"Pandora's Box Is Open": Why Japan May Have Started A 'Silent Bank Run'

Submitted by Tyler Durden on 01/30/2016 22:28 -0500 ZeroHedge.com
As extensively discussed yesterday in the aftermath of the BOJ's stunning decision to cut rates to negative for the first time in history (a decision which it appears was taken due to Davos peer pressure, a desire to prop up stock markets and to punish Yen longs, and an inability to further boost QE), there will be consequences - some good, mostly bad.
As Goldman's Naohiko Baba previously explained, NIRP in Japan will not actually boost the economy: "we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years."
What the BOJ's NIRP will do, is result in a one-time spike in risk assets, something global stock and bond markets have already experienced, and a brief decline in the Yen, one which traders can't wait to fade as Citi FX's Brent Donnelly explained yesterday.
NIRP will also have at most two other "positive" consequences, which according to Deutsche Bank include 1) reinforcing financial institutions’ decisions to grant new loans and invest in securities (if only in theory bnecause as explained further below in practice this may very well backfire); and 2) widening interest rate differentials to weaken JPY exchange rates, which in turn support companies’ JPY-based sales and profit, for whom a half of consolidated sales are from overseas.
That covers the positive. The NIRP negatives are far more troubling. The first one we already noted yesterday, when Goldman speculated that launching NIRP could mean that further QE is all tapped out:
... we believe the BOJ thinks that JGB purchases will have reached their technical limit in quantitative terms eventually, and it is highly likely it was a last-ditch measure to somehow maintain the current pace of purchases for some time. If not, we would have expected the BOJ not to introduce a negative interest rate this time either and to have opted instead to further increase JGB purchases.
Today, Deutsche Bank's Japan analyst Mikihiro Matsuoka jumps on the bandwagon and adds that "we are worried about a possible opening of a Pandora’s Box by explicitly removing the lower bound of nominal interest rates."
Here, according to Deutsche, are the most severe consequences of Japan opening the NIRP Pandora's box :

1. as the monetary base target of expanding by JPY80trn a year continues, the tax on financial institutions expands rapidly also, even if an upper bound on excess reserves that are subject to the negative rate is set. The net interest margin of Japanese commercial banks is lower than in other countries.
2. it is unlikely to deliver a combination of the reduction in excess reserves and a rise in lending on private financial institutions’ balance sheets: financial institutions cannot avoid this tax. If they intend to shift reserves to loans and holding securities in order to avoid the tax from the negative interest rate, excess reserves (a part of the monetary base) should fall, which the BoJ would not accept. As long as the target for monetary base expansion is maintained, the mostly likely outcome would be increases in both excess reserves and bank loans (or the holding of securities). On the other hand, in order for the monetary base to continue to expand, there have to exist sellers of government securities to the BoJ. A downward shift of the yield curve could cause financial institutions to refrain from selling government securities with higher associated capital gains to the BoJ.
3. the negative interest rate is, in effect, a tax on financial assets, and not the BoJ’s intention. This could lead to an opposite outcome to that of the initial intention, whereby the country encourages companies and households to engage in capital outflow.

It is that last bullet point which is most important because it leads us to the most disturbing topic of all for Japan - the risk that NIRP backfires and leads to another "China", where the local citizens rush to park their assets offshore, resulting in a slow at first then rapidly accelerating capital outflow. This is how DB explains it:
if the negative interest rate continues for longer or goes deeper, commercial banks may have to set negative interest rates on deposits, which would expand not only the tax on commercial banks, but also on depositors (households and companies). This could lead to a ‘silent bank run’ via a shift of deposits to cash (banknotes), which in turn damages the sound banking system by enlarging the leakage of funds from the credit creation mechanism in the banking system.
That, and the capital outflow noted above. The good news is that Japan has a lot of physical banknotes to allow the NIRP bank run to continue for quite a while before collapsing the financial system.
In short, to grasp the worst possible consequence of Japan's panicked response to a rising Yen and plunging Nikkei look no further than China's unprecedented capital control attempts to stem the monetary outflow. Could it be that in its eagerness to devalue the Yen, the BOJ - like the PBOC - will be fighting tooth and nail in a few months to prop it up?
And if that wasn't cheerful enough, here is DB's conclusion which confirms that just a month after the Fed made a policy mistake, it is Japan's turn to follow in Yellen's shoes:
We wonder whether removing the last breakwater of the lower bound at a zero interest rate could end up being an expensive choice in the long run. The factor which pushed the BoJ down this path is probably its view that causality runs from economic activity to wages and then to prices, which we do not agree with. Our view is that causality runs from economic activity to prices and then to wages, and we do not share the argument that inflation does not rise because wages have not risen.
We believe the additional room that the BoJ has to lower rates on bank reserves is smaller than in other countries that have already introduced a negative interest rate, because of the lower net interest margin of commercial banks in Japan. However, if the BoJ pursues this path, we could reach the point of the trade-off of possibly damaging the soundness of the banking system.
By then, however, a Davos peer-pressured Kuroda will be long gone, and the doomed attempt to keep the system together will be someone else's problem. For now, all that matters is that stocks bounced... if only for a short time.

