Bank of Japan Expands QE

The BoJ, possibly stung by unfavourable comparisons between its record and the record and activism of the Federal Reserve, has announced a further £128bn of purchases of government bonds and has set a 1% inflation target “for the time being” (1% is the mid-point of its definition of price stability, which is 0-2%). Bloomberg points out that inflation has not been above 1% in any calendar year since 1997; indeed, given the persistence of deflation in Japan, the BoJ has patently failed to achieve price stability. The BoJ is worried about Japan’s vast debt mountain — because it means there is a huge risk to interest rates if inflation ever rises — and would like to wean the economy off deficit spending. That is why it has been pushing the government to balance its books, and that in turn is the reason for the DPJ government’s attempts to introduce a VAT hike (which have been hamstrung by an obstructionist LDP, which doesn’t necessarily disagree with the policy but hates the DPJ). Now it appears that the BoJ has reversed course, and is prepared to continue to fund deficit spending after all.

I do not know what the answer is to Japan’s problems — perhaps to generate a bit of inflation and hold bond yields artificially low, as happened in the US and Britain after WW2. The BoJ has resisted that route, but perhaps it is the route it will now take. In any event, the ECB and the BoJ are now conducting extraordinary monetary easing and the Fed has an easing bias (I still think that QE3 is likely unless the pace of recovery accelerates markedly; but in any event there appears to be a Bernanke put on the rate of improvement in unemployment). Buy, buy, buy!

What does all this mean for the currencies? As I said on 10th January, funding is cheaper in USD and JPY than in EUR, and therefore I expect USD and JPY to be the funding currencies of choice at present — i.e. not EUR. This action by the BoJ makes JPY still more attractive as a funding currency by making it less likely that the currency will appreciate.

US Homebuilders

I mentioned on 20th October that housing starts had beaten expectations on thanks to multi-family starts. Housing starts had been rising since March 2011 and Calculated Risk, an excellent blog, had been arguing for some time that multi-family construction was likely to be a boost to the economy in 2011. Since October, the S&P 1500 homebuilders index has outperformed the main index by almost 30%. I cannot help but feel I have missed this trend. Homebuilders would have been a good buy after the crash in August on the basis that the multi-family pick-up meant that there was light at the end of the tunnel for them, which is what markets react to. The reason I missed it is that I was thinking like everybody else — rather than focusing on my surprise at the improvement in multi-family starts, I focused on all the reasons to be bearish about the US housing market; but those were in the past, and improvement was in the future. That is what makes this a mistake.


  • French non-farm payrolls -0.2% d.e. Q4. The first fall since 2010.
  • UK CPI 3.6% a.e. Jan. CPI ex indirect taxes was also 3.6%, as the VAT hike has now fallen out of the figures. This represents a significant increase over last month’s reading of 2.8%. This increase is base-effect related — prices tend to fall in January (presumably because of the sales), and this January they fell less than last January. I think it is fair to say that inflation remains above target but moderate. Core CPI declined to a thoroughly manageable 2.6%.
  • German ZEW sentiment 5.4 b.e. This is a big improvement. The Eurozone-wide survey also showed an improvement.
  • Eurozone IP -1.1% a.e. Dec.
  • US retail sales 0.4% d.e. Jan. Core 0.7% b.e.

Coming Up

  • Prelim. Eurozone GDP
  • UK employment data
  • Eurozone trade balance
  • BoE inflation report
  • Empire State index
  • US industrial production and capacity utilisation
  • FOMC minutes