The Bank of Japan is exploring the outer limits of monetary policy

Today I wish to invert my usual rule and open with a look at financial markets because in this instance they help to give us an insight into the real economy.

The Nikkei 225 average tumbled 650.23 points, or 3.01 percent, to end at 20,977.11, its first closing below 21,000 since Feb. 15. On Friday, the key market gauge rose 18.42 points.

The Topix, which covers all first-section issues on the Tokyo Stock Exchange, finished 39.70 points, or 2.45 percent, lower at 1,577.41 after gaining 2.72 points Friday. ( The Japan Times)

We have a crossover here as Japan catches up with what western markets did on Friday. But if we return to Friday’s subject of expected central bank activity, well in Japan it is already happening. In other markets discussions of the existence of a Plunge Protection Team for stock markets are more implicit than explicit but Japan actually has one. The Bank of Japan or as it has become known the Tokyo Whales does so and according to its accounts bought some 70,200,000.000 Yen’s worth this morning in its attempt to resist the fall. That amount has become a habit in more ways than one as on days of solid falls that is the amount it buys as for example it bought the same amount on the 13th, 8th and 7th of this month. It’s total holdings are now at least 24,595,566,159,000 Yen and I write at least because whilst it declares most of them explicitly in its accounts some other holdings are tucked away elsewhere.

Monetary Policy

To finance these purchases the Bank of Japan creates money and expands the monetary base. It adds to its other attempts to do so as for example it also buys commercial property ( in a similar route to the equity market it buys exchange-traded funds or ETFs) as well as commercial paper and corporate bonds. But the main effort is here.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward
and downward to some extent mainly depending on developments in economic activity and prices.
7 With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual
pace of about 80 trillion yen.

As you can see it is buying pretty much everything with the only variable left being how much. If we stay with that theme we have seen regular media reports that it is tapering it s buying of which the latest was Bloomberg on the 14th, Those reports have varied from being outright wrong ( about equity purchases) to nuanced as for example circumstances can limit the size of JGB buys.

Meanwhile, the government would continue to undertake expenditure reforms and reduce the
amount of newly issued government bonds for fiscal 2019 by about 1 trillion yen compared to that for fiscal 2018. ( Bank of Japan)

But also market developments play a role as I note this from @DavidInglesTV this morning.

Japan 10Y yields collapse further into negative territory

There is a bit of hype in the use of the word collapse to represent the benchmark yield falling to -0.06% but there are relevant factors in play. For example yet another benchmark bond yield is moving further into negative yield territory as Japan accompanies Germany. Next we have an issue for Bank of Japan policy as it is left sitting on its hands if Mr(s) Market takes JGBs to where its “guidance” is anyway meaning it does not have to buy more. So its bond buyers are left singing along with the Young Disciples.

Apparently nothing
Nothing apparently
Apparently nothing
Nothing apparently

The Yen

This is another area where the Bank of Japan is active. These days it is not that often in the news promising “bold action” and much less actually explicitly intervening. But according to economics 101 all the money printing ( more technically expansion of the monetary base) should lead to a lower Yen. For a while it did but these days the position is more nuanced as The Japan Times reminds us.

The stronger yen battered export-oriented issues. Industrial equipment manufacturers Fanuc sagged 3.84 percent and Yaskawa Electric 5.35 percent, and electronic parts supplier Murata Manufacturing lost 3.14 percent.

In a way here the Tokyo Whale is spoilt for choice as it could act to weaken the Yen and/or buy ETFs with those equities in them. But the reality is that lower equity markets create a double-whammy for it as hoped for wealth effects fade and a flight to perceived safety strengthens the Yen. Thus we find the Yen at around 110 to the US Dollar as I type this.

One of the central tenets of Abenomics was supposed to be the delivery of a 2% annual inflation target which would “rescue” Japan from deflation. Yet mostly through the way the Yen has resisted the downwards pressure leaves us observing this.

As for prices, members concurred that the year-on-year rate of change in the CPI for all items less fresh food was in the range of 0.5-1.0 percent, and the rate of increase in
the CPI for all items less fresh food and energy remained in the range of 0.0-0.5 percent, due partly to firms’ cautious wage- and price-setting stance.

The all items inflation rate was 0.2% in February. The situation is a clear failure leading one Board Member to spread the blame.

households’ tolerance of price rises had not shown clear improvement and services prices in such sectors as dining-out had not risen as much as expected.


We can now bring in a strand from recent articles which has been illustrated earlier by the former chair of the US Federal Reserve Janet Yellen.


Also something which we figured out some months back.


Also let me throw in something which shows an even deeper lack of understanding.

Former U.S. Federal Reserve Chair Janet Yellen said Monday that the U.S. Treasury yield curve[s:TMUBMUSD10Y], which inverted on Friday for the first time since 2007, may signal the need to cut interest rates at some point, but it does not signal a recession. ( @bankinformer )

Firstly central bankers have pretty much a 100% failure rate when it comes to forecasting recessions. Next we have an issue where they help create an inverted yield curve then worry about it! That may turn out to be something with very different effects to one achieved more naturally.

But the real issue here is that Janet like her ilk is guiding us towards more monetary easing but we have been observing for some years that in terms of the Shangri-Las the Bank of Japan is the Leader of the Pack. But once we switch to how is that going we hit trouble. From Friday.

The flash Nikkei Manufacturing PMI for March remained unchanged at 48.9 in March, registering below the 50.0 no change level for a second successive month to indicate an ongoing downturn in the goods-producing sector. The latest readings are the lowest recorded since June 2016.

