Bank of Japan’s Economic Outlook

The monetary policy statement is at http://www.boj.or.jp/en/announcements/release_2013/k130522a.pdf. CPI is still negative, but “some indicators suggest a rise in inflatoin expectations.” The outlook:

“Japan’s economy has started picking up.  Exports have stopped decreasing as overseas  economies have been moving out of the deceleration phase that had continued since last year  and are gradually heading toward a pick-up.  Business fixed investment continues to show  resilience in nonmanufacturing and appears to have stopped weakening on the whole.   Public investment has continued to increase, and housing investment has generally been  picking up.  Private consumption has seen increased resilience, assisted by the improvement  in consumer sentiment.  Reflecting these developments in demand both at home and abroad,  industrial production has stopped decreasing and signs of picking up have become  increasingly evident.  Meanwhile, financial conditions are accommodative.  On the price  front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh  food) has been negative, due to the reversal of the previous year’s movements in energy-related and durable consumer goods.  Some indicators suggest a rise in inflation  expectations.

With regard to the outlook, Japan’s economy is expected to return to a moderate recovery  path, mainly against the background that domestic demand remains resilient due to the effects  of monetary easing as well as various economic measures, and that growth rates of overseas  economies gradually pick up.  The year-on-year rate of change in the CPI is expected to  register smaller declines for the time being, and thereafter is likely to gradually turn positive.”

Also of interest:

“Mr. T. Kiuchi proposed that the Bank will aim to achieve the price stability target of 2 percent in the  medium to long term and designate quantitative and qualitative monetary easing as an intensive  measure with a time frame of about two years.  The proposal was defeated by an 8-1 majority vote.   Voting for the proposal: Mr. T. Kiuchi.  Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr.  H. Nakaso, Mr. R. Miyao, Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, and Mr. T. Sato.”

Central Bank Independence

From a recent Reuters article titled “Japan government piles pressure on BOJ ahead of October 30 meeting”:

Japan's government piled fresh pressure on the central bank to expand monetary stimulus on Tuesday, as the economics minister said he wanted to attend a rate review meeting next week to reiterate a call for bolder action to bolster an economy wounded by both the global slowdown and a diplomatic row with China.

But Jojima said there is no truth to a media report that the government is requesting the central bank to increase asset purchases by 20 trillion yen ($251 billion) to bolster economic growth.

Central bank independence is tenuous and often under tremendous pressure during bad times.

Ex-post, from a Bloomberg article on October 30th titled “Bank of Japan Expands Stimulus as GDP Poised to Decline: Economy”

The Bank of Japan expanded its asset-purchase program for the second time in two months, a move that failed to cheer investors as stocks slumped amid mounting evidence that the economy contracted last quarter.

The fund will increase by 11 trillion yen ($138 billion) to 66 trillion yen while a separate credit loan program will stay at 25 trillion yen, the bank said in Tokyo, acting hours after data showed the biggest decline in industrial output since last year’s earthquake. The BOJ will also offer unlimited loans to banks to boost credit demand.

For those keeping track, the BOJ increased the program by 11 trillion yen instead of the falsely reported government request of 20 trillion yen.

A Good Paper on Yield Curve Estimation

A very good paper by Kikuchi and Shintani titled "Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data" (downloadable here; direct link here) on zero coupon yield curve fitting/estimating. They looked at various methods of curve fitting and concluded that the Steeley (1991) method is best suitable for estimating the Japanese zero coupon yield curve. These various methods include Svensson (1995), Nelson-Siegel (1987), as well as McCulloch (1975), and they judge the methods on the criteria of undesirable (negative) values, excessive unevenness, and fitness to market prices. They also make the estimated yield curve data from 1999 to 2011 available  (downloadable here).

One issue cause by the zero lower bound for many of the curve estimation methods is negative values at the short end of the curve. (The other common issue, particularly for yield curves estimated by Nelson Siegel or Svensson, being the up and down spike at the short end of the implied forward rate curve.)  You can see the negative value issue from the dataset used in Wright (2011) (data downloadable here). For example, the Japanese nominal 3-month zero coupon rate for 2002 October is -0.0132 in the dataset.

