Saturday, November 01, 2014

BOJ/Abe Administration Double Play Trivia and a Few words on Consumption Tax Hike

“In addition to the BoJ's decision to expand its already massive monetary stimulus plan, an announcement by the country's government pension fund that it would increase its holdings of foreign and domestic shares added to yen selling.”

The surprise BOJ call—no “trick-or-treat” headlines? Disappointing—got me a phone call for a radio interview, which I politely declined because: I a) I had nothing to say beyond the obvious (ex. equities up, bonds down) or something that I’d have to swipe off comments by financial analysts or BOJ-watchers and deliver with feigned conviction; and b) would be drunk by 8PM, when the interview would be scheduled.

The 5 to 4 split among the Board members seemed too close for comfort, that’s for sure. It was a safe bet that Kuroda, and Deputy-Governors Hiroshi Nakaso (BOJ lifer) and Kikuo Iwata (a long-time go-to-academic for the government) voted for the expansion, as thy have staked their reputations (and potential reappointment) on the first Abenomics arrow, and I was almost as certain that Nobuhisa Morimoto (business representative from TEPCO, easily the financially most challenged among the long-term debt-heavy power companies) voted along with them. Not so. Morimoto had apparently voted his conscience. My bad, Mr. Moromoto*.

The timing of the decision to expand equity purchases Government Pension Investment Fund (GPIF) was a little forced. Yasuhisa Shiozaki, the Minister of Health, Labor and Welfare, had talked about the need to improve governance at GPIF (for all its size, it only has a handful of investment experts) in order to take on more risk, but that was obviously going to take time. Maybe it’s just me, but the decision looks a little ass-backward.

Beyond the immediate market impact of all this, the consumption tax hike decision in December has become even more likely, particularly in light of the BOJ action. That said, it’s not a total given that the rate will go from 8% to 10% eleven months to the day from now. The only reason the decision must be made in December is that the FY 2015 budget bill cannot be drafted by the year’s end (or not too long after that) otherwise. If the economy tanks between now and next October, you can be sure that there will be cries for postponement, in an extraordinary Diet session if necessary.

* That said, Morimoto reportedly voted against the measure because he was confident that the 2% inflation target would be achieved—which would make him a super-fan?

Note also that three out of the six “independent” Board members voted against the measure because they had misgivings about the ability to achieve the inflation target in its current form.

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