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Deutsche Bank Japan bond veteran turned author warns of bubble
[TOKYO] The Bank of Japan's bond-buying stimulus is exposing investors to risks similar to the 2008 debt crisis, according to a Deutsche Bank AG veteran trader turned best-selling author.
The monetary authority's policies are "artificially lifting asset prices," misleading the public, said Yoshihiro Matsumura, who headed Japanese government bond trading at the German bank in 2004. His book, whose title translates as Why Do We Feel So Insecure About Our Future Now? overtook Thomas Piketty's Capital in the Twenty-First Century as the biggest seller online in Japan soon after being published in February.
Mr Matsumura, who retired in 2011 after trading in the world's second-biggest bond market for more than two decades, joins other investors who have criticized the BOJ's unprecedented stimulus for the distortions it creates.
He also sees Japan's commitment to using monetary policy to force-feed economic expansion as creating the sort of moral hazard that laid the foundations for the demise of Lehman Brothers Holdings Inc during the crisis seven years ago.
"The BOJ is driving massive, speculative dealing," Mr Matsumura, 51, said in an interview in Tokyo. They are "luring everybody to jump on the bandwagon and make money now because markets are looking only up. It will be the Japanese public who'll get stuck with losses when it all ends."
Japan's benchmark 10-year JGB yields have declined 70 1/2 basis points since reaching a high of 1 per cent in May 2013, a month after the BOJ embarked on its easing policy in April.
The Nikkei 225 Stock Average has almost doubled and the yen has weakened about 30 per cent versus the dollar since Prime Minister Shinzo Abe was elected as a prime minister at the end of 2012, pledging to end more than a decade of deflation.
The yen depreciation has helped boost corporate profits and tax revenues, and the labour market has improved, according to Tetsuro Ii, the chief executive at Commons Asset Management. Japan's job-to-applicant ratio was 1.24 in September, the highest level since January 1992, and regular wages rose for a seventh straight month. Now, government spending is needed to further boost economic demand, Mr Ii said.
"Monetary policy was the most effective macro economic policy," he said. "Kuroda has pretty much done what he can do."
The BOJ refrained from expanding stimulus last month even as it postponed its time-frame for reaching a 2 per cent inflation target to the six-month period through March 2017. Mr Kuroda said the central bank isn't losing credibility and that its actions so far are having the intended effects.
With the size of the BOJ's balance sheet now equivalent to more than two-thirds of Japan's economic output, critics worry that the governor will run out of options unless he succeeds soon.
"From a trader's perspective, the BOJ's quantitative easing framework is outright wrong," Mr Matsumura said. "A dealer always thinks of a strategy with an exit in mind. Policy that does not take into account an exit is unthinkable."
Gross domestic product declined an annualized 0.8 per cent in the three months ended Sept 30, following a revised 0.7 per cent drop in the second quarter, meeting the common definition of a recession.
When Lehman Brothers collapsed, Mr Matsumura was a proprietary JGB trader at Barclays Plc. Three years later, he gave up his 22-year trading career including stints at Goldman Sachs Group Inc and Merrill Lynch.
His book, which analyses why many Japanese feel very insecure about their future and are skeptical of the effectiveness of current policies, briefly ranked No. 1 on Amazon.com Inc's Japan online list for economic books in August. It has sold more than 10,000 copies, according to the author.
"My book probably drew sympathy from people who are vaguely aware something is wrong," Mr Matsumura said. "There is no growth despite the aggressive money printing. They sense soaring stocks and higher wages aren't a real fundamental solution."
The BOJ's "miscalculation" is that rising corporate earnings as a result of a weaker yen haven't quite led to salary increases, said Hideo Kumano, the chief economist at Dai-ichi Life Research Institute.
"It's gotten even more difficult to read where monetary policy is headed," Mr Kumano said, following the decision at the Oct 30 meeting.
Asset purchases have made the BOJ the biggest player in Japan's US$8 trillion bond market. The central bank held a record 295 trillion yen (S$3.4 trillion) of outstanding sovereign debt and bills at the end of June, making up 28.5 per cent of the total pool of securities.
While a mark-to-market based performance in the JGB market may appear to look good, whether investors actually made profits will only become clear when the central bank exits its current stimulus, Mr Matsumura said.
"Lehman also held massive positions they couldn't get out of and went bust," he said. "But some people were paid bonuses because of mark-to-market gains. That's what the BOJ is doing right now."