The Bank of Japan begins to face its failures

The last couple of weeks have seen two of the world’s main central banks strongly hint that the path for interest-rates is now lower, or perhaps I should say even lower. So as we open this week my thoughts turn eastwards to what the Shangri-Las would call the leader of the pack in this respect, Nihon or Japan. If we look at the Nikkei newspaper we see that Governor Kuroda of the Bank of Japan has also been conducting some open mouth operations.

TOKYO — Bank of Japan Governor Haruko Kuroda said extra stimulus would be an option if prices refuse to keep rising toward the central bank’s 2% inflation target.

The BOJ “will consider extra easing measures without hesitation” if the economy runs into a situation where momentum toward reaching stable inflation is lost, Kuroda said at a news conference on Thursday in Tokyo after keeping monetary policy unchanged.

There are various problems with this which start with the issue of inflation which has simply not responded to all the stimulus that the Bank of Japan has provided.

  The consumer price index for Japan in May 2019 was 101.8 (2015=100), up 0.7% over the year before seasonal adjustment,   and the same level as the previous month on a seasonally adjusted basis. ( Statistics Bureau).

This has been pretty much a constant in his term ( the only real change was caused by the rise in the Consumption Tax rate in 2014) and as I have pointed out many times over the years challenges Abenomics at its most basic point. If we stick to the monthly report above the situation is even worse than the overall number implies. This is because utility bills are rising at an annual rate of 3.2% but this is offset by other lower influences such as housing where the annual rate of (rental) inflation is a mere 0.1%. Also the services sector basically has virtually no inflation as the annual rate of change is 0.3%. Even the Bank of Japan does not think there is much going on here.

On the price front, the year-on-year rate of change in the
consumer price index (CPI, all items less fresh food) is in the range of 0.5-1.0 percent. Inflation expectations have been more or less unchanged.


On Friday we got the latest wages data which showed that real wages fell at an annual rate of 1.4% in April, This meant that so far every month in Japan has seen real wages lower than the year before. If we look back we see that an index set at 100 in 2015 was at 100.8 in 2018 so now may well be back where it started.

This matters because this was the index that Abenomics was aimed at. Back in 2012/13 it was assumed by its advocates that pushing inflation higher would push wages even faster. Whereas that relationship was struggling before the credit crunch and it made it worse. Indeed so strong was the assumed relationship here that much of financial media has regularly reported this it has been happening in a version of fake news for economics. The truth is that there has been an occassional rally such as last summer’s bonus payments but no clear upwards trend and the numbers have trod water especially after Japan’s statisticians discovered mistakes in their calculations.

Problems for economics

Back when QE style policies began there was an assumption that they would automatically lead to inflation whereas the situation has turned out to be much more nuanced. As well as an interest-rate of -0.1% the Bank of Japan is doing this.

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……….The Bank will purchase exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively…….As for CP and corporate bonds, the Bank will maintain their amounts outstanding at
about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Yet we have neither price nor wage inflation. If we look for a sign of inflation then it comes from the equity market where the Nikkei 225 equity index was around 8000 when Abenomics was proposed as opposed to the 21,286 of this morning. Maybe it is also true of Japanese Government Bonds but you see selling those has been something of a financial widow maker since around 1990.

Misfire on bond yields

2019 has seen yet another phase of the bond bull market which if we look back has been in play since before the turn of the century. But Japan has not participated as much as you might think due to something of a central planning failure.

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.

That was designed to keep JGB yields down but is currently keeping them up. Ooops! We see that bond yields in Germany and Switzerland have gone deeper into negative territory than in Japan. If we compared benchmark yields they go -0.31% and -0.51% respectively whereas in Japan the ten-year yield is -0.15%.

Economic Growth

On the face of it the first quarter of this year showed an improvement as it raised the annual rate of economic or GDP growth to 0.9%. That in itself showed an ongoing problem if 0.9% is better and that is before we get to the fact that the main feature was ominous. You see the quarterly growth rate of 0.6% was mostly ( two-thirds) driven by imports falling faster then exports, which is rather unauspicious for a trading nation.

