The credit crunch era has been one where monetary policy has been bent twisted and expanded all at once. The opening move in the game of chess was to reduce interest-rates to what were considered to be extraordinary low levels back then. The next was to buy bonds mostly government bonds in what was called unconventional policy back then as Quantitative Easing looked to reduce bond yields. However as time went on and advocates QE sang along to this bit in The Sound of Silence “silence like a cancer grows” then it became well conventional. There were also lending support policies which of course were a critique of ultra-low interest-rates and QE as of course if those two had worked then other polices would not be needed! Obviously official communiques turned their blind eye to such thoughts and logic. We have more recently seen a new phase of interest-rate cuts as more and more central banks have moved interest-rates lower again into negative territory taking many bond yield with them. On that front the chart below is rather eloquent I think.
A negative yield for an oil company. What could go wrong?
As well as actual moves and action central bankers have increasingly deployed what I call Open Mouth Operations where they promise to do things. In spite of the long list of broken promises and failed forecasts they publicly continue with making Forward Guidance which in the UK is at around Mark fifteen as thresholds and dates come and go. In some ways the peak for this sort of thing was this from Mario Draghi of the ECB on the 21st of January.
There are no limits to how far we are willing to deploy our instruments within our mandate
Perhaps he was bopping away to the band 2 Unlimited in the 90s and their biggest hit is stuck in his mind.
The Yen and the Nikkei 225
This morning has seen this in Japanese markets. From the Financial Times.
The yen surged 2 per cent and equities slumped……..Futures on the broad Topix stock index were trading down 42 points at 1,339. The yen surged 2 per cent to Y109.3 against the dollar.
Actually things went further than that as the Yen continued it surge and has risen through at 108 versus the US Dollar as I type this. Lots of countries and currencies have had an involuntary devaluation as for example the UK Pound £ now buys 158 rather than 162 Yen. If we look for some perspective the FT adds this.
The yen has risen from about Y120 against the dollar this year, despite a shock BoJ move to interest-rates of minus 0.1 per cent in January, hurting Japanese exporters and setting back the central bank’s effort to escape from two decades of on-and-off deflation.
There is obvious FT speak there via the use of “despite” rather than “because of” and the assumption against the evidence that Abenomics will work. That was true even before it became Japanese owned. But let us mark that and move onto equity markets which also continued their move with the Nikkei 225 closing some 3.6% lower at 16,666.
Now with such moves one might conclude that the Bank of Japan had acted and that the half-life of the subsequent equity market rally is now so short that it had fallen by the end of the day. But in fact the announcement was as below.
The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen……The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank
That was what the apochryphal civil servant Sir Humphrey Appleby would describe as “masterly inaction” as it was unchanged policy. So we note that if the Bank of Japan acts the Yen rises and the equity market falls and if it does not the same happens! The only difference is that acting gives a one day rally for the equity market. We get some perspective on today’s move from Reuters Jamie.
USD/JPY -3%. It’s lost more than 3% on only 5 days since 1998, and only 20 days since Bretton Woods collapse in 1971
There were reasons to act
The obvious one for an inflation targeting central bank was the inflation news this morning. From NHK.
Japan’s consumer price index for March was down 0.3 percent from a year earlier, for the first drop in five months…….Excluding all types of energy and food, the index was up 0.7 percent year-on-year, for a 30th straight month of growth.
As you can see not so good from the Abenomics point of view even if you can manage to live without energy and food. If you find someone like that please let me know! The Bank of Japan was downbeat in other areas.
Comparing the current projections through fiscal 2017 with the previous ones, GDP growth is somewhat lower, influenced mainly by weaker exports that reflect the slowdown in overseas economies. The projected rate of increase in the CPI for fiscal 2016 is lower, mainly reflecting downward revisions in projections for GDP growth and wage developments.
As you can see it is all apparently the fault of Johnny Foreigner or Gaijin and you may note something crushing to Bloomberg which has regularly reported better wage growth is around the corner.
Let us move on from the Bank of Japan which resembles the Titanic and I will leave it to readers to decide whether it is before or after it hit the iceberg.
Other central banks
There was a joint outbreak of “masterly inaction” as the US Federal Reserve, the central bank of Brazil and the Reserve Bank of New Zealand did nothing except put Yes Minister on You Tube. Is that a fluke?
Anyway for the US Federal Reserve it is an utter failure for “Forward Guidance” as in election year the scope for “between 3 to 5 interest-rate” hikes has done a bit more than faded I think.
We are often assured that central banks cannot run out of money yet it would appear that this economic basket case has in fact managed it. From Bloomberg.
In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases…….Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.
Now let me add a little dose of sanity as the central bank could create the money to pay for those although of course this might push the exchange-rate even lower. However this is a scenario which many “experts” such as Paul Krugman would tell us is “unpossible” as hyper-inflation only exists according to them in the world of “inflation-nutters”.
Venezuela’s inflation, the world’s highest, is expected to rise this year to close to 500 percent, according to the International Monetary Fund.
This is deflationary hyper-inflation and I guess you are all waiting for the Weimar style wheel-barrow quote.
“It’s a very bad sign to see people running around with wheelbarrows full of money to buy a hot dog,”
Ah a poor diet too?
For the seven years or so central bankers and their media acolytes have been singing along to Paul Simon.
These are the days of miracle and wonder
And don’t cry baby, don’t cry
However these boys in the bubble are finding it increasingly tough going as their Forward Guidance of better days ahead keeps turning into a disappointing reality. I do not know yet what the GDP number will be for the United States today but it will not be great I do know that. This keeps happening although the US and UK are of course doing better than Japan in this regard. They kicked the can into the future but their own actions delayed and stopped the reforms required to make the future strong enough to pick the can up. Still some have enjoyed it.
A loose affiliation of millionaires
And billionaires and baby
Before the Bank of Japan meeting I broadcast my thoughts on TipTV.