The Bank of Japan fears no longer being the “leader of the pack”

The next two weeks look set to bring a situation you might not expect. After all Japan has built a reputation as the “leader of the pack” as the Shangri-Las would put it in terms of monetary policy easing. Except that it is now facing a situation where it looks set to be left behind. On Thursday the European Central Bank will announce its latest moves and its President Mario Draghi has been warming us up for some action. Either he will announce an interest-rate cut or he will signal one for September. So there are two perspectives here for Japan. The first is that the Euro area looks set to cut by the total amount that Japan has below zero as 0.1% is the minimum and of course 0.2% would be double it. Next is the issue that the new rate of -0.5% or -0.6% would be a considerable amount lower than in Japan.

If we now shift to the United States the US Federal Reserve looks set to cut interest-rates as well when it meets at the end of the month. There was a spell last week when financial markets switched to expecting a 0.5% cut which would put the new rate at 1.75% to 2%. Personally I am far from convinced by that and a 0.25% cut seems much more likely but nonetheless it puts the Bank of Japan under pressure.

The Yen

The factors we have looked at above will be putting some upwards pressure on the Yen as interest-rate expectations shift against it. This has been reinforced by an unintended consequence of the policy applied by the central planners at the Bank of Japan.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent). With regard
to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding
of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible for purchase, while the guideline for average remaining maturity of the Bank’s JGB purchases will be abolished.

The problem here as I have pointed out before is that something which was supposed to have kept Japanese Government Bond ( JGB) yields down has ended up keeping them up. Ooops! As world bond markets have surged Japan has been left behind because its bond market is essentially run by the Bank of Japan ( 80 trillion yen a year buys you that) and it has been wrong footed completely. The recent surge began in early March and the German ten-year yield has fallen as much as by 0.6% and the US by 0.8% but Japan by only 0.16%.

So as you can see relative interest-rates and yields have moved to support the Yen since the early spring of this year. The policy of “yield curve control” aiming for bond yields of 0% to -0.1% no doubt seemed a good way of continuing the Abenomics policy of weakening the Yen at the time. However over the period that bond markets have surged the Yen has strengthened from 112 versus the US Dollar to 108 now. That is before we see any shift in the rhetoric of President Trump who as the tweet from the early part of this month below points out, wants a weaker US Dollar.

China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!

That will have been viewed with horror in Tokyo because whilst The Donald is not currently putting Japan in his cross hairs they have looking to weaken the Yen since Abenomics began back in 2013. This would be quite a reverse for Japan as it would not want to get into a currency war with the United States.

Moving to other currencies we see that the Yen has been strengthening against the Euro and the UK Pound as well. Indeed we get another perspective I think from looking at Switzerland which regular readers will know I labelled as a “Currency Twin” with Japan due to the way both currencies were borrowed heavily in the pre credit crunch period. There are increasing rumours that the Swiss National Bank has been getting the equivalent of an itchy collar over the strength of the Swiss Franc and has been checking the markets as a hint that it may intervene again. It may well find itself having to match any ECB interest-rate cut and that will echo in Tokyo as well as giving us a new low for negative interest-rates.

The Pacific Trade Crisis

The stereotype of this area is of fast growing economies with the image of many of them being Pacific Tigers compared to the more sclerotic Western nations. Yet troubles are there too now so let us go to Seoul on Thursday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.75% to 1.50%.

Okay why?

With respect to future domestic economic growth, the Board expects that the adjustment in construction investment will continue and exports and facilities investment will recover later than originally expected,
although consumption will continue to grow. GDP is forecast to grow at the lower-2% level this year, below the April forecast (2.5%).

This morning has brought more news on that front. From Bloomberg.

South Korea’s exports, a bellwether for global trade, appear set for an eighth straight monthly decline as trade disputes take a toll on global demand. Exports during the first 20 days of July fell 14 percent from a year earlier, data from the Korea Customs Service showed Monday. Semiconductor sales plunged 30 percent, while shipments to China, the biggest buyer of South Korean goods, fell 19 percent.

Korea is a bellwether as these numbers are released very promptly and many of its companies are integrated into global supply chains, so it gives a signal for world trade. Currently it is not good and there is a direct link to Japan.

Imports from the U.S. rose 3.7 percent, while those from Japan dropped 15 percent.

Also on Thursday Bank Indonesia decided to join the party.

The BI Board of Governors agreed on 17th and 18th July 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 5,75%,

A day earlier say troubling news for the economy of Singapore.

SINGAPORE’S exports, already in double-digit decline for three straight months, fell again in June, according to Enterprise Singapore data released on Wednesday morning.

