Japan’s Central Bank Splits Over Easing Program
Some on the BOJ’s board think its extensive bond buying needs to be more flexible, adding uncertainty to a radical experiment in monetary stimulus
The world’s leading experiment in monetary easing is floundering, and its engineers are divided over how to get it on track.
The Bank of Japan has tried radical measures for 3½ years to reflate the country’s sagging economy, resorting this year to negative interest rates. Growth and inflation remain elusive. Now the bank’s board, while still in favor of easing, has some members wanting to revise the methods for doing so—likely sparking uncertainty for economy-watchers and worries for investors.
Japan’s financial regulator, big banks, insurers and advisers to Prime Minister Shinzo Abe have all piled into the fray with policy prescriptions, in a ferment that comes less than a week before the BOJ meets to decide its next move.
“The BOJ’s policy has become a ‘cloudy cocktail’—nontransparent and difficult to understand,” said Nobuyuki Nakahara, a former BOJ board member who advises Mr. Abe.
It is part of a larger unease in the central banking world, where years of easy monetary policy have failed to achieve goals in Europe as well as Japan, and the U.S. Federal Reserve is struggling with how and when to follow through on a long-advertised tightening.
Doubts about where central banks are headed are rippling through global markets, jolting investors who long piled into stocks and bonds as central banks flooded the world with cheap money.
A bond selloff sent yields on longer-term benchmark German and Japanese bonds surging this month, after historic lows earlier this year. The yield on Japan’s 30-year bond nearly hit zero in July but has jumped to about 0.55%. The S&P 500 stock index, which went two months without a 1% move, recently posted three of that size in three trading days.
The suspicion that central-bank firepower is reaching its limits finds support in Japan, where the BOJ has yet to generate steady inflation despite buying nearly $800 billion of bonds annually since late 2014, plus billions of dollars worth of exchange-traded funds. Economic growth is fragile, while the yen has been on a tear—the opposite of what the central bankers wanted and of what Japan’s exporting companies need. Japan’s stock market is down 12.7% this year.
The BOJ is due to publish an assessment of these policies at its meeting next week..
Until recently, Bank of Japan Gov. Haruhiko Kuroda managed to keep a fragile majority on the nine-member board in favor of his preferred easing steps. A decision in January to introduce negative rates on certain commercial-bank deposits passed 5-4. Two of the dissenters later left when their terms expired, replaced by supporters of easing.
That should have given Mr. Kuroda a comfortable majority. But the seven supporters of easing now have fractured over where to go next, say people familiar with their thinking.
At least three in this camp favor sticking with the plan, convinced that both huge government bond purchases and negative rates are still effective in forcing private money to flow into riskier assets. This faction thinks curbing those purchases, or even tinkering with the buying formula in a way that markets might perceive as tightening, could send the yen soaring, according to people familiar with its views, which is the opposite of the policy’s intended effect. That could hit corporate profits and the stock market.
Others, while still pro-easing, are no longer confident bond purchases can get the job done. Some including BOJ staff have floated the idea of flexibility in the buying. In place of the current commitment to buy ¥80 trillion of government bonds a year, some in this group have suggested a range, perhaps ¥70 trillion to ¥90 trillion.
The two sides get particularly heated over whether Japan is running out of bonds to buy, according to people familiar with the deliberations. The pro-flexibility faction says the practical limit could come in the next year or two as banks, which often use government bonds as collateral in day-to-day operations, become reluctant to sell more of their holdings to the central bank.
Bank of Japan Gov. Haruhiko Kuroda acknowledged the concerns insurance companies have about the BOJ’s policy of pushing down interest rates in a Sept. 5 speech.
Bank of Japan Gov. Haruhiko Kuroda acknowledged the concerns insurance companies have about the BOJ’s policy of pushing down interest rates in a Sept. 5 speech. PHOTO: KIYOSHI OTA/BLOOMBERG NEWS
These board members believe the BOJ should begin looking for policy alternatives, according to people familiar with their thinking, such as introducing a target for long-term interest rates and pledging to buy only the amount of bonds needed to guide rates to that target.
The thought is that such a move—which former Fed Chairman Ben Bernanke has endorsed as an option in certain situations—could reassure people that borrowing costs will stay low while giving the BOJ room to reduce purchases if necessary.
