Abe and BOJ

There is practically no chance that the BOJ changes policy.
 BOJ shares the common dilemma among major central banks. Growth is
ok–above trend, which in Japan is seen as about 0.8%, but price pressures remain
weak.  The core rate in Japan, which excludes fresh food, is up 0.5%
year-over-year.   The target is 2%.  
The BOJ and SNB are widely
understood to be laggards in the long drawn out process of normalization.
  There have been two recent
developments to note in this context.  First, Abe looks posed to call as
snap election, which the LDP and he will most likely win, which is why the
election would be called early in any event.  That means the continuation
of Abenomics– and may increase the perceived chances that Kuroda gets a second
term.  In the US, there is a two-term tradition.  In Japan, it would
appear to be the first time in 50 years that a BOJ governor has a second term.
 The point is the snap election strengthens the case for continuity.
The second point is that
Abe, like Trump, are influencing their central bank, not through rhetoric
designed to lobby for a certain policy and challenge the independence of the
central bank, but through the power of appointment.
 Two new members join the BOJ board
with this meeting.  They seem to be on Kuroda’s side of the activist
monetary policy debate and the need to continued stimulus. 
In Europe, there is a
concern that officials are running out of securities.
 Some worry that the BOJ buying is
adversely impacting liquidity.  Draghi seemed to play down these concerns
recently.  Kuroda too has argued the liquidity is not a problem, which
means that purchases (running less than the targeted JPY80 trillion, a year)
can continue.
The stronger world growth is
spilling over and helping the Japanese economy. 
The transmission mechanism is Japanese
exports.  Last month, Japanese exports were 18.1% higher than a year ago.
 It is the largest rise since late 2013.  In August 2016, Japanese
exports were nearly 10% lower from a year ago.    
Japanese auto exports to the
US are up 28.3% from a year ago, but there is a powerful base effect that may
at play after weak auto exports to the US last year.
 Still, overall Japanese exports to
the US were up nearly 22%. Electronic exports to Asia were up 21.6% from a year
ago, while exports to China were up over a quarter.  Exports to the EU
were up a little less than 14%.
Imports remain strong,
rising 15.2% from a year ago, even though it represents a modest slowing from
16.3% in July.  
strength of imports may reflect robust domestic demand.  Of note, Japan’s
oil imports are off a little more than 1% over the past year.  Oil imports
from Russia are off nearly 28%, while for the first time in five years, Japan imported
oil from South Korea.   
In the big picture, the
dollar-yen exchange rate often seems to be range-bound. 
When it looks like it is trending it
frequently is simply moving to another range. Over the past six months, the
range has been roughly JPY108 to JPY115. We suspect Japanese officials would be
more comfortable if the dollar did not move below JPY110, but the current range
seems acceptable.  
In the options market, the
discount for dollar calls over puts (25 delta risk reversals) is the smallest
(~1.0%) since the end of Q2. 
 This is consistent with expectations is dollar-friendly.
 However, the cross-currency swap is a different story.  Since late
August premium the dollar enjoys in the cross-currency swap market (over LIBOR)
has fallen by nearly 20% to about 45 bp.   The smallest premium this year
is about 38 bp and it began the year near 80 bp.  


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