Now that inflation is clearly moving up Japan will have to make the decision at some point to raise rates and sell much of what they bought.
If they sell such huge quantities of assets it will surely help to crash markets. Any trader knows getting into an illiquid position is the easy part. Getting out is the nightmare. Japan will have to get out."
Since the rise in the Japanese equity market would have been in a large part due to the Japanese govt buying up to 1/3 of the assets, many investors (both domestic and off-shore) would have gotten on board the gravy train.
If/when the Japanese govt starts to sell, there is not only their selling pressure but those who bought alongside them.
While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world's gross domestic product.
In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion's share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.
Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including "an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness" presented challenges for borrowers.
Additionally, "a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities," the IIF warned.
"Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs."
For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market's only concern is just when will the Dow Jones finally crack 20,000.
The squeeze will have a temporary impact,” Luke Spajic, head of emerging Asia portfolio management at Pacific Investment Management Co., said in Hong Kong. “But I don’t think it necessarily changes the challenge, and the challenge is they still have to worry about the $50 billion to $60 billion a month of outflows and what they’re going to do about the value of their currency. And they have to face the fact that the U.S. is probably going to keep hiking rates.”
Benjamin Fuchs, chief investment officer at the $2 billion hedge fund BFAM Partners (Hong Kong), said China’s moves to repeatedly tighten capital controls risk eroding confidence in its currency. The dollar’s advance against the yen and other currencies has also increased competitive pressure on China to let the yuan depreciate, he said.
“We’re starting to see more and more of a negative cycle being created,” Fuchs said. China’s attempts to curb outflows are “just making people want to take money out quicker, and make companies change their behavior.”
Surge in Global debt - US Debt $165K per household
Federal Debt in FY 2016 Jumped $1.4 Trillion, or $12,036 Per Household
(CNSNews.com) – In fiscal 2016, which ended on Friday, the federal debt increased $1,422,827,047,452.46, according to data released today by the U.S. Treasury.
At the close of business on Sept. 30, 2015, the last day of fiscal 2015, the federal debt was $18,150,617,666,484.33, according to the Treasury. By the close of business on Sept. 30, 2016, the last day of fiscal 2016, it had climbed to $19,573,444,713,936.79.
According to the Census Bureau’s latest estimate, there were 118,215,000 households in the United States as of June. That means that the one-year increase in the federal debt of $1,422,827,047,452.46 in fiscal 2016 equaled about $12,036 per household.
The total federal debt of $19,573,444,713,936.79 now equals about $165,575 per household.
Corporates Lead Surge To Record $6.6 Trillion Debt Issuance
(The News PK) – Global debt sales reached a record this year, led by companies gorging on cheap borrowing costs.
The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.
Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.
Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.
The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.
“The low cost of financing with record-low interest rates simply made building up leverage tempting,” said Scott Mather, chief investment officer for core fixed income at Pimco.
TrimTabs also pointed out that last year’s fund flows reveal an overwhelming preference for passive U.S. equity products. U.S. equity mutual funds, most of which are actively managed, lost $233 billion in 2016, their third consecutive annual outflow. U.S. equity ETFs, almost all of which are passively managed, issued $169 billion, their seventh consecutive annual inflow.