If we look ahead Friday’s manufacturing PMI report from Markit posted a warning.

June survey data reveals a further loss of momentum
across the manufacturing sector, as signalled by the
headline PMI dropping to a three-month low. Softer
demand in both domestic and international markets
contributed to the sharpest fall in total new orders for
three years. A soft patch for automotive demand…..

The last few words are of course no great surprise but the main point here is the weaker order book. So Japan will be relying on its services sector for any growth. Also there is the issue of the proposed October Consumption Tax hike from 8% to 10% which would weaken the economy further. So we have to suspect it will be delayed yet again.


To my mind the Abenomics experiment never really addressed the main issue for Japan which is one of demographics. The population is both ageing and shrinking as this from the Yomiuri Shimbun earlier this month highlights.

The government on Friday released a rough calculation of vital statistics for 2018, revealing that the number of deaths minus births totaled 444,085, exceeding 400,000 for the first time.

The latest numbers on Thursday showed yet another fall in children (0-15) to 12.1% of the population and yet another rise in those over 85 to 4.7%. In many ways the latter is a good thing which is why economics gets called the dismal science. The demographics are weakening as Japan continues to borrow more with a national debt of 238% of GDP.

The size of the national debt is affordable at the moment for two reasons. The first is the low and at times negative level of bond yields. Next Japan has a large amount of private savings to offset the debt. The rub is that those savings are a buffer against the demographic issue and there is another problem with Abenomics which I have feared all along. Let me hand you over to a new research paper from the Bank of Japan.

The reversal interest rate is the rate at which accommodative monetary policy
reverses and becomes contractionary for lending. Its determinants are 1) banks’
fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of passthrough to deposit rates, and 4) the initial capitalization of banks.

So it looks like they are beginning to agree with me that so-called stimulus can turn out to be contractionary and there is more.

The reversal interest rate creeps up over time, making steep but short rate cuts preferable to “low for long” interest rate environments.

Exactly the reverse of what Japan has employed and we seem set to copy.


23 thoughts on “The Bank of Japan begins to face its failures

  1. Reducing interest rates helps people in debt and will have an effect on consumption as people should have more money in their pocket to spend and in theory should push up inflation.

    Well to my simple view of economics that’s seems OK on the one front but savers get less money on deposit in fact as interest rates go lower and even negative, money on deposit is eroded.

    So what do people do with more money in their pocket i.e. those not in debt?

    They have two options in my view to watch their money be eroded which a lot do or spend it.

    If they spend the money on property it wont affect the goods in the shops therefore has little effect on inflation.

    If they chose to spend it on holidays abroad that will also have zero affect on internal inflation.

    Gilt and bond yields in the US UK and Germany were again down today money is being eroded by the hour.

    The moral of my post being nothing is guaranteed in life expect at some stage we will all die, we enter the world with nothing and we leave the world with nothing we cannot take it with us.

    in the garden of Eden one man sinned and therefore all sinned and we were meant to toil the earth to the day of death and in fact that is what we all do.

    We have to constantly work or consider what we do with our money if we don’t we see it eroded.

    • Re: “in the garden of Eden one man sinned and therefore all sinned and we were meant to toil the earth to the day of death and in fact that is what we all do”

      no , we’re all addicts really

      “OXYGEN: An intensely habit-forming accumulative toxic substance. As little as one breath is known to produce a life-long addiction to the gas, which addiction invariably ends in death. In high concentration, it causes death quickly, but even in a 20% dilution few survive more than 0.8 century.”

      better with popcorn


      • forbin

        Oxygen may indeed be addictive and so is food, if we dont eat we will die,and we need to toil the earth to eat. Which adds to my argument that we need to toil the earth until we die.