Opposing the idea, one easing proponent said “any grade-school student can tell with a little arithmetic” the BOJ can’t buy bonds forever, “but it’s strange to be deciding policy today based on some future limit when…we haven’t reached that limit.”
The seven pro-easing board members nonetheless agree that lowering interest rates further into negative territory should remain as an option.
They have run into opposition from commercial banks. Banks have had to lower lending rates since the BOJ’s negative-rates policy took effect. They aren’t willing to impose negative rates themselves, on savers, so the result is a narrower spread between their cost of money and what they charge. Some banks also say they see little evidence the BOJ’s negative rates are working as advertised.
“We mainly see loan demand from manufacturers who need money for maintenance of aging machinery, not for new investments,” said Hideaki Furuyama, an executive at San-In Godo Bank Ltd. in western Japan.
An official at the Financial Services Agency, which regulates banks, said FSA executives have contacted their BOJ counterparts more than once in recent months to express concern about financial institutions’ profits. People familiar with the situation say the FSA put itself forward as a mouthpiece for financial firms’ concerns after a leading banker, Mitsubishi UFJ Financial Group Inc.’s Nobuyuki Hirano, publicly criticized the BOJ in April.
Life-insurance companies also are struggling when interest rates fall to this extent, said Shuhei Hirano, manager of investment planning at Meiji Yasuda Life Insurance Co.
Mr. Kuroda, the BOJ governor, nodded to these concerns for the first time in a Sept. 5 speech. He said rates of return on insurance products would likely decline and “affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense.”
He made clear the bank’s assessment won’t result in open retreat from its 2% inflation goal or its easing program. It could scrap its latest time frame for the goal, which is sometime in the year ending in March 2018, according to people familiar with the situation.
Government officials said they were exploring ways to send a stronger message that the central bank and government are working together to defeat deflation. Prime Minister Abe has put forth a new stimulus package with ¥7 trillion in spending, the first part of which is set to be approved by parliament this fall.
At a bookstore on the 10th floor of the BOJ’s headquarters, a top seller is a work by a former BOJ official, Hideo Hayakawa, comparing advocates of radical easing to Japanese World War II generals who thought they could win just through blind faith and fighting spirit. Three years ago, the store’s top titles featured the views Mr. Hayakawa attacks.
Apple Stock and iPhone 7 Both Look Like Winners
Shares of Apple have been surging, boosted by news that the first run of the iPhone 7 has sold out. Stay long.
What a week!
Apple stock has gained more than 10% since last Friday and is higher again Thursday on news that the first run of the iPhone 7 Plus has sold out.
Although Apple’s (ticker: AAPL) iPhone 7 models just went on pre-order sale Friday following Apple’s September 7th media event, the Plus model has already sold out, and the smaller model is also sold out in the jet black finish, according to Reuters.
The shares rose 2.8% to $114.90 in afternoon trading on the news. The demand for the new iPhones is all the more bullish given that this was one of the least anticipated launches in the company’s history, with analysts forecasting that buying an iPhone would soon be akin to buying a new microwave and preferring to look toward models in 2017 and beyond for buy signals. Even after the introduction of the new models Apple got at least one downgrade and there was plenty of criticism from early reviewers.
However with a large number of consumers ready to upgrade from the two-year-old iPhone 6 model—and the highly publicized battery fires in Samsung phones—orders have been swift, showing that consumer loyalty and excitement remain key parts of Apple’s business.
Citi’s Jim Suva argues that there may be many reasons for the new phones selling out beyond simple demand: “Apple’s initial roll out across more than 25 countries (almost two times the number of countries in prior roll outs) could be a contributing factor. Availability of dual camera components (which are in the iPhone 7 Plus models) could be another factor,” as well as promotion from carriers. (Both Sprint (S) and T Mobile (TMUS) were out recently with upbeat sales data.) Overall it’s still good for Apple, he writes, and reiterated a Buy rating on the stock citing the recent positive news flow.
Perhaps this shouldn’t be surprising, given that even the iPhone models less hailed by Wall Street and critics remains popular with the public. Even with Apple losing a bit of market share in the second quarter, its iPhone 6s and 6 remained the bestselling smartphones in the world by some estimates.
Credit Suisse ’s Kulbinder Garcha increased both his iPhone unit estimates and earnings estimates for Apple today, writing that “a number of recent data points suggest a better than expected iPhone 7 cycle.” He expects the higher margin Plus model to account for 33% of sales (up from 30% in the 6s cycle), with his recent surveys of U.S. consumers finding 81% plan to upgrade to higher memory as well.
