How does Japan avoid inflation?

It is time again to look across to Nihon or the land of the rising sun. On the one hand it is getting ready to stage the Olympics and on the other there are a rising number of Covid-19 cases. Switching to the economics Japan must be having a wry smile at the various “tapering” debates as it has been there so many times. I stopped counting on the 19th version of QE and that was a while ago now.  They must also be a little bemused if they look south to New Zealand which looks to be planning some interest-rate rises.

Meanwhile the Bank of Japan continues on the same path. On Friday we got its latest announcement and as well as keeping the -0.1% interest-rate we were told this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

The reason I pint this out is that it has turned into an interest-rate rise of sorts, or to be more specific that 0% target stops Japanese Government Bonds from rallying past that point. This morning it was at 0.01%. This means that it has missed out on the yield falls we have seen elsewhere with the US ten-year falling by around half a point. If we switch to Germany it looked back in late May that its benchmark yield might be on its way to positive territory again is now -0.36% as I type this. This is awkward because you are doing QE because you believe lower yields give the economy a boost but then you stop the yields from falling further. Meanwhile you continue to buy JGBs on a grand scale.

In terms of the money supply the Bank of Japan has been pumping things up.

The year-on-year rate of change in the monetary
base has been positive at around 20 percent, and
its amount outstanding as of end-June was 660
trillion yen, of which the ratio to nominal GDP was
121 percent.21 The year-on-year rate of increase
in the money stock (M2) has been at around 6
percent, mainly reflecting an increase in fiscal
spending and a past rise in bank lending.

But as you can see the impulse fades considerably even before it hits measures which are influenced by the real economy.


Many countries are facing an inflation scare with the debate being how long it will last? Not Japan.

The year-on-year rate of change in the CPI (all
items less fresh food) has been at around 0
percent recently due to a rise in energy prices,

You may note that it has taken a rise in energy prices to get things to zero and zero is essentially what we have observed throughout the “lost decade” period. As someone who has a mobile phone contract which rises every year this seems typically Japanese.

a reduction in mobile phone charges.

If we drill deeper into the situation we see something else which is Japanese and here is the Bank of Japan explanation.

In the cases of the United States
and Europe, the output prices indices have
exhibited remarkable increases in tandem with
the escalation of the delivery delay indices.

As we have observed costs have risen and we tend to respond by raising prices but behaviour in Japan is different.

On the other hand, in the case of Japan, although
both the delivery delay index and the output
prices index have increased, the recent degree of
increase for both indices has been limited
compared with that in the United States and

Why is that?

The relatively small degree of rise in Japan’s
output prices index may be partly attributable to
Japanese firms’ strong tendency, at least in the
short run, to ration their products without raising
their selling prices when faced with excess

So Japan places the quantity rather than the quality ( I take price as a quality measure) game. Thus they avoid at least some of the second and third order effects of higher prices. Even when things came under what they considered to be real pressure they only saw the sort of level the UK is at now.

In this regard, in the final phase of the rise in
commodity prices in the 2000s, the year-on-year
rate of change in the CPI excluding fresh food
temporarily increased to around 2.5 percent,

Could you imagine the Bank of England ever writing this?

That said, the price change distribution at
that time shows that the rates of increase for a
majority of CPI items stayed at around 0 percent,

So even when you get the below it gets heavily watered down.

and only those for a limited number of items, for
which the raw material ratio is large, saw high
price rises of around 4-6 percent

Or as they put it.

Considering these past experiences, it seems
highly likely that the CPI inflation that merely
reflects upstream cost increases will spread to
other items to only a limited extent, and thus will
be only transitory.

So if anywhere is going to see transitory inflation then as Talking Heads put it.

I Guess that this must be the place

Wage Inflation

This used to be mostly ignored as an issue in economics because wages were assumed to rise faster than prices. That changes years and in this case decades ago as it is a feature of what we call the lost decade. Although the news has yet to reach some of the Ivory Towers.

The year-on-year rate of change in scheduled
cash earnings has been positive to a relatively
large extent on the back of (1) a rebound from the
decline seen last year, (2) rising wages of full-time
employees in the medical, healthcare, and
welfare services industry, which faces a severe
labor shortage, and (3) a fall in the share of part-time employees, mainly due to the adoption
of equal pay for equal work.