        • indeed but with our current fossil fueled economy we employ 1.5% of England’s workforce in agriculture. that means many of us do not toil the soil but provide other services .

          in the current situation in Japan , with ROW to follow , we will actually need more AI and robots

          or we can go back to some form of feudalism , Dune or techno .

          or worse


  2. Hello Shaun,

    as far as ecologists and greens are concerned then this is good news….. after all less people means more wildlife and eco-heaven will be assured .

    as far as BAU economics goes , its a pain in the neck.


    • What the world really needs at the moment is some idiot to press the nuclear button and wipe out a percentage of the population then we all start again.

      History has taught us that after a war or epidemic it reduces the population, then people rebuild and start again.

      But until that happens there will be market uncertainty and sooner or later another financial crisis things cannot go on the way they are.

  3. Why are CB’s so addicted to 2% inflation? Because every other CB is!
    It has never been proved that having this target or any other is the answer to all our economic woes.
    Very few countries have achieved this figure and kept it there for very long, subject as it is to external factors, such as the price of oil, raw materials, exchange rates, etc, all manipulated by dealers and speculators.
    So why bother to try to modify your domestic economy, usually to the detriment of the common good, for some mythical figure, which is probably unachievable. Better to have regard to it, but don’t have it as your main focus of economic policy.
    This is far too sensible for CBs, who have to follow each other like sheep, usually over the cliff edge!

    • “Why are CB’s so addicted to 2% inflation? ”

      possibly the same reasons as to why High Priests always insist of rituals and sacrifices …….. the Sun will not rise, rains will not come and crops will fail…

      to same effect of course 😉


    • Hi Peter

      Cheers for the link and I have a couple of thoughts for you on it. This bit is awkward.

      “You might be inclined to moan about various aspects of politics in the UK and the US, but no one can say that Italy is a better credit risk than either of those countries.”

      That requires some nuance as the 10 year yield in Italy at 2.16% is higher than the US and a lot higher than the 0.81% in the UK.

      This bit is a little breathtaking. Did Mark Carney write it for him? As they did not raise before Brexit either

      “As for the UK, the Bank of England has largely been held back from raising interest rates by the ongoing Brexit saga”

      Anyway it is good to see the issue being raised elsewhere.

  4. Algorithms! Fresh algorithms today!! Most of the stock markets (in n.a) today are controlled by computerized algorithms employing the (science?!) of behavioral economics and game theory (John nash)-with a side offering of economic technical analysis. It lies beneath the bridge of technical (dismal) economics- where chamber pots are dumped and late drunks relieve themselves- a troll world of data geeks spit on by beggars and cursed by “legitimate” investors. Vermin reading the daily entrails. Show time trolls- click to “blue monday” – New Order.

    P.S-technical-Sean- In the discussion of short squeeze on natural gas (Nov 2018), I see the 2x bear natural gas etf symbol hnd on tsx is triple that point today (below $3.5 to over $10 today). It was the right idea (they’re burning off excess natural gas in shale oil Texas) just the wrong investment vehicle!!

    • Hi Canuckistinian

      So how does that ETF work? Because as you say things seem to be going to plan.

      “Natural Gas Slumps to a 37-Month Low

      Natural gas prices fell to their lowest level in more than three years after U.S. government data revealed a weekly injection in domestic stockpiles that was much more than expected. The commodity, which dropped to a new low since May 2016 at $2.185 per MMBtu on Thursday, is now more than 40% down from its Jan 15 high of $3.722 per MMBtu. ( Yahoo Finance)

      It would not be the only investment vehicle misfiring right now.

  5. Disclosure: any stocks or recommendations I make are purely for entertainment or technical analysis.
    They are not to be construed as investment advice.
    Past performance of any investment security is NOT indicative of possible future returns (and usually rarely is)

    • canuckistian:

      “Disclosure: any stocks or recommendations I make are purely for entertainment or technical analysis.
      They are not to be construed as investment advice.
      Past performance of any investment security is NOT indicative of possible future returns (and usually rarely is

      Potential investors should seek their independent advice based upon their own risk criteria and take account of the fact that independent financial advisors often get things wrong and sometimes investors would be better doing the blindfold test with a pin and sticking it in the share page of the FT.