Non-oil domestic exports (NODX) were down by 17.3 per cent on the year before – a six-year low  ( Business Times )


The Bank of Japan finds itself between a rock and a hard place on quite a few fronts. The Yen has been strengthening and other central banks are on their way to matching its policies. That is before we get to the issue of the clear trade slow down in the Pacific region. This will add to the problem hidden in what looked on the surface as solid economic growth in the first part of the year.

In the three-month period, exports dropped 2.4 percent and imports sank 4.6 percent, as in the initial reading. As a result, net exports — exports minus imports — pushed up GDP by 0.4 percentage point. ( Japan Times).

In all other circumstances the Bank of Japan would cut interest-rates in a week. But they do not like negative interest-rates much and they are buying pretty much everything ( bonds, equities and commercial property) as it is! In October another Consumption Tax rise is due as well. Perhaps Bryan Ferry was right.

Say, when you’ve been around, what’s left to do?
Don’t know? Ask Tokyo Joe
So inscrutable her reply
“Ask no question and tell me no lie”




13 thoughts on “The Bank of Japan fears no longer being the “leader of the pack”

  1. I think it’s high time we all stopped pretending that that all economic ills can be cured by miniscule changes in interest or indeed by abnormally low interest rates. What was it Einstein said about doing the thing? If a 1% rate doesn’t stimulate the real economy then it’s highly probable that 0.1% will either.
    Yes I know we must protect ‘the precious’ but the most basic job of the state should be to maintain full employment and ensure wages are high enough to drive the economy forward in a way which a few mega rich corporations and individuals cannot.

    • Hi bill40

      I completely agree but the media and so many analysts keep churning out that line. The catch is that “the precious” does not like rate cuts at these levels which is the main factor in why Japan has not gone beyond -0.1% so far. After all its banks have been zombified for nearly 30 years now.

  2. Hi Shaun. Technical question. If net exports pushed up japan’s GDP by .4 per cent (larger fall in imports vs exports);
    wouldn’t negative interests on bonds (gov/corporate) have a build-in implict future GDP (or corporate) boost to balance sheets that could be calculated? Anybody have any thoughts on this? Perhaps this was the default game plan all along?!?

    • Hi Canuckistinian

      Yes and via corporate profits GDP should be a bit higher as less interest is paid out. Although care is needed as those who used to contribute to GDP via interest income in this area will be a negative. But most will be in pension funds so I guess it is for the future and thus not counted.

      As to anyone doing the maths of this, not that I know of.

  3. Hello Shaun,

    Can’t help thinking the Japanese Government and BoJ are schizoid, wants inflation but then raises Consumption Tax ? Surely this will cut demand and cause dis-inflation ?

    And then all also all the buying frenzy of bonds, equities and commercial property….. is there much to go ? so how does one price such assets if the government owns the stock ?

    Still , watch carefully , for where Japan treads , we will follow in their foot steps , after all is hasn’t gone wrong yet ( not sure it’s gone right either as there’s no big KA-BOOM I guess that’s good enough !!)


    • Hi Forbin

      It is both deflationary as the higher prices mean consumers buy less and inflationary as prices are higher. Last time around it did this according to NHK.

      “Consumers went on a huge buying spree ahead of the tax increase. But spending fell by 3 percent afterward. It took 3 years to put the economy back on track. ”

      If we switch to The Japan Times it published some of the expected numbers.

      “The new taxes will cost the average family about ¥44,000 ($390) more for goods and services a year, according to Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

      An April 2018 report released by the BOJ estimated that the overall tax burden would translate to about ¥2.2 trillion when factoring in tax breaks, welfare benefits and education expense increases. By comparison, the overall tax burden of the 2014 consumption tax hike was far higher, at about ¥8 trillion.”

  4. For all those who want higher interest rates in the UK due to debt worries the favourite to replace Carney is the man:

    However the NEISR already thinks the UK is in a technical recession and I think its now too late to even contemplate increasing interest rates with too much debt around never mind whether or not we are in a technical recession:

    • If you read the article it probably explains why he never even got an interview — talking like that about raising rates.

  5. So if we have simultaneously stagflation ( stagnate incomes, inflated food (imported) prices) and cheap computer chips
    (uhmm chips!) disinflation -this must mean only thing- time for El S.I.D. – the mysterious Banksy mural to appear on a wall somewhere?

  6. With the upcoming fed rate cut(?) your focus on M1/M2/M3 money supply will be VERY important for us neophytes to grasp how successful the last great hope plan is progressing.
    Even if they jigger the stats, you have been successful at detecting anamolies and presenting them to us. Onward to Infinity! then, and a mild nuclear decay of their neg rate bonds! Excellent work detecting these interesting times!!!

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