Thursday, July 24, 2014

Japan Breakeven Data Update

Just for my reference, I pulled off some of the Japanese Breakeven rate info off Bloomberg.  As always, this data may have some problems.  These contracts are not very liquidly traded and have risk premiums embedded in them.

1 year, 4.38%:

5 year, 2.33%:

10 year, 1.21%:

Jason Smith sends me to this Scott Sumner quote in a comment on the previous post:

4.  Japan will be hit by an adverse supply shock next year (higher sales tax rates) which will boost inflation–making it look like they will hit their 2% target.  Don’t be fooled.  When the effects wear off Japanese inflation will slip back below 2%. Because of Japan’s fiscal situation, it has no good options.  The sales tax increase will hurt the economy, but is needed.  I used to think they should delay it, but now I think they should bite the bullet and do it.

Maybe.  Certainly the VAT is affecting the CPI and through it the break even rates.  Will inflation backslide below 2%?

The 2 year break even is 3.317%.  That implies a second year rate of 2.26%.  Using the five year, we get a final four year rates of 1.82%.  Using the ten year and five years together, we can see that the market predicts the last five years to have inflation very close to 0, about .5%.

So the market is looking forward to several years of rising prices.  That's quite a different prediction that many gave when Abeonomics started.  Will the BOJ hit it's of 2% over five years?  It looks like they are expected to be around that range.  Certainly with some help from the VAT, but even in the last four years prices are expected to rise.

On a long horizon, will they revert back to zero?  Maybe.  Maybe as soon as everyone comes around, everything will start heading backwards.  I would caution that the longer we go out in time, the worse the expectations theory probably is.  Risk premiums may be more important to model on longer horizons.  Ignoring them for several years compounds the error.  

Wednesday, July 23, 2014

Japan Update: We've Waited, Let's See

A few months ago, Stephen Williamson posted this unfortunate picture.

It turned out that the large drop in inflation that he thought was evidence in favor of his views on monetary policy was actually the result of an accidental misuse of Japan data (as I pointed out in this post and in the comments on his blog).  He corrected the mistake and adopted a wait and see attitude, "Thus, the Bank of Japan seems to have had some difficulty in producing inflation - but this time may be different. Given that the Bank seems intent on holding the short-term nominal interest rate at zero (essentially), I don't see it, but I'm curious to see how the data unfolds."

Well, we've waited a bit and can see a little more.  Let's update the graph:

Wow!  It's almost directly opposite of the original.  Japan yoy inflation is up close to 4%.  What liquidity trap?

It's interesting to note that way back in April of 2013, we noticed that markets were predicting a rapid rise in the second year of Abeonomics.  The market predicted .35% for year one (until April 2014) and then 2.3% the following year.  Well, the market estimate was obviously low.  Inflation actually averaged about 0.89%, but we may be seeing that the dynamics of back loaded inflation is substantially correct.  Now will the BOJ be able to hit their target?  What is their target?

In response to a comment, here are the index values: (Data)

Learn This Simple Trick To Know How To Legally Kill Dudes

By Robert H.

This is a weird contradiction I have noticed:

1. Among military and International Humanitarian Law lawyers, there is pretty widespread agreement about the standard for how to judge whether civilian casualties are excessive.  Where there are disagreements, it is over application.  But,

2. Among laymen, there not only isn't agreement about the standard by which to judge civilian casualties, almost no one adopts the standard universally agreed to by lawyers and policy makers.

So, elaboration: Under international law and most national laws, if you want to attack a military target but think you are going to hurt civilians or damage their property in the process, the main test is the Principle of Proportionality.  If the damage that will likely be done to civilians is clearly not proportional to the military advantage you will gain from the attack, it's illegal.  There is a lot to fight over within that definition -- how do we define military advantage, what's proportional, do we judge attacks on a granular or broad level (ie, do we ask "was the air offensive proportional" or "was each air strike proportional") -- but everyone from the IDF lawyers approving gaza air strikes to peacenick UN officials denouncing those same air strikes agree on the basic framework.

No laymen seem to, though.   Instead laymen seem to

1. Obsess over casualties -- especially deaths -- at the expense of property damage or the destruction of materiel.  A pro-war type will treat an attack that blows up a city block as presumptively reasonable and acceptable, provided the block was evacuated ahead of time, despite the fact that damage to civilian property is explicitly weighed in the proportionality analysis.  Just so, a pacifist type will often look at the civilian/combatant casualty ratio rather than taking a more holistic view of "military advantage."  This is in error: an air strike that kills a civilian but blows up a cache of long-range rockets and launchers may yield a higher military advantage than a strike that kills a civilian and a low-ranking Hamas militant while doing no other damage, even though the second strike has a much more favorable civilian/combatant casualty ratio.

2. Adopt extreme positions.  I can't count the number of times I've heard arguments that amount to "any attack that kills civilians is wrong" or "when your enemy hides among civilians, being touchy about civilian casualties just rewards and encourages that behavior, so bomb 'em all."

3. Effectively ignore the other side of the balancing test.  Most of these errors focus on the civilian side of the equation at the expense of the military side: Anti-war types wax eloquent for op-ed after op-ed about all the damage being done to civilians without even trying to articulate what military advantage is being gained.  Alternatively, pro-war types will talk about all the precautions being taken to avoid civilian casualties without going on to argue that civilian casualties are not only low, they are proportional to the military advantage gained.  All that said, you occasionally see people ignore the civilian side in favor of the military advantage side -- "we have to do this to enhance our security/protect ourselves/defeat Hamas" without adding "also it will likely result in bringing us close enough to effecting that goal to be worthwhile when weighed against the harm to civilians."

Anyways, maybe all that is boring, but it strikes me as genuinely weird.  If I ask some random laymen what genocide is or whether it's right to use chemical weapons, I bet they could come close to articulating the international consensus.  If I ask laymen whether it's right to use landmines, they would probably disagree with each other because there isn't an international consensus.  But in the weird world of collateral damage you've got all kinds of international consensus but no lay-understanding.  Weird!