Japan (and its Real-Estate market) Rides Again

Bloomber – Nic Smith. Hardly convincing. A very superficial rap. The RE he's talking about is market REITs fueled by a rotation out of bonds. WSJ article wouldn't come up.

BOJ is trying to push investors out of JGB's at a controlled rate (not working) and into stocks and other investments. It's also buying directly into the market especially ETF's. 

This will be a disaster for Japan. If you don't understand the relationship between JGB's, yield ceilings, currency devaluation and their effects on key sectors of the economy then you need to study this thing a lot harder. BOJ hasn't got control of this and it's lurching from one crises to another as it tries to hold things together.

This has been done before. It failed then and it'll fail again. Crucial economic indicators are deteriorating not getting better.

Here's my bet. The current hot money flows into Japan trying to front run the market will in due course (and I expect that to be soon) correct back and beyond where they came from. AU$ saw some pressure from Yen exiting positions here and heading home to speculate on the gold rush spurred by BOJ policy and market actions. AU$ dollar now seems to have stabilised around the US0.96 region.

The kind of stuff you're seeing on the ground is to be expected. Problem is they are distortions from a normal market and that produces volatility. That volatility is pushing large institutional investors away from bonds and investing in Japan. The VaR isn't worth it. 

BOJ has started something it may not be able to stop. They want 2% inflation but bonds to stay below 1%. Enough Bond holders are saying bugger that an opting out. That's putting upward pressure on yields and rates forcing the BOJ to support the market. Over 1% and banks face substantial T1 capital impairment. Mainstream banks by 10% and regionals by 20%.

It's the kind of thing Bass has alluded to. He's also indicated the BOJ planned operations are too small and they will have to massively increase bond buying programs over the long haul. He describes this as the investor paradox. The govt wants 2% inflation but sub 1% interest rates. The normal investor would sell and look for yield somewhere else. With almost one quadrillion yen on the table a Y60T buying program isn't going to satisfy the bond market. That then leads to a currency depreciation as the initial program of doubling the money supply will have to go much further to support the bond market.

They're caught between a rock and a hard place. Their debt load is, according to current budget forecasts, set to increase by 7% between now and 2014. Their cost to income ratio is already at 46% of revenue and set to deteriorate further.

Bond rates where around 0.3% when this all started and are now around 0.9%. That's a massive hit to expenses. 

Local stuff aside for a minute. All this printing is pushing yen out of the country looking for safety and yield. That's screwing with international bond markets and forcing CB's to take stabalising action to buffer their own economies. I can't see them tolerating this for too much longer.

Ziv you need to stop admiring the paint job and pop the bonnet for a deko at the engine. It's a dog.

Fascinated to know how you arived at that conclusion when the MOF's figures show quite categorically that import costs are rising faster than export revenues. 

Never said that. The renewables sector is a heavily subsidised industry that can't stand unsupported in actual market conditions. At this point in time it is a drag on growth. On the IP and development side the kind of revenue generated is fairly small in the scheme of things. On the manufacturing side cost pressures have and are pushing manufacturers to the wall. Even the cheap Chinese manufacturers are going bust.

The latest head wind for renewables is a loss in confidence due to poor manufacturing techniques which are showing a 10 – 15% component failure rate on a product that is guaranteed for 20 – 25 yrs. US companies are now putting aside huge reserves ($250 million in one case) against future claims. That now suggests uptake could be dampened if the industry doesn't do something to lift quality. It takes around 7 yrs in most cases to recoup your home install investment with subsidies. If a system needs replacing because of quality issues then ROI goes out the window along with subsidies and we're likely to see a pullback or stalling of renewable uptake.

At the moment subsidies are manageable because renewables are a small percentage of the market and the additional cost and tarrif rates can be smoothed to accomodate the additional cost. As that ratio increases then somewhere along the cost curve the consumer is going to have to shoulder the full cost. As the market approaches that point resistance is likely to increase. I think that will prove difficult to overcome.

Another problem renewables face is that energy demand is increasing considerably but the bulk of that demand is industrial which renewables are in the main unable to supply. 

