Abenomics: More Signs of Backfire

Japan’s inflationism will lead to increasing reliance on foreign capital first, and importantly to eventual capital flight, these increases the risks of a debt/currency crisis

Here is what I wrote back then

Worst, a sustained deterioration of current accounts means that Japan will increasingly rely on foreign capital and or draw down from the her pool of savings which has been estimated at $19 trillion and which could also extrapolate to a reduction of assets held overseas or $4 trillion net foreign investment position

There seems to be incipient signs of the above as Japanese companies opens the door to financing from abroad.

From Bloomberg:

Shizuoka Bank Ltd. (8355) joined Japanese national lenders in expanding U.S. dollar finance activity, anticipating monetary easing will crush margins on yen loans.

The nation’s second-biggest regional bank by market value raised $500 million in zero-coupon notes due 2018, the first public sale of dollar-denominated convertible bonds by a Japanese company since 2002. The average interest rate on long- term yen loans from the country’s lenders fell to 0.942 percent in February, compared with 3.348 percent companies worldwide pay on dollar facilities, according to data compiled by Bloomberg.

Mitsubishi UFJ Financial Group Inc. plans to increase energy and utility financing in the U.S., as the Bank of Japan (8301)’s focus on cutting long-term borrowing costs undercuts earnings from yen loans, President Nobuyuki Hirano said. Sumitomo Mitsui (8316) Financial Group Inc. aims to sell a record amount of dollar bonds this year for overseas business, even as the BOJ policy seeks to spur domestic lending to revive the economy.

Abenomics has failed to prompt for the desired domestic spending and credit growth as Japanese firms remains flushed with cash, preferring foreign financing. Again from the same article

Prime Minister Shinzo Abe’s call to boost fiscal and monetary stimulus hasn’t been enough to spark corporate demand for loans, leaving Japan’s banks with a record amount of excess cash. Customer deposits held by Japanese lenders exceeded loans by 176.3 trillion yen ($1.8 trillion) in March, central bank data show.

Yet concerns over Japan credit ratings have emerged, as seen via Japan’s Credit Default Swaps CDS at near record highs.

The cost to insure Japan’s sovereign notes for five years against nonpayment was at 71 basis points yesterday, after reaching 78 earlier this month, the highest since Jan. 23, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the credit-default swaps signals improving perceptions of creditworthiness.

The adverse impact from Kuroda’s implementation of aggressive Abenomics has reportedly contributed to the gold-commodity rout.

We can see why.

Yields of the 30 year JGBs has sharply bounced off the lows

Yields of 2 year JGBs has surpassed the .1% level, which have been standard for about 1 year 

From the bigger picture or 5 year chart we can see the deviation of 2 year JGB yields from the norm (all charts from Bloomberg)

All these has coincided with a monster rally in the yen, decline of the Nikkei and a nosediving gold.

Abenomics has simply been doing the same thing over and over again expecting different results. Some people call this insanity. 

The halcyon days of Abenomics appears to be numbered.