2015 Spurred Billions in Bank Fines, But Not Enough for Warren
David Michaels davidamichaels
January 29, 2016 — 6:00 AM EST Bloomberg.com
 Wall Street’s most famous critic has offered her assessment of how good a job authorities did last year punishing corporate wrongdoers. The verdict, not surprisingly, is that Elizabeth Warren is not impressed.
In a 10-page report titled “Rigged Justice: 2016,” the U.S. Senator’s staff cited 20 cases in which they say prosecutors showed “timidity” by not pursuing individuals for civil or criminal misdeeds. No executives at Citigroup Inc., JPMorgan Chase & Co., or Deutsche Bank AG were accused of wrongdoing in cases alleging rigged currency markets and the misleading of investors, her office wrote in the document released Friday. The investigations led to their companies paying billions of dollars in penalties.
To the potential annoyance of banks and their watchdogs, Warren’s staff said the report is the first of what will be an annual exercise. That shows Warren has no plans to stop bashing Wall Street or its regulators, even if her platform for throwing barbs isn’t as prominent as it might have been had she run for president. Supporters famously spent months trying to persuade the Massachusetts Democrat to throw her hat in the ring.
The document also lambastes prosecutors for settlements they reached with General Motors Co. and Standard & Poor’s. In each case, Warren’s staff wrote, the government extracted hefty fines but didn’t take a single individual to task. The criticisms indicate her office doesn’t believe any prosecutions of executives are forthcoming.
‘Shockingly Weak’The report even dismisses a recent U.S. Justice Department announcement, known as the Yates memo, in which Deputy Attorney General Sally Quillian Yates heralded a new direction by telling prosecutors to embark on investigations by focusing on people, not companies. “Both before and after this DOJ announcement, accountability for corporate crimes has been shockingly weak,” Warren’s office wrote.
Patrick Rodenbush, a spokesman for the Justice Department, declined to comment.
Warren’s staff castigates the Securities and Exchange Commission as “particularly feeble” for waiving penalties that are triggered when companies settle serious civil or criminal charges. The punishments can disqualify a bank from lucrative business activities, such as raising money for hedge funds. In most cases, the SEC waives them because it concludes the broad sanctions would harm innocent parts of a business that didn’t employ any of the bad actors.
Gina Talamona, an SEC spokeswoman, declined to comment.

http://www.bloomberg.com/news/articles/2016-01-29/2015-spurred-billions-in-bank-fines-but-not-enough-for-warren

NOTE:The U S Department of Justice should have taken Iceland's stance and jailed the bankers and the politicians involved and imposed heavy fines.

This Is What The Death Of A Nation Looks Like: Venezuela Prepares For 720% Hyperinflation
 
Submitted by Tyler Durden on 01/22/2016 14:57 -0500  ZeroHedge.com
For citizens of Nicolas Maduro's socialist paradise the news is terrible, and getting worse with every passing day.
Barclays has decided that Venezuela is now past the "point of no return", and a bankruptcy in 2016 will be "difficult to avoid." But while some may have thought that this dramatic impact, while welcome by the rest of OPEC and oil bulls around the globe, would only impact the government, the reality is that this latest hit means a total disintegration of the economy and will take the country's already staggering hyperinflation to previously unprecedented levels.

According to the latest IMF estimate, Venezuela’s consumer inflation, already the world’s highest, will triple this year to a level above all estimates from economists surveyed by Bloomberg.

This is because the IMF, which until recently had predicted "only" 204% inflation for Venezuela, already higher than the 140% consensus, revised its numbers and now sees a mindblowing 750% hyperinflation in 2016: this means that the average price of products and services will increase over eight times over the span of the next 12 months.

Bloomberg reports that inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner. That’s nearly quadruple the median 184 percent estimate from 12 economists surveyed by Bloomberg, and exceeding the highest forecast of 700 percent from Nomura Securities
.
Venezuela’s central bank published economic statistics Jan. 15 for the first time in a year, confirming that inflation had reached triple digits and closed the third quarter at 141.5 percent on an annual basis. As of December 2014, the last time data was released, inflation was 68.5 percent.

It has gotten so surreal, that the local central bank accused websites that track the dollar’s street value of “destroying prices” and installing a “savage” form of capitalism in the country, adding that 60 percent of inflation was the result of currency manipulation.
Whatever the cause, the reality is that real inflation is even worse, and when charted, this is what the death of a sovereign nation looks as follows (this does not assume a sovereign bankruptcy; when that happens the hyperinflation will really take off):
Spiking prices and widespread shortages for even staples have driven discontent in Venezuela. That helped spur the opposition to gain control of Congress for the first time in a decade as President Nicolas Maduro attempts to turn the tide of what he has deemed an “economic emergency.”

“A lack of hard currency has led to scarcity of intermediate goods and to widespread shortages of essential goods — including food — exacting a tragic toll,” Werner said. “Prices continue to spiral out of control.”

Actually, the hard currency exists, because while locals may not have access to dollars, they certainly could have converted their now totally worthless currency into gold, thus not only preserving but boosting their purchasing power relative to the local stock market which, as we showed previously, has also generated negative returns relative to the rampaging hyperinflation.

According to Bloomberg, Venezuela’s economy will shrink 8% this year following a 10% contraction last year, according to the IMF. While these forecasts are more pessimistic than economists’ median estimates for a contraction of 4.1%, in reality the Venezuela economy no longer exists, with all transactions now taking place in the gray or black markets, and the government apparatus effectively operating in a vacuum.

Which  is good news for oil bulls: once the now inevitable sovereign bankruptcy hits, the resulting chaos and collapse in oil production in the political and power vacuum which may last for years, will serve as just the supply drop buffer the world oil market so desperately needs.

But while that may be good news for oil traders, there is no good news in any of the above for the long-suffering citizens of this "socialist paradise" which any minute now will be downgraded to its fair value of "socialist hell."