Another point of resistance is large traditional energy suppliers who see renewables as a competitor. 

Renewables won't fail over the long term but they are not the economic panacea you make them out to be. Renewable technologies are being pursued globally and Japan is just one player among many who has to fight for market share. 

That's one aspect of it. But how many immigrants does it take to make a difference? What jobs will they do? How would they contribute to improving Japan's economic outlook? How does Japan compete for quality immigrants when the whole world is doing the same thing. Japan needs to change its regulations to give immigrants equal rights with Japanese. It would need to initiate an education and media program to change attitudes both internally and externally.

Simply stating immigration could unlock economic opportunity without considering the complexity and difficulty in its implementation let alone the time frames it would take to see any economic benefit is fanciful at best. Japan has never been adept at welcoming foreigners. Quite the contrary. There's nothing I see that suggests they have the skill, desire or level of support that would indicate this could be achieved. Until they do something tangible it's just political hot air.

Again putting words in my mouth. Abe has no credibility. He's a once failed PM. So now that he's reborn with an old strategy that failed last time but repackaged as new with a slick marketing name like 3 arrows he's suddenly the messiah. If Abe was a failed property developer you'd be considered an idiot to sign up to his offerings second time round.

once fooled shame on you…twice fooled shame on me

Obama – i had high hopes for the guy. What a let down. He'll be remembered for drone strikes and that abomination called Abamacare.

Krugman – a guy who is widely considered to be very good in his specialist field of economics but an absolute muppet in theoretical macro economics. In the last few years he's been taken to the cleaners by some of his noted peers. He's become a bought and paid for mouthpiece of the NYT. That's a peer assessment not mine. In the front lines of economic activity he's not taken seriously by the big successful fund mangers who are widely regarded as astute intelligent players based on their performance not what they say.

Sooking again…

Certainly is.

A quote from forumite BMW with relatives on the ground there from that thread:

Doesn’t seem like a rosy future ahead.

My FIL has a small engineering shop in outer Tokyo but is almost being  forced to retire due to lack of work coming in.

At the moment they are buying other currencies as their accountant has warned of a massive devaluation of the Yen to be coming soon.

My worry is that so many people believe that the government will be able to provide for them in retirement as they have paid the super tax during their working lives, but it just doesn’t seem sustainable with an ageing population and massive government debt.

…and another one from Shahin Afarin

Very interesting thread – I had 2 Japanese investors purchasing here and both mentioned that they 'escaped' Japan as they believe the economy is terrible and they have no confidence and things are going to get any better anytime soon. No real concrete evidence or numbers but just the word from the people living in the country.

…..and another. I don't often agree with Alistair but in this case..

What this article is saying is that Japan has a policy of defaulting on their debt by proxy by reducing the value of the currency in which the debt is denominated. It then goes on to say this is good because it will help exporters, but what about bond holders and people in Japan with savings, they are the victims.

In short, the Government has spent above its means and is now going to tax those who have supported it and those who have been responsible and not spent above their means, by inflating away the value of their Yen.

...and I couldn't go without including this one from PrimePropertyIn

Been looking at this conversation for a while, I think you have a very good point Freckle.

zmagen wrote:

"I think a disaster is coming, and no one will convince me otherwise". It's cool, you're entitled to your opinion, enjoy it!

A disaster isn't coming it's already here for millions upon millions.

Iceland

Ireland

Portugal

Spain

Greece

France

Slovenia

Netherlands

Libya

Egypt

Cyprus

Italy

Syria

Argentina

Venezuela

..and the list above doesn't even consider the millions in 1st world countries like the US who lost most of their wealth to the GFC. 

Abe's a joke. A failed PM with no economic credibility whatsoever who's simply repeating past attempts that failed but some how moar is better and it's different this time. The 3 arrows thing is a catchy gimmick to sell the public but it's more like a 3 legged tripod. One leg fails it all falls over.

It's time you stopped sooking like a schoolgirl every time you get smacked around the ears with some basic data and simple logic. If you want to be taken seriously then support your argument with something substantive. For example;  saying immigration is a solution without providing a strategy, timeline or how it would be implemented is just waffling in the wind.