Apple previously said that there were limited quantities available for preorder, and analysts had already lowered their expectations for the 7 models.
Nonetheless, there seems to be room for the latest iPhone to surprise on the upside. And even with Apple stock hitting a nine-month high, the shares still trade at a reasonable 12.9 times forward earnings, with a 2% dividend yield.
In late July, Barron’s said Apple was still a buy despite third-quarter sales dropping 15%, arguing that slowing iPhone growth wasn’t as dire as bears feared. The stock is up 10.5% since that article’s publication, compared to a 1.3% decline in the S&P 500.
The iPhone 7 may not be the most revolutionary model Apple’s introduced, but as today’s news shows, it doesn’t pay to bet against the tech giant and its enduring appeal to consumers around the world.
SFR minorities’ protest against Altice offer ignores upside potential - source
SFR [EPA:SFR] minorities criticising Altice’s [AMD:ATCT] exchange offer for the 22.25% it does not own are ignoring upside opportunities from the combination, a source close to the situation said.
Minority SFR shareholder CIMA has filed a complaint with France’s stock market regulator AMF, contesting the fairness opinion conducted by independent expert Accuracy on the exchange ratio and questioning the methodology used to calculate the offer.
A second minority investor told this news service his fund is seeking advice from lawyers on whether a case can be made against Altice’s offer. This investor said it is not tendering.
SFR is confident the methodology employed by Accuracy stands up to scrutiny, said a source and a person familiar with the situation.
The French cable group stands by its decision to support Altice’s offer, the source said.
Eight newly issued Altice class A shares are offered in exchange for five SFR shares, corresponding to EUR 24.02 per SFR share based on Altice’s closing share price this afternoon (Thursday) of EUR 15.01. SFR closed at EUR 24.70.
Minority take-outs do not usually warrant a premium, the source said. Criticism may have been justified had the offer been in cash, and not allowed SFR shareholders to benefit in any upside in the combination, the source said.
There is a notable cross-shareholder base largely weighted in favour of Altice, the source and a person familiar with the situation said. The SFR camp believes these shareholders are likely to tender to benefit from improved liquidity in the Altice shares, the source said.
But the deal also means SFR shareholders will hold a stake in a debt-heavy Altice, which may not be as attractive to some shareholders, a former investor in the cable company said. SFR is a good brand which has lost customers since being acquired by Altice, this investor said. Altice’s debt, in particular the bond interest rate, could be a concern for SFR holders, this fund manager said.
In its latest investor presentation for 2Q16 results, Altice said group net leverage was 5.0x, with Altice France (SFR) at 4.0x.
Opposition from French shareholders with larger stakes in SFR than Altice does not come as a surprise, the person said. Altice is therefore unconcerned, he said.
The all-share offer announced on 5 September is opportunistic, the shareholder approached by this news service said. Altice is taking advantage of a slump in SFR’s share price, he added. His fund has long-term positions in both Altice and SFR, he added. It is making the offer prematurely, as SFR is yet to benefit from Altice’s investment in the cable company’s network, he said.
SFR hit a year-to-date closing high of EUR 38.10 on 29 March, just before news that a proposed tie-up between fellow French TMT players Orange [EPA:ORA] and Bouygues’ [EPA:BOUY] telecom unit had collapsed. SFR stock has since rebounded from a low of EUR 19.98 on 3 August.
Claims of opportunism are ill-founded, the source said. Altice always intended to acquire the outstanding shares sooner rather than later for better access to SFR’s cash flows, the source said.
The proposed Orange/Bouygues deal unveiled in January had a positive impact on domestic cable and mobile players. The prospect of French consolidation prevented Altice from making the SFR offer for a few months, the source said. Altice was also pre-occupied with concluding the Cablevision [NYSE:CVC] transaction in the US at this time, he said.
The pressures on SFR’s share price are not going to disappear in the short term, as the failure of the Orange/Bouygues deal suggests the French telecoms market will remain fiercely competitive, the source argued.
Altice declined to comment. SFR did not respond to a request for comment.
Apollo could make higher offer for TDC; Telia could also be interested - report
Apollo Global Management is reportedly mulling over raising the offer for Denmark – based telecoms company TDC, according to Bloomberg.
