Archive for December 23rd, 2008

Understanding Bank of Japan’s monetary policy moves

December 23, 2008

BoJ Governor, Masaaki Shirakawa has given an insightful speech on Japan’s woes and the recent monetary policy moves. Apart from the monetary policy easing, there are 2 other moves.

One, to infuse dollar liquidity to support markets. And tow, which is more interesting is taking on corporate credit risk on its balance sheet.

The Bank has already been conducting purchases of CP under repurchase agreements, and these have been significantly increased in terms of frequency and size to support the better functioning of the CP market. In addition, with a view to facilitating corporate financing during the run-up to the calendar and fiscal year-ends, the range of corporate bonds and loans on deeds accepted as eligible collateral has been expanded and, as a temporary measure, BBB-rated corporate bonds and loans on deeds have been included in eligible collateral.

Furthermore, a decision was made to introduce a special operation to facilitate corporate financing, which will be implemented in early January. This special operation will enable financial institutions to obtain funds over the fiscal year-end with no explicit ceiling on the total funds available, although the maximum loans available to individual financial institutions will not exceed the value of the corporate debt pledged as collateral. Also, the interest rate on these funds will be set lower than corresponding market interest rates.

This is interesting stuff. BBB rated corporate debt and loans on deeds as well. In the end Shirakawa says not to create another crisis by taking decisions in haste:

Considering the background to these experiences, it seems necessary to remember that responding to crises with excessive policy actions may lead to larger crises later on. In the current crisis, many issues have surfaced in central banking circles in areas such as the basic ideas behind the conduct of monetary policy and the regulation and supervision of financial institutions. I am sure that various issues are also being reconsidered in the field of corporate management, given the progress of globalization in economic and financial activities.

I actually feel bad for Japan. When would its lost decade end? Would the lost decade become lost 20-30 years? In context of Japan I also came across this summary of visit of Japan and Korea by San Francisco Fed President. She says:

Finally, analysts universally concluded that the government needs to help banks get toxic assets off their balance sheets. Otherwise, banks will remain focused on the potential for further deterioration of these loans at the expense of looking forward and making new loans. Thus, new capital will be hoarded to protect against potential new losses. Equally important is price discovery. In Japan, the government took severe haircuts in purchasing assets from banks (in 2000). This policy reduced uncertainty by establishing a floor price for future asset sales. Everyone we met with urged the U.S. to move forward with an asset disposition program, as originally envisioned for the Troubled Asset Relief Program (TARP).  

Nice way to push the TARP argument. The problem was never with the intention of TARP but the execution. It has been a mess so far and has set in a bad standard.

Mutual Fund or Distributor’s fund?

December 23, 2008

Economic Times has a story on Indian Mutual Funds. The article lists 10 Fund houses whose AUMs have declined severely in November 2008 compared to October 2008 . In order to boost sales:

In their bid to bolster their sagging assets under management (AUMs), mutual fund houses are pampering distribution agents with unique incentives to boost sales. Fund houses are handing out upfront commission and other monetary remuneration to increase fund sales. Instead of annual commission, which was the case until some time ago, fund houses are now offering an upfront commission of 1% for selling gilt and income funds.

Among a host of measures adopted, fund marketers are promising higher commission on schemes sold. In addition to the 2.25% as entry load and 0.5% trail commission, distributors are being offered 0.5% extra commission for everytax saver fund sold.

I am not sure how to react to this story.  Mutual Funds are for retail/small investors but has been in news for all the wrong reasons. First, they seem to be passing on a chunk of returns to distributors. Second, seem to prefer institutional investors instead of retail investors. Third, which has become a latest trend is the compensation packages at these funds turning new highs.

(more…)

Japan, Thailand join the “falling from a cliff” export club

December 23, 2008

I had pointed China, Korea, Taiwan and India exports have declined sharply. 2 more Asian countries join the club.

  • Japan: Japan’s exports have declined by 26.7% in November (WSJ, Bloomberg, see detailed research here). Shipments to the U.S. declined by 34 percent and sales to China slumped the most in 13 years. Imports declined by 14.4 percent, the first decline in 14 months, as oil costs eased and the yen gained. This led to a trade deficit of $2.5 billion, the third shortfall in four months. 
  • Thailand’s exports declined by 18.6% in Nov. Imports rose 2.0 percent from a year earlier to $13.07 billion in November following a 21.7 percent rise to $15.82 billion in October.  The November trade account showed a $1.2 billion deficit after a $558 million deficit in October.

WTO was concerned that trade finance is going to impact the global trade severely. The case looks like of slumping global demand now. World Bank/IMF also said trade volumes might decline in 2009.  Simeon Djankov of Crisis Talk Blog pointed that trade finance is not the main concern now.

All these economies (except India) are export-driven and the fall is really steep. The impact on growth is a given. Anoher export-led economy New Zealand is facing severe stress as well. China cut rates y’day and is staring at the barrel. James Kwak says all we can do is wait for Obama plan.

Assorted Links

December 23, 2008

1. Krugam says crisis is hitting those US states hardest that didn’t have a housing bubble:-) MR shares his thoughts as well

2. Krugman seperates the wheat from the chaff on fiscal stimulus. Mankiw raises basic questions with fiscal stimulus

3. Roth advices on what should economists study

4. PSD Blog points in Russia smileys have been trademarked!

5. CTB points trade barriers increasing.

6. Econbrowser has an excellent post on Fed’s balance sheet

7. TTR points to forecasts and oil prices

8. IDB asks a question which this paper had asked long back


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