Sunday, January 15, 2006

 

'Deflation Persists' In Japan As Rates Fall

Bloomberg has the latest on deflation in Japan. "Japan, the world's biggest debtor, may pay the lowest cost to sell 30-year bonds since February 2004 after government officials suggested the central bank will keep interest rates near zero percent. Thirty-year bond yields dropped to a six-month low after Bank of Japan Governor Toshihiko Fukui said on Jan. 8 there's still 'some way to go' before consumer prices stop falling in the world's second largest economy."

"Finance Minister Sadakazu Tanigaki said a day later it's too early to raise rates because costs haven't stabilized after seven years of deflation."

"The yield on Japan's 2.5 percent government bond due September 2035 has dropped 25 basis points to 2.265 percent since it was sold on Oct. 18. Japan's central bank has said it won't change its five-year- old interest-rate policy until prices stop falling for at least a few months. Core consumer prices, the central bank's preferred measure of inflation, rose 0.1 percent in November from a year earlier, the first increase in two years."

"'Mild deflation still persists even though the statistics have been improving,' Tanigaki said in New York on Jan. 9."

"Japan's public debt swelled to the equivalent of $6.4 trillion as the ruling Liberal Democratic Party spent 10 years pouring money into roads, bridges and construction projects to spur growth. The consequences of being the world's biggest borrower have been limited because more than 90 percent of the government's borrowing is held locally and rates near zero percent kept financing costs low."

"The U.S., the world's second-biggest debtor, relies on foreign investors who hold about 52 percent of its $4.1 trillion of bonds. Italy is the No. 3 borrower with the equivalent of $1.5 trillion in government debt."

"Pacific Investment Management Co., which runs the world's biggest bond fund, is buying Japanese 30-year bonds, Tomoya Masanao, a portfolio manager at Pimco Japan Ltd., said in a Dec. 22 interview. As the U.S. housing market slows, demand for Japanese exports will drop, hurting Japan's economic expansion, he said. A fifth of Japan's overseas shipments go to the U.S. 'We see a negative outlook for the U.S. economy, and that's the main reason for us to think Japanese growth will slow in late 2006 and yields won't rise much,' said Masanao."

Comments:
PIMCO's Bill Gross, surprisingly to me for a guy who runs mostly US$ denominated Funds, advised, "US investors should accelerate their exposure to non-dollar stocks, because the dollar as a currency is DOOMED." Barron's Round Table January 16, 2006.

He did not provide a timeline.
 
The way all the central banks are printing their own currency to finance their debt is shocking. Soon the paper currency couls become worthless. Precious metals and commodities are promising
 
I held EWJ (iShares Japan ETF) for a while, but I sold my position today for reasons the article touches on. That is: I'm pretty convinced the dollar is in trouble -- quite possibly 'serious' trouble. Despite the fact that Japan's markets have been doing well -- its hard to imagine a scenario in which the dollar eats the dirt and Japan stays afloat. I moved back into gold and Canadian oilsands. Two things that will survive the demise of the greenback...
 
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