We actually have some wages growth at 2% and at first it looks good because with no inflation that is a real wages rise. Except when we look back to May last year we see that real wages fell by 2.3% so in fact we are worse off. We will find out more soon as June and July are months which are significant in bonus terms but as we stand we see that wages have continued to stagnate overall.

I do like the “sooner or later” bit below.

Special cash earnings
(bonuses), which lag behind corporate profits by
about half a year, are likely to stop declining
sooner or later, reflecting improvement in
corporate profits, and continue increasing steadily


The Japanese experience is really rather different but in a curious development often ends up in the same place as us. They have a system where many of the numbers are 0 as we look at interest-rates and yields, inflation and wages growth. If we look at the overall pattern we see that national GDP has followed not that different a path, although the individual number is better. But they have taken ZIRP and end up with it in other areas.

But the lesson here is that at least part of the inflation issue is behavioural. Care is needed as other parts of the Bank of Japan report look at the impact of the higher price for crude oil. But that is in play and Japan has seem 0% CPI and lower producer price inflation than us. In spite of this.

In foreign exchange markets, the yen has
depreciated somewhat against the U.S. dollar
amid a weaker yen against a wide range of


What are lower bond yields telling us?

A major story in 2021 so far has been the moves in bond yields. This matters because they have become more significant in economic terms during the credit crunch. A factor in this is the way that the ZIRP era of effectively 0% official interest-rates has pretty much stopped the game there for now. For example the US Federal Reserve is presently trying to stop more US rates going below zero. Even the European Central Bank which has applied negative interest-rates for some years now thinks it is at its limit as we learn from the denial below.


Putting it another way their last move was a paltry 0.1% cut to -0.5% although of course they sneaked in a -1% for the banks.

If we step back and ask why?The answer comes from the early days of the credit crunch when official interest-rates were slashed but economies did not respond as the central bankers hoped they would. In effect they thought they had more economic power than they did as longer-term interest-rates cocked something of a snook at them. So we got QE bond purchases in an attempt to control them as well, but whilst this has been associated with lower bond yields the link has been far from what you might think.

Last Night

Whilst many of us in the UK had our eyes on Wembley last night the Federal Reserve released the minutes of its most recent meeting.

On net, U.S. financial conditions eased further, led by a decline in Treasury yields.

Remember this was from mid-June and in terms of central banker psychobabble you can explain it like this.

Lower term premiums appeared
to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates.

There had also been bad news for those using real yields as a measure.

The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.

The Federal Reserve is of course desperate to emphasis anything agreeing with its claim that inflation will be transitory. But the problem for those seeing things in real yield terms is that the higher inflation forecasts should lead to higher bond yields and we got lower ones. Oh Well! As Fleetwood Mac would say.

Oh and I did point out earlier that the Federal Reserve is trying to stop short-term rates going below zero.

Amid heightened demand and reduced supply for short term investments, the ON RRP continued to maintain a
floor on overnight rates.


Here things get a little awkward again. Because any reduction in the current rate of purchases ( $80 billion of US Treasury Bonds and $40 billion of Mortgage-Backed Securities a month) should lead to higher bond yields. Except for all the talk it still seems some way away.

In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

This backs up this from the statement at the time.

The Committee expects
to maintain an accommodative stance of monetary policy until these outcomes are achieved


An exaggeration but there is a point behind it. Highlighted in a way by this from Reuters.

“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.

Actually the US ten-year yield is 1.26% as I type this as we wonder if that is meaningful enough for Mr. Maley? This compares to 1.78% earlier this year as the yield party peaked and 1.6% just after the Federal Reserve meeting and its hints of a couple of interest-rate rises in 2023. So if you have been long bonds well played.

Back to the economic implications and we start with the US government being able to borrow very cheaply again. Related to that is that long bond (30 year ) yield and its impact on mortgage rates.

Mortgage rates have fallen fairly consistently over the past 2.5 weeks with the past 2 days seeing some of the better improvements…….

They have the 30-year at 3.07% with Freddie Mac going below 3% to 2.98%. I doubt today’s fall to 1.88% for the long bond is factored in but of course the day is not over and things might change.

The International Effect

We can see one via Yuan Talks.