      Another option is to place a money spider on the FT page and see where it stops for a rest if it runs of the page don’t buy on that day.

      Apart from that investors need to know everything is a risk in life there is a stabbing every day now in London, and investments can be wiped out at any time.

      Good luck with your investments in todays economic climate you will need plenty of it!

    • Past performance of any investment security is NOT indicative of possible future returns (and usually rarely is)

      translation : goat entrails are not what they used to be


  6. Hello Shaun,

    here’s a thought , Tokyo housing market – buyers are not being born anymore, owners are dying out.

    When will the property market notice ?

    what can CB do ? ( apart from check their RPI linked pension pots )

    ( over here I am surprised that Halifax had the gaul to post an increase in property prices for last month – Sunny Surrey is hurting , eheheheh, down to 525K and maybe sir you should settle for 500K ( six months ago , “yah mate, put it up for £640K and we should see 630K min, ” lies , all lies…..) ).

    Interesting times indeed!


    • Hi Forbin

      Maybe it has if this from Japan Property Central is any guide.

      “On May 28, the Japan Real Estate Institute (JREI) issued their latest medium-term forecast for the price of brand-new apartments in Tokyo’s 23 wards. As we saw last year, price predictions have again been revised upwards from earlier forecasts. In 2019, the average new apartment price is forecast to be 1,065,000 Yen/sqm, up 0.4% from 2018 and 7.7% than an earlier forecast.

      In 2020, the price is expected to drop slightly to 1,064,000 Yen/sqm. By 2025 it is forecast to be 1,024,000 Yen/sqm.

      For the rental market, the average monthly rent of a new apartment in 2019 is forecast to reach 3,470 Yen/sqm, up 2.1% from last year. It is forecast to continue to increase by 2025.”

      So if they are right falling prices are on their way. But they too have been seeing rises since 2013 or so….

  7. Natural gas close 2.305 (+5.04 per cent)

    Hnd on tsx (horizon 2x bear) close 9.03 (-1.02) (-10.15 per cent)
    Hnu on tsx (horizon 2x bull) close 9.6 (+.84) (+9.59 per cent)

    Black box leveraged twins roughly a ying/yang counter balance

    Further information on line

    Disclaimer: information displayed here is not intended as solicitation, advice or encouragement in any financial investments. It is merely presented as entertainment for financial technical analysis. You MUST read the online prospectuses! Please discuss with your financial advisor when making all investments. These are highly volatile instruments suitable for only minor portions of a mature retirement portfolio. Please-please- this is for a technical information discussion ONLY!!!

  8. More disclaimers: regarding horizon etf tsx. Are generally played inside Canadian tfsa (tax free savings account) to avoid onerous paperwork regarding capital gains etc. These should be played inside tax sheltered entities. Tax implications vary for Britain and u.s. Similar entities and products may available for british/us subjects. Please consult a British or American Financial planner to find similar products
    suitable specifically for your country to avoid complicated capital gains calculations and/or paper work. Sorry. Sorry. You ask for an answer and all I can offer is Can-A-Duhh!?! I’m not sure how to answer the question??

  9. “Low for long” is a trap that is proving difficult to escape from. MC tries to talk his way out . So far without success. He may blame events (dear boy),; but it’s the policy that’s causing the problem – the policy of saving the precious by ultra loose monetary policy that is turning out not to be loose enough after all. Will it change? Like a stalling aircraft it takes nerves of steal to fight your instincts, reduce power, and push the stick down. But CBs don’t do nerves of steal.
    Worst still “ long ….” could turn out to be 20 or 30 years.

  10. Pingback: The Bank of Japan begins to face its failures - Free World Economic Report

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