The Bank of Japan reminds us it is all about the banks

It is time for another part of our discovering Japan theme as we travel to Nagoya, where Governor Kuroda of the Bank of Japan was talking earlier today. Let us open with some good news.

The real GDP has been on an increasing trend, albeit with fluctuations, and the output gap — which shows the utilization of capital and labor — widened within positive territory from late 2016, for seven consecutive quarters through the April-June quarter of 2018 . Under such circumstances, the duration of the current
economic recovery phase, which began in December 2012, is likely to have reached 69 consecutive months this August. If this recovery continues, its duration in January next year will exceed the longest post-war recovery phase of 73 months.

So reasons to be cheerful part one, and below we get part two, but as you can see part three is a disappointment.

In the Outlook Report released last week, the real GDP growth rate for fiscal 2018 is projected to be 1.4 percent, and this is clearly above Japan’s potential growth rate, which is estimated to be in the range of 0.5-1.0 percent. As for fiscal 2019 and 2020, the real GDP growth rates are both projected to be 0.8 percent.

Economics gets called the dismal science but at the moment central bankers are trying to under perform that with the UK having a growth “speed limit” of 1.5% and the ECB saying something similar. The Bank of Japan is even more downbeat which is partly related to the demographics of both an ageing and declining population. This is partly because the previous foundation of their Ivory Towers called the output gap has failed so badly in the credit crunch era but the more eagle-eyed amongst you will have noted a reference to it above. How is that going?

The Output Gap

It is “boom,boom,boom” according to the Black-Eyed Peas and the emphasis is mine.

In the labor market, the active job openings-to-applicants ratio has been at a high level that exceeds the peak of the bubble period, and the unemployment rate has declined to around 2.5 percent. The number of employees has registered a year-on-year rate of increase of around 2 percent, and total cash earnings per employee have risen moderately but steadily.

As you can see the Japanese output gap is already struggling as we are apparently beyond bubbilicious in terms of demand but wage growth is only moderate. What about inflation?

The year-on-year rate of change in the consumer price index (CPI) has continued to show relatively weak developments compared to the economic expansion and the labor market tightening, and that excluding fresh food
and energy prices has been at around 0.5 percent.

In fact after deploying so much effort Governor Kuroda abandons his favourite measure for a higher one.

The year-on-year rate of increase in the CPI (all items less fresh food) has continued to accelerate, albeit with fluctuations. Although there is still a long way to go to achieve the price stability target of 2 percent, the year-on-year rate of change recently has risen to around 1 percent, which is about half the target .

Actually the state of play here is as  strong of a critique of the original claims about QE as we have as according to the central bankers it would raise inflation. Whilst it has created asset price inflation there has been a lack of consumer inflation except in places where currencies have fallen, and in Japan not even much of that. Indeed whilst I would welcome the development below Governor Kuroda will be crying into his glass of sake.

What lies behind this likely is that people’s tolerance of price rises has decreased.


Monetary Policy

We have found something which has given the Bank of Japan food for thought. Output gap failure? Rigging so many markets? Impact on individual Japanese? Of course not! It is worries about the banks.

The Bank fully recognizes that, by continuing such monetary easing, financial institutions’
strength will be cumulatively affected by low profitability, mainly through a decrease in
their lending margins, and that it could have an impact on financial system stability as well
as the functioning of financial intermediation.

This is a little mind-boggling as we note that policies which were instituted to help the banks are now being described as hurting them. This is because the banks did not have to change and pretty much carried on as before knowing that they are too big to be allowed to fail. Also I though central banks and regulators were on the case these days but apparently not.

That is, if financial institutions become more active in risk taking to secure profits amid the low interest rate environment and severe competition continuing, the financial system could destabilize should large negative shocks actually occur in the future.

This if we think about it is quite a confession of failure. We have already looked at how economic policy has been directed to suit the banks and in Japan’ case that has continued for nearly thirty years now. Next we seem to have a loss of faith in the new regulations which were supposed to fix this. Finally we have something of a confession that it could all happen again!

If we looked wider we do see some context for example in the way that the European bank stress tests were widely ignored over the weekend. I think that those interested have already voted via bank share prices in 2018, but we do see something rather familiar via @jeuasommenulle.

While everybody is having fun bashing EU banks and pointing out that market volatility on Italian govies will hurt bank capital… the US quietly removes rules that make market volatility impact capital in the 1st place 🤪

Yep back to mark to model rather than mark to market. Just like last time in fact, what could go wrong?

You and I get told what to do but the banks get a different message.

encourage them to take concrete actions as necessary.

The Tokyo Whale

The Bank of Japan has been living up to its reputation and moniker.

The Bank of Japan bought a monthly record of 870 billion yen ($7.68 billion) in exchange-traded funds in October, apparently aiming to support equities as investors turned bearish amid sell-offs in U.S. shares. ( Nikkei Asian Review)

Back on the 23rd of October I pointed about I was bemused by the Japanese owned Financial Times report on a “stealth taper”.

The central bank has become more flexible on its annual ETF purchase quota of around 6 trillion yen — a mark it will likely exceed by year-end at the current pace. ( NAR)

Another Japanese style development comes from this.

 But its large-scale purchases under Gov. Haruhiko Kuroda’s massive monetary easing program were criticized for propping up share prices for a limited range of companies and distorting the market.

To which the classically Japanese response is of course to rig even more of them.

This prompted the BOJ to decide this July to spread out buying more widely.