The wire report cited unnamed sources close to the situation and wrote that the investor company is thinking of making a higher offer than its original bid, which was rejected in July. The item said that Apollo had engaged financial advisors for the job as well as it is raising funds. The item claimed that Apollo may make its renewed offer within weeks.
The Sweden – based telecoms company Telia could also make an offer, the item said, citing the same unnamed sources and TDC could even interest other private equity players. TDC turned down a bid earlier in July but did not say who the bidder was. The item said that Apollo may still decide not to make an offer.
DJ Lawmakers Probe Tax Incentives Received by Solar-Energy Firms
By Brody Mullins, Ianthe Jeanne Dugan and Richard Rubin
Congressional lawmakers have launched a formal investigation into whether solar-energy companies improperly received billions of dollars in tax incentives from the Obama administration.
The Senate Finance Committee and the House Ways and Means Committee on Wednesday sent letters to seven foreign and domestic companies in the solar industry, expanding a more limited probe started earlier this year.
The recipients included three firms in the residential solar industry, SolarCity Corp., Sunrun Inc. and Sungevity Inc., and four solar utility companies -- SunEdison Inc., Abengoa SA, NextEra Energy Inc. and NRG Energy Inc.
A spokesman for SolarCity said the "answers to the questions posed are fairly straightforward, and we will provide them as requested."
Officials at SunEdison, Abengoa and NRG Energy declined to comment. NextEra, Sunrun and Sungevity didn't respond to requests for comment.
Congressional investigators are examining the use of tax incentives for solar-power companies, third-party financing and how the companies determine the value of the credits.
The probe is being run by Sen. Orrin Hatch (R., Utah), the chairman of the Senate Finance Committee, and Rep. Kevin Brady (R., Texas), the head of the Ways and Means panel.
Earlier this year, Mr. Hatch began looking into the roughly $25 billion in cash grants that solar and other "green energy" firms have received during the Obama administration. He concluded that the Treasury Department and the Internal Revenue Service -- which are also examining the valuations -- don't have adequate controls over the program.
At issue is a Treasury Department policy that gives solar firms a 30% investment tax credit on the cost of acquiring a system. The tax credit provides a dollar-for-dollar reduction in income taxes otherwise owed by a taxpayer; the companies could also opt to get a grant instead of a credit.
But the 30% calculation isn't always straightforward because of the economics of the industry. Solar-energy developers don't necessarily have the income to use the credits or the funds to buy and install solar energy systems. So they routinely enlist big investors and transfer the tax benefits. Some also lease systems to homeowners and businesses.
So there is debate over the fair market value of the solar energy systems -- the price paid by a buyer, whether it is a homeowner or an institutional investor. Those calculations are made by independent appraisers, solar firms say, following IRS guidelines.
Staff at the Senate Finance Committee said the Treasury Department and the IRS don't have a long-term method for identifying companies that received the cash grants in the past to ensure they don't apply for other tax incentives in the future for the same investments.
The Treasury Department's inspector general had recommended the creation of such a tracking system. Congressional investigators found that the IRS had taken some steps toward doing so, but hasn't put in place a system to track the grant recipients in the long term.
Some investment tax credits can be carried on a company's books for decades, so there is a worry that the IRS wouldn't catch companies that were double dipping in the federal tax incentives.
A Treasury Department spokeswoman declined to comment, citing pending litigation.
The Treasury Department in 2012 began asking solar firms for more information on their calculations about the fair market value of solar energy systems that have been built, according to public filings by solar firms. And the IRS has said it was weighing whether the valuations have been inflated. The inquiries are ongoing.
"If the Internal Revenue Service or the U.S. Treasury Department were to object to amounts we have claimed as too high of a fair market value on such systems, it could have a material adverse effect on our business, financial condition and prospects," Solar City wrote in a recent federal financial filing.
The firm has said that its valuations are correct, and even below Treasury Department guidance about where they should be. But it has said that its results could be affected if its position is disputed by a federal audit, the outcome of the Treasury investigation, or changes in guidelines. This could force them to reimburse some institutions that buy their tax credits as investments.
Solar City received about $501.1 million in credits through Dec. 31, 2014, so even a 5% adjustment downward "would obligate us to repay approximately $25.1 million to our fund investors," the company wrote.
The green energy tax program was launched in 2009 as part of President Barack Obama's plan to stimulate the U.S. economy and promote investments in renewable energy in the aftermath of the financial crisis.