Abenomics Has Failed

Well folks, Elvis has left the building. Abe had a big announcement today and failed to jawbone the market back into line. As of 3:25 pm on June 5, 2013, the Nikkei Stock Market and the US dollar/yen rate have announced the market's verdict: Abenomics have failed.

The yen has cracked to under ¥100 to the US dollar. Look out below! See the spike? That's when Abe began to speak... Gee, what happened within an hour? Your guess is as good as mine.

Bloomberg reports:

The yen gained against most of its major counterparts after Japanese Prime Minister Shinzo Abe’s growth strategy failed to boost domestic stocks. 

Japan’s currency rallied against the dollar and euro after the Topix index of shares extended losses to more than 3 percent. The dollar erased earlier gains driven by speculation the Federal Reserve will scale back stimulus measures. A volatility measure of Group-of-Seven currencies was near the highest in more than three months...  

“The yen is swayed by the movement in equity prices,” said Akira Moroga, manager of foreign-exchange products at Aozora Bank Ltd. (8304) in Tokyo. “Stocks which rose in anticipation of Abe’s growth strategy were sold off after the announcement lacked any concise measures.”

At the same time, while all this is going on, the JGB market is going berserk.

Zerohedge has a great article about the next chapter in this farce entitled "The Problems With Japan's "Plan (jg)B": The Government Pension Investment Fund's 'House Of Bonds'", the raiding of the $1.1 trillion dollars that are sitting ducks in the Government Pension Investment Fund (GPIF) which is now in the sights of the Japanese government... But! That is the final gamble and it is a wild one!

Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it....The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure. 

Well that's not good: if the largest Japanese bank can't handle what may soon be concerted selling by one of the largest single holders of JGBs, who can? And what can be done then? Oh, that's right: this is where Kuroda's plea to please not sell bonds, just to buy stocks comes into play. The problem is only the BOJ can come up with money out of thin air, for everyone else buying something, means selling something else first. So unfortunately unless the BOJ wishes to further increase its QE, which will be needed to absorb all the selling without a surge in yields (something Kyle Bass warned about last week), a move which however would further break the connection between bonds and inflation expectations, and further destabilize the equity, FX and bond markets. 

So in short: Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

I think it is already too late.