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Ex-Soros Adviser Says BOJ’s Bet On Massive Easing Will Backfire
Perspective | 19 April 2013

The Bank of Japan’s (BOJ) “huge bet” by boosting quantitative easing won’t turn the economy around and is instead sending the nation toward default, said Takeshi Fujimaki, former adviser to billionaire investor George Soros.

The BOJ said 4 April it will double monthly debt purchases to 7.5 trillion yen (US$76 billion). That’s about 70 percent of planned bond issuance from the world’s most heavily indebted government. Governor Haruhiko Kuroda set a two-year horizon for achieving the 2 percent annual inflation target adopted in January at Prime Minister Shinzo Abe’s urging and said the monetary base will grow to 270 trillion yen by the end of 2014.

“By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on 11 April. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”

The BOJ governor said in the week ended 12 April he won’t set a time limit for easing and he had taken all necessary measures for now to achieve the inflation target. Kuroda’s actions drove the yen to a four-year low of 99.95 yen and spurred volatility in government bond markets. The yield on the 10-year note climbed to 0.62 percent at the end of the week ended 12 April after dropping as much as 14 basis points on 5 April to a record-low 0.315 percent.

Bond Volatility
“The volatility in the Japanese Government Bond (JGB) market as well as the fact that there is large selling represent fear among investors,” Fujimaki said. “They are early signs of a larger selloff and we should continue to monitor the moves in the long-term bonds.”

The BOJ will respond flexibly to rising price swings, central bank officials told reporters on 11 April after a meeting with market participants that marked another Kuroda innovation. It will consider announcing operation schedules in advance, they said.

Fujimaki said he recently bought put options for JGBs of various maturities, without elaborating. He continues to hold real estate in Japan and options granting the right to sell the yen against the greenback expiring in less than five years. He also holds assets in US dollars and currencies of other developed nations.

“Japan’s finance is sinking into the ocean,” Fujimaki said. “There’s no escape from a market crash in the future when you have such enormous debt.”

Record Debt
Japan’s outstanding government bonds, bills and borrowings increased to a record 997.2 trillion yen at the end of 2012, according to Finance Ministry data. The International Monetary Fund estimates liabilities will grow to 245 percent of the nation’s economic output this year, expanding for a sixth-straight year.

Five-year credit-default swaps that insure Japan’s debt from nonpayment were at 70 basis points on 12 April, up from a more than two-year low of 57 on 11 March, according to CME Group Inc.’s CMA. The contracts are used by traders to speculate on the debt’s outlook, with an increase in price signalling worsening perceptions of creditworthiness, while an advance suggests the opposite.

The yen touched 99.95 on 11 April, the weakest since 14 April 2009. The currency has depreciated 21 percent in the past six months, the worst performer among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

Stock Gains
Japan’s Topix Index has climbed 56 percent since 15 November 2012 when Abe, one month before elections that would bring him to power, called for “unlimited” money printing by the central bank. The gauge traded at 1.31 times book value compared with 2.37 for the Standard & Poor’s 500 Index.

“Things may look rosy for now as stocks rise, but should we see hyper-inflation, JGBs will see a huge selloff, leading to a stock market crash,” said Fujimaki, adding that he sold “almost all” of his Japanese stock holdings some time ago.

Kuroda’s predecessor Masaaki Shirakawa had warned of the dangers of excess liquidity. At his final meeting as governor he said the costs and risks of monetary policy tend to be recognised long after steps are taken and that the government and BOJ need to have discipline.

“Shirakawa did more than enough and he had good reasons to not do any more,” said Fujimaki. “There will be tremendous side effects from monetary stimulus. QE doesn’t work and has no exit.”

Fujimaki’s agreement with Soros Fund Management, once the world’s biggest hedge fund group, ended in October 2000. He has since written a book and lectured at Waseda University and Hitotsubashi University in Tokyo. He was born in 1950.

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