18.01.2023 – It was probably nothing: the market had hoped for a tightening by the Bank of Japan. But the Bank is stubborn. The yen is sliding against pretty much all currencies. And in the long run, the question is how this will continue.
Japan is maintaining its interest rate and yield curve policy. Thus, the key interest rate remains at – 0.1 per cent and the BoJ will continue to buy Japan bonds in the future without specifying a limit. This is to keep the yield at 0, it was said in Tokyo. The central bank had caused a surprise in December when it announced that the yield band for ten-year government bonds would be between minus and plus 0.5 per cent from now on. Previously, it had hovered at plus/minus 0.25 per cent. From which the forex market concluded that the yield may move upwards and that Tokyo must soon follow suit. Today’s statement took the wind out of these fantasies. Consequently, the yen slipped against the dollar, the euro, sterling, the New Zealand dollar and also against its Australian counterpart. Indeed, the reaction in the Aussie nicely illustrates the recent nervousness – investors had to put down a few more yen before profit-taking set in on AUDJPY – shown here in the hourly chart.
Source: Bernstein Bank GmbH
Japanese monetary policy is now causing quite a headache for some professionals. Phoenix Capital Research fears that “Japan’s central bank (…) is beginning to lose control of its financial system.” Since the introduction of quantitative easing in 1999, the central bank has never managed to normalise monetary policy. For more than twenty years, therefore, a nationalisation of the Japanese financial system has been taking place. The BoJ already holds about half of all Japanese government bonds issued and more equities than any other country or institution in the world. Bloomberg just added that in about 33 weeks there will be no more privately held Japan bonds left for Tokyo to buy.
Nationalisation of the financial market
The monetary guardians of Nippon are also the top 10 shareholder in 40 per cent of Japanese public companies, according to Phoenix. The central bank’s balance sheet amounts to 92 percent of Japan’s gross domestic product. We think: Lenin would be proud of the Japanese – they have implemented state socialism and nobody wants to notice. And red policies always end in disaster. But back to Phoenix Capital Research: Unfortunately, the bond market has started to test the BoJ’s resolve and yields have recently risen above the target range. This means that Tokyo has to intervene behind the scenes almost daily.
Plague or Cholera
Now the central bank is trapped, Phoenix added: if it continues to print yen to buy bonds and defend the yield target, the yen will collapse and inflation will explode. But if it stopped pumping air money into the market to hold bond yields, yields would shoot up and Japan would slide into insolvency. The investment house drew a parallel to 2008 – only this time an entire country would go bankrupt.
We add: If this scenario happens, a Japan crash will shake the entire financial world. Jim Grant, editor of “Grant’s Interest Rate Observer”, also fears that Japan could trigger a shock for the global financial system and advises buying gold. And so we wonder how long the current monetary policy should continue like this. The global analysis house Vanda Research also commented, “bond buying is nothing short of unsustainable”. According to the financial blog “ZeroHedge”, the BoJ has already spent the equivalent of 300 billion dollars on bond purchases this month alone. So keep an eye on the real-time news, it smells like intervention in the yen – or a break in current policy. Bernstein Bank wishes you successful trades and investments!
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