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Japan’s next reflationary tactics

It seems like some time ago now that Japan threw everything, including the kitchen sink, at the deflation problem. Now they are ripping out the plumbing and anything else they can find to try and escape the deflationary slump which the economy has been suffering from for the best part of the past fourteen years.

The latest meeting has seen the Bank of Japan expand its asset purchase-program by a further JPY 10trln (to JPY 40trln). It also chose to extend the maturity of both government and corporate bonds to be purchased under their QE program. It now has an inflation target of 1%, which it remains confident of reaching “in the medium to long term”, but that is a long time in central banking terms and markets hold little faith in such a forecast, largely through the bitter experience of recent years (and not only in Japan).

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S&P downgrades Spain. That ratings agencies still hold such sway over markets remains perplexing at times, with the euro weaker overnight on the back of S&P’s two-notch downgrade of Spain (to BBB+). S&P noted that “Spain’s budget trajectory will likely deteriorate against the background of economic contraction”, which is not the most controversial revelation in the world, it has to be said.   It also discerns “an increasing likelihood” that the government will have to provide further support to the banking sector. This should have been apparent on the back of the bad loan and also housing market data released last week.   Spanish bonds are opening weaker on the back of these revelations.

China eases the reins on housing.   Aware that the property market has slowed rather more rapidly than it would have expected, Beijing is now implementing measures designed to ease financial conditions selectively. In the first quarter of 2012, home sales in China declined by 18%, while the inventory of unsold new homes in the ten major cities jumped by almost 50% in the year ended March.   In response, policy-makers are allowing the major banks to offer discounted mortgages to first-time home buyers. Eligible borrowers have been able to get a 10% discount on their mortgage from major lenders such as the Bank of China, China Construction Bank and Agricultural Bank of China. These discounts seem to be working because first-time home-buyers are a huge force in the housing market right now.   Looking ahead, we may well see some progressive relaxation of previous home-purchase restrictions and deposit requirements. Anticipation of further stimulation of the housing market has provided Chinese property shares with a boost over recent days.

Loonie Love.  One major currency that has attracted some steady interest this year has been the loonie. Indeed, for the year to date, the Canadian dollar is the top performer amongst the majors after the pound. Over the past three months the CAD has consistently traded under parity; this morning, yesterday it almost touched 0.98, a seven-month low. There are numerous explanations for the CAD’s outperformance. In the first instance, the currency has become a favourite of the sovereign wealth funds at a time when their faith in the single currency has been severely dented and they are keen to diversify out of the dollar. Likewise, European money market funds have been raising their allocations of the Canadian currency. Secondly, the loonie has benefitted from its status as a petro-currency. And finally, the economy is the second-strongest in the G7, which at some point may necessitate higher rates as BoC Governor Mark Carney made clear last night. Indeed, Carney expressed some concern yesterday that the strong currency might represent a headwind for the economy in the future. He is also concerned by the high level of household debt and the continuing strength of property prices in some areas. For now, there are no signs of loonie love fading.

The sterling bounce-back.   After Wednesday’s post-GDP data-beating, sterling recovered from the knock and has since more than recovered the sagging tone.   Not surprisingly, there were the doubters of the GDP data, suggesting that the data were likely to be revised higher in the coming quarters, in part based on the survey evidence seen in Q1 and the tendency to see fairly major revisions to the provisional releases as subsequent quarters are releases. Furthermore, stronger consumer confidence data also helped the better tone in the background.   As always, currencies are a relative game and sterling’s resilience is partly a result of the issues going on elsewhere, not least in Europe.   Still, there are further tests looming over the horizon, not least the Bank of England inflation report next month, where once again they will have to talk their way around why inflation has turned out higher than they expected and growth lower.

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