Among the various survey sub-indices, the output index signalled a third consecutive monthly fall in manufacturing production, with the rate of decline accelerating to the fastest since May 2016. The drop in production was the third largest seen since 2012.

Now today.

Japan’s new vehicle sales in fiscal 2019 are projected to fall 2.0 percent from the current fiscal year to 5.22 million units amid growing economic uncertainty, an industry body said Monday. ( The Mainichi )

That adds to the slow down in the real growth rate such that GDP rose in the final quarter of 2018 by a mere 0.3% on a year before. Not exactly an advert for all the monetary easing is it?

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19 thoughts on “The Bank of Japan is exploring the outer limits of monetary policy

  1. The red flags are waving and its all about the yield curve and it wont be only the US going into recession imo:

    But to reiterate what Shaun mentioned a week or so ago, what happened when the purchases run out and there are none left to buy?

    Monetary easing QE and negative interest rates can only go so far then the tools run out. Meltdown would then follow.

    Quite how this idiocy of supporting overvalued assets continues confounds me there seems to be a complete lack of fiscal understanding by banks and financial institutions and governments imo.

    • There is no lack of understanding whatsoever, and the tools have not run out, it’s just you have concluded all the normal policy tools are exhausted and then assume the central banks will capitulate and let markets operate without their interference – they won’t!!! They are merely in the throes of supporting a failing system that requires ever more extreme measures and ever larger injections of money to prevent it from imploding.
      As the system tries to correct itself and asset prices try to correct, they will introduce more and more policies to prevent this as otherwise the precious are toast since they have lent all the credit to get us into this position.

      At times like this it is necessary to remind ourselves of the words of Ludwig Von Mises, who predicted what happens when such a system approaches the end:

      “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

      And destroy our currencies is exactly what central banks are doing, as they print more and more billions for further iterations of QE (and in future it will be trillions), to keep prices moving upwards, eventually when the currency collapse is complete, the asset prices will have crashed(as interest rates are raised to try and reverse the falls in the currency and the bond markets) yes Mark even you will have to do it in the end.

      • Hello Kevin, indeed you are correct. Listen to Macro-Voices feature interview last week. The guest described how the Bernanke put equalled 10% points when you rolled together IR falls and QE. The next rescue will simply have to be more and bigger money. Negative IR’s, money printed to be given away as UBI and for building infrastructure, the people are asking for it, just like they asked for change via Brexit or yellow vests or syrian migrancy it will happen to them…. whatever.

  2. Hello Shaun ,

    so basically the only people with money are the Governments . The TBTF banks are still bust after 10 years and still will be in another 10 years

    Unlike some I think we’ll have “innovative financial instruments ” for at least another 20 years .

    This long stagnation will continue until around 2038 -/+ 5 years , this is because I believe all the major measures are fiddled , GDP is over stated by 2% ( -/+ 0.5% ) and inflation understated by 3% ( -/+ 1.0% ).

    Japan still after decades has managed to make money as country , even if its debt has not been reduced.

    we will go through some very interesting times and I’m not so sure they will be nice ones !

    as for jobs , we do well , but

    ” The ONS analysed the jobs of 20 million people in 2017 and found 7.4% of these were at high risk of being replaced.”

    As the ONS has an appalling track record I’d suspect they’re trying not to frighten the horses….


    • I was intrigued by that ONS report – I can only assume they go to very different cafes & restaurants than me if they think the job of negotiating irregular and changing pathways, baby carriages, bags, and small children while carrying trays of drinks will be automated in the next 10 years. Maybe they think the proles should settle for self-service when eating out ?
      Although I can see where a robot could be very persuasive about the tip – “I’ll be back…”

      • The BBC link below gives an indication of which jobs could be replaced:

        I think you could also add accountants for small business, which are technically half way there with online fill yourself forms and software packages will follow to do without the need for an accountant.There must be a substantial amount of call centres where employees aren’t really needed as all the employees do is refer to a script.

        Then what about lorry driver and indeed taxi driver when driverless vehicles come about?

        There are rapid changes in the construction business they have robots which can brick lay and also lay pavement flags.

        In fact there should be less need to rely on immigration should the UK speed up both automation and the use of robots.

        This could in turn improve productivity and in turn GDP. Robots and automation could be our saviour in a completive world as world growth slows.

        The countries which I think will suffer more with atomization and through robots are likely to be those with the highest population.

      • Hello Arthur ,

        I sometimes think that the push to the rental model again is some what indicative that we are all getting poorer …….

        for those who are too young , the poor rented things like TVs and the rich owned them….

        until the price of goods dropped and the plebs wages rose – we seem to be going the other way these days …


  3. Hi Shaun

    Great article as always. I’m not sure if someone on here mentioned it? But if GDP is increasing and the population is decreasing, then GDP per capita is increasing. Surely this is good?


    • Hi Forbin

      In an era of automated flying highlighted by the Boeing 737 Max issue I find myself wondering what the pilots were doing? Apart from heading the wrong way they must have spotted that they were not flying over water. I commuted to Edinburgh for a bit when I worked for Standard Life and even back then the plane showed you the route. So the passengers would have known but not the pilots?

  4. Pingback: The Bank of Japan is exploring the outer limits of monetary policy – JapanBiZZ

  5. As you rightly state, the inverted yield curve is really a manifestaion of Monetary Transmission Policy overshoot and altering expectations of future moves.

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