The comments about an interest-rate hike from Japan are mostly driven by this from today’s speech.

Japan’s economic activity and prices are no longer in a situation where decisively implementing a large-scale policy to overcome deflation was judged as the most appropriate policy conduct, as was the case before.

The problem with such rhetoric comes from the section about as we note that Bank of Japan bought a record amount of equities via ETFs in October. Also this summer it give a specific pronouncement on this subject which was repeated today.

Specifically, the Bank publicly made clear to “maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

Indeed he even hints at my “To Infinity! And Beyond!” theme.

it has become necessary to persistently continue with powerful monetary easing while considering both the positive effects and side effects if monetary policy in a balanced manner.

So they will continue the side effects but carry on regardless unless of course the side effects become an even bigger problem for the banks. The status quo continues to play out.

Whatever you want
Whatever you like
Whatever you say
You pay your money
You take your choice
Whatever you need
Whatever you use
Whatever you win
Whatever you lose.


I plan to begin a new series of weekly podcasts this Friday.If anyone has any thoughts or suggestions please let me know.





11 thoughts on “The Bank of Japan reminds us it is all about the banks

  1. Hi Shaun
    I presume that Japan must have different rules
    to the UK but what happens when the Whale
    consumes a third of its major companies will it
    have to make a takeover bid?
    As for a podcast topic, very few people thought
    that the TBTF era could last a decade,what might
    end it?


    • Hi JRH

      The use of the Japanese word Hiei seems to cover this.

      “The remaining shareholders do not receive a control premium paid by the bidder, as the mandatory bid does not require the bidder to make a mandatory purchase of the remaining shares. In fact, a partial bid can be made. Another anomaly is that in Japan, a mandatory bid is only required when the transaction is made off the market. On-market purchases are exempt from the mandatory bid requirement”

      So yes but no at 30% seems to be the answer. Here is the full paper that seems to cover it.

      As to the podcast suggestion, I will bear it in mind,

  2. Great blog as usual, Shaun.
    The CPI for all items less fresh food and energy had an annual inflation rate of 0.4% for September 2018, all items less fresh food 1.0% and the CPI for all items 1.2%. The first core measure comes closer in definition to the UK core CPI (all items less food, energy, alcohol and tobacco) than the second one does, but the all items less fresh food index has a special significance in the Japanese CPI since fresh food is calculated using a monthly basket approach and other categories are not. (At one time, Canada, France and the UK also had monthly baskets for fresh produce, but Statistics Canada, l’INSÉÉ and the ONS are now apostate national statistical institutes; only the Bank of Japan has kept to the true faith.) The annual inflation rate for a given month will not be strictly comparable with the annual inflation rate for the preceding month because items may drop out or enter the basket. This should lead the Bank of Japan to emphasize the annual inflation rates of the seasonally adjusted CPI rather than the CPI unadjusted for seasonal variation. The CPI less fresh food should not have any special interest as a core measure.

    • Hi Andrew and thank you

      I know you are a fan of seasonal weights so do you approve of the Bank of Japan keeping what New Order would call True Faith? As to the numbers you reminded me to check the Tokyo numbers which are a month ahead and in Japanese terms are high at 1.5%. But sadly for the Bank of Japan it was is food (3%) and utilities aka energy (4.4%) that did it leaving its core rate at 0.6%.

      One slightly odd feature is the weighting for food which is ~25% for Tokyo whereas for the UK I only get to 10% if I add in alcohol.

  3. Shaun, ‘Yep back to mark to model ‘. Is there any aspect of our lives that is not now determined by ‘models’? We surely live in a world that is computer driven, not just the hardware or the social media, but decisions made by unthinking people taking the output of ‘models’ without much consideration of the inputs, the algos or the bias of the designers/operators. Vast swathes of the human race live in communities divorced from ‘reality’ on an increasing basis , dependent on the machines and the output of the ‘models’.

    • Hi JW

      You remind me of a discussion I had on Friday on Twitter with Ian Mulheirn of Oxford Economics. He did not like my description of Imputed Rent as a fantasy concept as apparently it is.

      “No. I’m claiming it is a real cost – no less real than a cost that involves a cash transaction. Would you disagree?”

      Anyway after various loaded questions he decided that I would have to loan him £100k at 0%. Whereas I went away thinking that his description of himself as “Former think-tanker and HM Treasury economist” was no surprise.

  4. If automation is to become so ubiquitous, why does Japan’s demographic matter?
    Indeed, shouldn’t a declining population be advantageous?
    Shouldn’t it eventually make pensions, and indeed all other benefits, far more affordable?
    Can’t have it both ways, you sleekit bankstards.

  5. Shaun,
    I give upwith Japan, the level of intervention is so off the scale it defies calculation. I guess as long as the working age population keep going to work then that is that matters there. The numbers are cuckoo land.

    Re: PodCasts, I do quite alot on my commute. I used to enjoy RealVision but they changed their format a few months ago and I don’t like the playful quiz style. I have leant to enjoy the rather self-referential MacroVoices. The best thing about Macro-Voices are the feature interviews, getting knowledgeable people to talk their book is always real interesting. I would recommend some investigative perspective for your stories,RenegadeInc is always controversial but it gets viewers.

    Best of luck, Paul C.

  6. How about a podcast, or series, reflecting how different cultures have a bearing on economic and related policies? I’m thinking, obviously Japan, but also Italy with its debt being mostly domestic, etc?

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