Recap 11-13-12: Japan, BAML’s Fund Manager Survey


In exchange for avoiding going over the fiscal cliff, Japanese PM Noda agreed to call early elections, which are likely to take place a bit over a month from now. Even though Japan has had a history of unpopular PM’s, this instance is of particular interest due to the recent government spat with the BoJ. (Recall that at the last BoJ meeting, the BoJ issued an unprecedented press release with the government which many participants took as an attack on BoJ’s independence) As a result, Noda’s likely ouster will probably be seen as a win for the BoJ. This is important, because the BoJ continues to harbor deep skepticism about the effectiveness of QE, which Governor Shirakawa highlighted in a detailed speech yesterday. This is likely to be a positive for Yen strength, at least in the short term.

BAML’s Fund manager survey had some interesting items.

  • China growth optimism is at 3 year highs

  • Net hedge fund exposure to equities hit the highest level (40%) since June 2007 this month. Bank of America warned that when hedge funds’ net equity holdings exceed 35 percent, the S&P 500 tends to fall 4 to 5 percent and underperform 10-year U.S. Treasuries by 7 percentage points in the subsequent four weeks.
  • Exposure to Tech stocks fell to the lowest level since February 2009
  • Exposure to Consumer Discretionary at the highest level since the series started:


  • The Atlantic goes over a Romney tax plan to limit deductions to $50k. Doing so would raise as much money as allowing the Bush upper-income tax rates to expire. Greg Ip points out a $50k cap would raise $749bn over a decade, which is just about what Democrats would get if the Bush tax cuts expire. According to the NYT, Democrats like a Romney idea and “now see it as an important element of a potential deficit reduction agreement – and one they can claim to be bipartisan.” Hubbard, Romney’s Economic advisor, wrote about this idea in the FT. h/t Jordan
  • PM Noda said he plans to dissolve the lower house in Japan. Elections could be held December 16th through January 20th. As a result, Japan’s Liberal Democratic Party agreed to pass a deficit funding bill in parliament, which will keep the country falling off its own fiscal cliff. – CNBC
  • The Eurogroup decided to extend Greece’s fiscal adjustment period by two years as requested by the Greek government, a final decision on the relase of the next 31.5bn tranche of aid has been postponed
  • China M2 growth declined to 14.1% YoY in Oct vs 14.5% exp and 14.8% prev. M1 declined to 6.1% YoY vs 7.1% exp and 7.3% prev
  • German Zew Economic Sentiment Survey declined to -15.7 vs -10 exp and -11.5 prev
  • UK CPI increased to 2.7% YoY vs 2.4% exp and 2.2% prev. Core CPI increased to 2.6% YoY vs 2.2% exp and 2.1% prev
  • UK RICS House Price Balance improved to -7 vs -15 exp and prev
  • French Payrolls declined -0.3% QoQ in 3Q vs -0.2% exp and -0.1% prev
  • Shirakawa:
  1. Why is it the case that business activity has not necessarily been invigorated even though it is profitable for firms to raise funds and make business outlays? Among several reasons that I can think of, the first reason owes to the difference in profitability between existing and new investments… If the profitability of new investment is lower than that in the past, firms are unlikely to invest. The second reason is that, as a result of prolonged periods of low growth, business sentiment has become cautious and there is not enough risk-taking activity in the corporate sector. As for the third reason, it is far more profitable to invest overseas than at home. The Bank hears from many corporate managers that there are only a few attractive investment opportunities at home. Unless we somehow manage to change this view, it will be difficult to stimulate business investment.
  2. In order to encourage the second stage of the transmission mechanism, it is vital that a wide range of economic entities, including firms, financial institutions, and the government, play their respective roles with a view to invigorating the growth potential of the economy.
  3. According to the opinion survey that I have just mentioned, the fact that most of the respondents viewed the price rise as "rather unfavorable" suggests that there is a possibility of wide acceptance in the public realm that it is normal for prices not to rise, or that price rises cannot be tolerated.
  4. Consumers, with the perception that prices should not rise, are unlikely to accept price hikes by firms, who in return reduce costs including wages; hence, it will take longer for the economy to overcome deflation. After all, it is more important to generate material changes in the economy, including strengthening the economy’s growth potential and achieving higher wages.
  5. In this "shared understanding," the government showed a clear recognition that, in order to overcome deflation, it is essential to reform an economic structure that is predisposed to deflation, as well as conduct appropriate macroeconomic policy management. The Bank strongly expects the government to vigorously promote measures for strengthening Japan’s growth potential
  6. Should the Bank Announce "Unlimited" Purchases of Financial Assets? … the Federal Reserve and the Bank of Japan share things in common in their conduct of monetary policy, in the sense that both central banks are determined to continue with necessary policy measures to achieve appropriate economic conditions and prices to which they are committed.
  7. there is a view that the Bank should increase "money" more aggressively in order to overcome deflation as early as possible… the amount of increase in the monetary base as a ratio relative to nominal GDP is about the same for Japan as it is for the United States and the euro area. Similarly, looking at the money stock — which is equivalent to the amount of cash held by non-financial private sectors — its ratio relative to nominal GDP in Japan has again been outperforming those in the other two economies, and it is currently on a clear uptrend … The point that I have been making so far