2 summaries + bbliography + opinion

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there will be 2 articles attached may you please summarize the articles attached seperatley and add a bibllography and opinion to each (must be at least 2 pgs double spaced)


Japan’s Swinging Bonds — A Future Economic Crisis

By Vincent Cignarella

The inability of Japanese government debt to stop gyrating wildly poses a significant threat to the country’s climb out of its two-decade economic mire.

In the past six months, Japanese 10-year bond yields have swung like a pendulum. The huge swings were never more prescient than Thursday, when the yield jumped over 1.0% for the first time in over a year.

That volatility poses a significant threat to Japan, specifically through the balance sheets of its banks. In a statement clearly acknowledging those risks, Bank of Japan Governor Haruhiko Kuroda said Friday that it is “extremely desirable” for the nation’s debt market to be stable.

When it comes to government debt, Japan’s biggest banks are all in. Consolidated financial statements of Mizuho Financial Group 8411.TO 0.00% and Mitsubishi Financial Group show they each hold 23% of total assets in Japanese national government and a variety of government agency bonds.

As that debt vacillates in price so do the banks’ Tier 1 capital asset ratios and presumably their ability to lend and create loans. Japanese banks would face 6.6 trillion yen in losses should interest rates rise broadly by one percentage point, according to the Bank of Japan.

One week into 2013, 10-year government bonds climbed in yield to nearly 0.85% from early December lows of 0.69%. They then fell dramatically to 0.44% in early April only to climb again violently to the 12-month high on Thursday. All that interest rate volatility and so far, no inflation in sight.

Recent gross domestic product figures from Japan showed growth of 3.5% on an annual basis but the GDP deflator, a measure of inflation printed at a decline of 1.2% from a year earlier. That is 14 consecutive negative quarters.

If these government bond yields continue to gyrate beyond the central bank’s control and no inflation comes, the government stands to lose credibility domestically.

That credibility is already somewhat in question given during his first term as prime minister, Shinzo Abe lacked the political power to follow central bank action with his own government reform. Without that reform, Abe’s goal of 2% inflation within two years is in grave peril.

If he has any doubts about the need for government action, look no further than U.S. Personal Consumption Expenditures, the Federal Reserve’s favorite indicator for inflation, was 2.5% in 2008 before the global financial crisis took hold. Now almost five years later and massive quantitative easing from the Fed, the PCE is just 1.1% because there has been no help from fiscal policy.

The importance of credibility is even greater in Japan, where local investors finance outstanding government debt to the tune of 90% of the total outstanding. And given the government’s call for higher interest rates, foreign investors are not likely to pick up the slack of domestic savers dumping debt.

The challenge the Prime Minister faces is that he must raise rates to levels that will create inflationary expectations but at a pace slow enough to allow banks to minimize the impact on their balance sheets, while also stimulating growth; a lot of balls to keep in the air.

The potential fallout, a sharp drop in Japanese bonds prices, would impair banks balance sheets, reduce the wealth of Japanese savers and hit the wealth effect. The very thing the government must foster to stimulate growth and increase inflationary expectations.

(Vincent Cignarella is a currency strategist/columnist for DJ FX Trader and co-inventor of The Wall Street Journal Dollar Index, with 30 years experience in currency markets including as a bank dealer at major money-center commercial banks. He can be reached at

[email protected])


And the Winner Is … the Euro?

  • By John McCarthy
 A copy of Mario Draghi’s signature is seen beneath the European Union (EU) flag on a five euro note. Photo- Bloomberg News

The race to the bottom that the dollar and the euro embarked on in the aftermath of the 2008 financial crisis now has become a race to the top.

And despite the constant chatter of the dollar’s resurgence and the restoration of U.S. economic dominance, it’s the euro that seems to be winning.

If that sounds incongruous against the euro zone’s continuing economic woes, another look at the past four years might help to make some sense of it.

In March 2009, the U.S. mortgage crisis was subsiding and policymakers turned their attention toward trying to restore growth. Thus the dollar came under continuing pressure from aggressive rounds of “quantitative easing” bond buying by an increasingly interventionist Federal Reserve. Not long after that the economic and political travails of Greece, Ireland, Portugal, Spain and Italy put the efficacy of the euro project into question. The end result was that both currencies sank against the rest of the world.

Now the focus is on the dollar’s rebound. That’s perhaps not surprising given that the U.S. currency is the preferred benchmark for most of the world’s currencies. It also comes with a handy narrative dealing with long-awaited economic improvement and tightening labor market conditions. Bond yields have crept higher as talk takes hold that the Fed is preparing to taper its bond purchases. Energy independence, improving home sales, even evidence of some manufacturing “onsourcing” all add to the improving outlook here.

But a closer look will reveal that most of the dollar’s gains against the yen, the Australian and New Zealand dollars, the Mexican peso, the South African rand and other emerging-market currencies have been matched and in some cases exceeded by gains in the euro against the same basket of currencies.

Why is this so?

I’ve heard of no analyst crawling from under a rock and calling for a rapid turnaround in the euro zone or an immediate end to the fiscal crisis there. No, you have to consider how the financial landscape is changing from what prevailed after the crisis. You’ll note that although these changes are being partly influenced by events here in the U.S., so much of the catalyst for the dollar’s and euro’s rebound originates in other regions.

The turning point came last summer when European Central Bank President Mario Draghi vowed to backstop the European periphery’s embattled sovereign-bond marketswith the ECB’s balance sheet and immediately put a stake through the heart of the euro’s existential crisis. The single currency stabilized as the threat of a euro breakup receded. This also put an end to much of the talk of global financial Armageddon and the overall failure of capitalism. The focus in world markets slowly returned to relative and not absolute questions–and it seems the market has concluded that in most cases it was the euro that was the most undervalued.

What followed next was the election of a new Japanese government led by Prime Minister Shinzo Abe, the commencement of “Abenomics” with its centerpiece of aggressive inflation-targeting monetary policy, and the end of safe-haven inflows into the Japanese money markets. Thus the yen fell as short-covering intensified. But while dollar/yen grabbed the headlines, the euro’s rise against the Japanese currency exceeded the dollar’s rise by almost 5%.

Now, investor concerns have shifted to the health of the Chinese economy, which has in turn put commodity bloc currencies under heavy selling pressure. The leaders in that particular selloff have been the Australian and New Zealand dollars, whose appeal has been further undermined by rate cuts and central-bank interventions. But the resulting rally in euro/Aussie has been greater than the fall in Aussie/dollar.

Meanwhile, the prospect of a Fed pullback has spooked bond markets around the world. This has filtered through to the emerging-market world, whose currencies are under renewed pressure. Commodity and labor concerns in South Africa have extended that currency’s slide. Again, the euro recorded gains along with the dollar against much of the emerging-market world.

Two of the main outliers in this trend aren’t insignificant currencies: the Swiss franc and the pound. It has been less clear that these two have dropped more against the euro than the dollar.

Still, the overall picture is one of a European currency that is at least holding its own against the dollar.

It’s worth remembering a line from Ecclesiastes: “The race is not to the swift, nor the battle to the strong….time and chance happen to them all.”

In this case the dollar may be swifter and stronger but it hasn’t necessarily won the race. The yen, Aussie, kiwi, peso and rand stories will help determine the race’s outcome as well. Sadly, a stronger euro, achieved in this case by “time and chance” represents an unwelcome outcome and will likely delay any prospect of brighter economic forecasts from Europe any time soon.

But that’s a story for later.





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