recent hike came at the end of February and on the back of positive 4th quarter GDP figures as well as of course the worry about carry trade and the subsequent international pressure on the BOJ. So was the BOJ rate hike in February a sound move based on economic fundamentals? Let us begin with with the Japanese industrial production which slipped 1.5% in January as well as Japanese retail sales which continued their secular decline posting a 0.8% decline as well in January. Adding to all this, Japanese inflation turned to zero in January.

(from Bloomberg - bold parts are my emphasis) 

Japan had zero inflation in January, underscoring the nation's struggle to overcome seven years of slumping prices.

Core consumer prices, which exclude fresh food, were unchanged from a year earlier, the statistics bureau said today in Tokyo, matching the median estimate of 39 economists. It's the first time prices failed to rise since May, and followed a 0.1 percent gain in December.

Wages fell the most in more than two years, a separate report showed, damping prospects for faster inflation and higher interest rates in the world's second-largest economy. The Bank of Japan raised rates for the second time in six years last week and Governor Toshihiko Fukui said further increases will be gradual.

``The Bank of Japan isn't going to be able to raise rates as long as CPI is negative,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo, who expects prices to drop next month. ``We're not going to see inflation pick up unless we see wages start to rise.''

So please take note ...

Take note that all the data cited above are from before the BOJ hike in February which of course does not at all bode well for Japan's so-called sustainable recovery and retreat from deflation. Methinks that Takehiro Sato from MS is probably and sadly going to be right on cue on his deflation call for February-March. Also take note that the paradox (excellently described by Dave Altig) in terms of how the recent hike actually caused a depreciation of the Yen may now revert to the opposite as investors seem to have become struck by a recent bug of risk aversion as markets have become rather volatile in the recent days. This has subsequently caused a flight to safe havens by investors and the Yen, sadly for Japan in this case, represents such a safe haven.

(from the FT - hat tip EuroIntelligence) 

The Japanese currency has strengthened as recent volatility in global markets prompted a flight to quality that has put pressure on carry trades, in which long positions in high-yielding assets are funded by selling low-yielding currencies such as the yen.

So take note, an appreciating Yen is perhaps at this point driven by short term volatility and as markets stabilize (if and when of course they do) the carry trade might resume its merry way. However, as we keep the January inflation figures fresh in mind as well as the dampening effect of the February hike itself might begin to materialize, the deflationary push related to an appreciating currency is, quite frankly, not what Japan needs in these months with the CPI index seriously flirting with negative territory.

Finally, please take note that although I worry/think about excess liquidity and subsequent excess risk taking as much as the next man pressuring the BOJ to raise rates is not a conceivable way forward from this point. We need to understand why real global interest rates are as low as they and why liquidity and inflation do not seem parallel results of this low interest rate environment. Not until we get to grips with this apparent conundrum can we begin to apply the right tools to adjust the valves of the global econom.

Japanclaus vistesen