#China‘s most-traded 10-year #treasury futures extend gains to more than 0.5% to hit the highest since Aug, 2020. The yield on China’s 10-year govt bonds drops by 6.25 bp and break through 3% mark to hit 2.9925%.

If we switch to Europe one of my subjects this week – France- has seen its ten-year yield move to a whisker away from 0% this morning. Germany has a thirty-year of a mere 0.15%.

If we travel to a land down under he get a new sort of insight into QE. This is because the Reserve Bank announced a reduction in the rate of it by around 20% from September. The knee-jerk response saw the ten-year yield rise to 1.48% but only a couple of days later it is 1.3%.

The Global Dunces Cap goes to the Bank of Japan. You may recall that a few months ago Yield Curve Control was all the rage. Maybe even fashionable if an economic concept can be. But by pinning the ten-year yield the Bank of Japan stops it from falling and effectively undertake a sort of reverse Abenomics. So it has only moved within the permitted range from 0.06% to 0.02%. I guess that counts as a big move for JGBs these days.

I suspect that has contributed to today’s rally in the Japanese Yen as it moved through 110 although currencies rarely move for one thing alone.


The pendulum keeps swinging in 2021. Markets tend to overshoot but even that theory is awkward now as we note how large the narrative is versus how small the bond yield moves have been. I have worked through plenty of occasions where a 0.5% move would not be considered much and one comes to mind ( White Wednesday 1992) when it was happening if not in seconds in minutes.

Is this a cunning triumph by the US Federal Reserve as some argue? I do not think so as that is way over emphasising their ability. Putting it another way if so they have just poured petrol on the house price rise fire via the impact on mortgage rates.

Switching to the UK we see the same themes in play. The fifty-year yield is back below 1% so the government can borrow incredibly cheaply just as theory tells us it should be getting a lot more expensive. Also we may see more of this.

Record low rate on a 60% LTV 2yr fix of 1.15% in June. No wonder that mortgage mover numbers and house prices are up. Average quoted rates are falling on higher LTVs but still higher than pre-pandemic. ( @resi_analyst )


Is this the bond market rally of 2021?

There are various themes waiting for us this morning. One of them is personal as you can take the boy out of the bond markets but perhaps you cannot take the bond markets out of the boy. That links into the move because in themselves bond markets can be dull due to the fact that in essence mathematical changes on prices and yields are hardly exciting in themselves. But the consequences can be and from time to time we get something of note.

(Bloomberg) — Treasury 30-year yields fell below 2% for the first time since February and those on 10-year securities slid under 1.40% as a selloff in equities fueled demand for haven assets.

Thirty-year yields declined as much as nine basis points to 1.93%, and 10-year yields dropped the same amount to a four-month low of 1.35%.

We have a big figure change as the US 30-year went through 2% and as well as the market excitement there are plenty of consequences from this. One sings along with George Benson.

Turn your love around
Don’t you turn me down
I can show you how
Turn your love around

After all bond yields were supposed to be rising with inflation but it has gone to 5% ( IS CPI) and the 30-year is now around 2%. Ooops. We have however seen the return of a past metric for such things if we return to Bloomberg.

 Stocks dropped across Asia with Japan’s Nikkei 225 Stock Average sliding 4%, while the yen strengthened against all its major counterparts.

So the old inverse relationship between equities and bonds which had gone missing seems to be back at least for one day. That will have also woken up The Tokyo Whale as it will have rushed into Japan’s equity market to ship in another 50 billion Yen.

Quantitative Easing

This is and is not the cause. What I mean by that is for all the hype about changes it carries on.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

In this sense there are also worldwide influences as the Bank of England will buy another £1.15 billion of UK bonds this afternoon. The ECB continues on the same path albeit with curious weekly fluctuations ( last week the PEPP was only a net 10.8 billion Euros) and its only retreat is this one.

But there is a problem because QE was in motion when bond yields were rising so saying they are a sole cause clearly is not true.

US Bond Market

There has been an influence from this as whilst the US planned to issue more debt in the second quarter of this year and quite a bit more in the third than the first, the structure has changed.

This would make sense if all the borrowing was taking place in bonds, but it isn’t. The huge difference in net issuance in Q2 is down to treasury bills, which don’t impact longer term yield levels. ( @StephenSpratt)

So there was a switch which is friendly to the longer end of the bond market as relatively fewer were issued and more short-term debt replaced it. In isolation that is a curious move because in terms of debt management you make yourself vulnerable of you “go short” because any lack of market enthusiasm for your debt impacts more quickly.