The main contribution of the Kikuchi and Shintani paper isnt't that Steeley (1991) is best for estimating the Japanese yield curve, but rather that the paper highlights additional considerations needed when estimating yield curves in addition to the standard tradeoff between fitting close to the market price and limiting excessive unevenness. If the purpose of the estimation is to find arbitrage opportunities, methods that fit close to the price would be preferred. If the purpose of the estimation is to understand the implications of the curve to the macroeconomics environment, a smoother curve is desired. If one were to use the curve to calculate implied forward rates, and find them to be the red line on the right (Figure 15 of Kikuchi and Shintani) – what implication should one draw about the macro economy?

Reference:
    Kikuchi and Shintani: Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data (IMES) ,
    Steeley (1991): Estimating the Gilt-edged Term Structure: Basis Splines and Confidence Intervals (Journal of Business Finance and Accounting),
    Svensson 1995): Estimating Forward Interest Rates with the Extended Nelson and Siegel Method (Sveriges Riksbank Quarterly Review),
    Nelson and Siegel (1987): Parsimonious Modeling of Yield Curves (Journal of Business),
    McCulloch (1975): The Tax-adjusted Yield Curve (Journal of Finance),
    Wright (2011): Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset [http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.4.1514] (AER).

Constant Maturity Yield Changes for Today (The Day after the Day after Yesterday)

This should be the last in a series of 3 posts. The constant maturity yields estimated by the Treasury Department (data here) today gain another 23 points at the 20-year and 30-year maturity. I assume the yields are driven by the event depicted in this article: EU Crisis Deal Buys Time for Greece: Papandreou.

Interestingly, the chart below shows that the yields on the Japanese Government Bonds head toward the opposite direction. (Data is here)  Sometimes, the discrepancy is due to the difference between the market close times for the US and Japan markets. But the change in yield has been negative for the past two days. Also, the change in yield is relatively small.

Reference: Bloomberg [Bloomberg]

Amount of Foreigners owning Japanese Government Bonds

Two quotes from a recent Financial Times article about wealth management in Japan.

“That conservative tendency shows in the way they manage their wealth, with a large proportion kept in cash in the domestic market.”

“While sitting on cash has worked in the past, after 15 years of deflation, clients are beginning to realise that they need to address the risks of inflation, Mr Humair says.”

Unlike the US, a feature of the Japanese government debt situation is the lack of foreign debt holders. I have not updated my Japanese Flow of Funds data for a while. But as of June 2010, this figure (Assets/-Central government securities and FILP bonds/Overseas/Stock) is 4.56% of the total.  In the US, the number is above 40%.

My best guess is that this is a result of regulation (difficulty to invest overseas) and institution (the large amount of funds tied to Japan Post). Perhaps too, foresight. Given the strength of the Japanese yen over the years, the rate of return on foreign asset will have to be high to justify the investment. From December 1, 1997 to June 30, 2010, the yen underwent a 45.6% appreciation, or 2.99% annually. [log(1.456)/((datenum(2010,6,30)-datenum(1997,12,1))/365.250)]

 

Reference: Wealth: Investment advisers have eyes on growing market [FT.com],
  Flow of Funds [Bank of Japan],
  Historical Exchange Rates [Currate.com]

Japanese Growth in the Past Decades and Google Economic Data Search

While Japan’s economic growth in the past two decades has not been staller relative to its own past in the 60s and 70s, it is not bad. The chart below, via Google, compares real GDP growth (year over year) with the US. [As an aside, Google provides on-the-fly graphs for search like “gdp growth of japan” and many others, like “life expectancy of japan.”  See their public data page for more.]

If you plot the data of the G7 countries in the same chart, Japan does not look all the different from the others.

Source: World Bank, World Development Indicators [Google]