The BoJ intends to keep much of the same game in play with the addition of ‘yield curve control’ QE measures which almost sounds like an automotive active safety system. One of my astute former colleagues correctly pointed out that “if we have surrendered the yield curve to the complete control of the BoJ and the BoJ wants to steepen the curve, how can they do this without tightening money supply, given liquidity at the short end of the curve? How is this good for a weak yen? Who is the willing counter party to a manipulator now looking top SELL not BUY to manipulate prices downward? Does this mean the end of fixed income departments?”
Once again, market manipulation as being conducted on the scale done by the BoJ would result in the multi-decade sentencing of anyone in the private sector. Although perhaps given Japan’s woeful prosecution of market manipulators (i.e. fines of $500 (yes five hundred dollars only) for insider trading) then perhaps the BoJ does not see its actions as anti-capitalist. My bigger concern remains yet again the refusal to allow the market to function properly. Ploughing more into equity ETFs might seem a helping hand to Mrs Watanabe but she is not out there spending any gains she might get. At the rates the BoJ is buying if this strategy doesn’t work the BoJ will end up part-nationalising listed companies which in turn will fly in the face of PM Abe trying to attract foreign capital to invest in Japan when liquidity is being sucked out of the market.
I did find the comment in the opening remarks of Kuroda’s assessment somewhat overly optimistic for the real economic impacts to reflect it – “More than three years have passed since the Bank introduced QQE in April 2013. In this period, Japan’s economic activity and prices have improved significantly, and Japan’s economy is no longer in deflation.
He goes further to highlight the ‘vision’ which for the most part is theoretical gibber.
“The main transmission channel of QQE would be the reduction in real interest rates. Namely, (1) people’s deflationary mindset would be dispelled and inflation expectations would be raised [this is not happening!] through the Bank’s large-scale monetary easing under its strong and clear commitment to achieving the price stability target of 2 percent. At the same time, (2)downward pressure would be put on nominal interest rates across the entire yield curve through the Bank’s purchases of JGBs. (3) Together, these developments would reduce real interest rates. (4) The decline in real interest rates would lead to an improvement in the output gap. (5) The improvement in the output gap, together with rising inflation expectations, would push up the observed inflation rate. (6) Once people experienced an actual rise in the inflation rate [Japan has coped with near as makes no difference zero inflation for 20 years], they would adapt their inflation expectations, resulting in higher inflation expectations and further reinforcing this process…In addition, it was envisaged that as a result of the Bank’s monetary easing, (7) asset prices such as stock prices [fuelled by artificial ETF buying] as well as the foreign exchange rate [FX is back to the same levels of April 2013 and since NIRP has strengthened 10%] would reflect actual or anticipated improvements in economic activity and prices, thereby improving financial conditions and having a positive impact on economic activity and prices. Finally, it was envisaged that (8) it would work through the portfolio re-balancing effect by increasing investors’ appetite for risky assets [Japanese are traditionally very conservative investors and this is pushing them out of their comfort zone, so much so they’re buying home safes], thereby exerting a positive effect on prices of risky assets and leading to an increase in lending [Japanese banks are hesitant to lend – lending sideways since April 2013].“
Toward the end the BoJ acknowledges:
“Given that the decline in deposit rates has been smaller than the decline in lending rates, the decline in lending rates, however, has come at the expense of financial institutions’ lending margins. Therefore, the extent to which a further decline in interest rates translates into a reduction in lending rates will also depend on financial institutions’ lending stance going forward.”
Although I interpret the “Moreover, reflecting financial institutions’ search for positive yield, new developments have been observed in the field of corporate finance such as an increase in the issuance of super-long-term corporate bonds and in funding through long-term subordinated loans” comment to suggest that gullible investors that get sucked into buying super LT corp bonds to get a morsel of yield may get completely thumped if weakening credit conditions for such enterprises (e.g. a Sharp or Toshiba) down the line crater their asset worth given the extended duration.
“In addition, it should be noted that financial institutions can boost their profits by selling assets they hold to realize valuation gains, which tend to increase when interest rates fall and the yield curve flattens.” I’m sorry but the BoJ promoting this activity as a virtuous circle just shows how Mickey Mouse the amateur levels of desperation at the BoJ are. This is kindergarten level commentary although at least their translators haven’t mastered the Fed’s use of comical language.
“Another issue is that an excessive decline in interest rates — especially at the long and super-long end — lowers the rates of return on insurance and pension products, and increases firms’ pension benefit obligations. The direct impact of this on economic activity as a whole is unlikely to be substantial. However, attention needs to be paid to the possibility that it can cause uncertainty regarding the sustainability of financial functioning in a broader sense, with a negative impact on economic activity through a deterioration in people’s sentiment.”
Perhaps I should ask why the Japanese government will explicitly withdraw ‘public pension’ money from individual bank accounts of those who earn Y3mn from Y3.5mn but are not contributing, largely because they have no faith in the pension system. Some 270,000 people are supposedly guilty of this crime but Although the return profile of Japanese pensions is far more realistic than US public pension funds, the unfunded risks going forward remain.
So what looked promising on the announcement is now being seen for what it is. Poorly thought out strategy. Trying to manipulate a curve where the BoJ might be both seller and buyer…hmmmm