US Treasury

This has also been in play via a couple of factors. This revolves around the cash balances held by the Treasury. These are held by the Federal Reserve for it and as a precautionary move it built them up in response to the Covid-19 pandemic and they peaked at around US $1.8 trillion.

It has been running this down and as of the latest numbers ( June 16th) the Treasury General Account averaged some US $653 billion in the week up to that. This was some US $76 billion lower than the previous week and a whopping US $907 billion lower than this time last year. In itself this is sensible as clearly uncertainty has dropped and the US Treasury does not need to have some much precautionary cash. But the timing decided by Secretary Yellen has meant that the run down will have boosted the bond market. Less debt will be needed to be issued.

The Economy and Fiscal Stimulus

I put these together because they have been operating in the same direction. the economy has been doing well which has added to the points above as the US gets more taxes and spends less. Also the fiscal stimulus plans are not flowing like they might have done.


This is a curiosity to this particular tale because it has turned out to not only be around but also to be higher than many expectations, especially those of the US Federal Reserve. You need not take my word for it as here it is.

“We were expecting a good year, a good reopening, but this is a bigger year than we were expecting, more inflation than we were expecting,” St. Louis Fed President James Bullard told CNBC’s “Squawk Box” Friday. “And I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.”

So having looked at an old relationship that has apparently begun again this one os more problematic. As you have to assume the higher than expected inflation has morphed into expectations of lower inflation ahead. Some markets have taken this literally as various commodities have dipped.

Reverse Repos

These have headed in the opposite direction to today’s theme as we have discussed in the comments section. On Friday the US Fed found itself receiving some US $747 billion of these as a banking system awash with cash looked for somewhere to put it. There is a link to the lower treasury bond issuance we looked at earlier because of more bonds had been issued it may have gone there at least in part.

This may be a case of another type of round tripping. Because cash at the Fed ( US Treasury) has been drawn down and we find that banks via reverse repos are replacing it. Not on the same scale but it is a large amount.


This has been quite an extraordinary move which has gone in the opposite direction to economic growth and inflation. It will have consequences as for example it will give another push to US house prices via the 30-year mortgage rate. That will reverse the recent trend.

The national average 30-year fixed refinance APR is 3.380%, up compared to last week’s of 3.300%.  (

Should that happen then it feels like a time that people should take it. Why? Well we have looked at factors which have boosted the bond market such as the running down of the US Treasury Account which can continue for a bit but will then fade and end.

But for now many countries can continue to borrow very cheaply as for example the 2% for the long-term for the US and my home country the UK can borrow at around 1% ( 1.02%) for fifty-years. So politicians the world around will be pleased.




Does higher inflation mean higher economic growth?

The issue of inflation is a hot topic in economics right now. Indeed this morning has suggested that to quote Glenn Frey the heat is on in India.

The wholesale price-based inflation hit an all-time high of 12.49% in May on the back of a spike in prices of manufactured products, crude petroleum, and mineral oils.

It touched the double-digit mark of 10.49% in April (2021). This is the fifth straight month of an uptick in WPI inflation. ( Business Today)

It is the five months in a row of rises which bothers me more than the all-time high which is influenced by the pandemic driven lows of last year. The vibe has also been reinforced by this.


So the issue in May has pushed into June and as an aside a higher oil price has negative consequences for the Indian economy. But for out purposes today the issue is one of inflation risks.

The Reserve Bank of India

We can stay on the sub-continent for the latest central banking missive assuring us that inflation is good. Earlier this month the RBI produced a working paper looking at this.

The concept of threshold inflation is linked to the level of inflation beyond which it becomes detrimental to economic growth.

There are a lot of begged questions in the assumptions but applying them to India the researchers get to this.

 For macroeconomic policy targets consistent with maintaining fiscal deficit at 6.0 per cent and current account deficit at 2.0 per cent of GDP, our estimates suggest a threshold inflation level of 6.1 per cent and optimal growth rate of 7.5 per cent for India.

As you can see they are juggling several plates at once but in principle they are replicating the western approach. What I mean by that is we are seeing an attempt to raise the inflation target by 50% or from 2% to 3%. Well in India a 50% rise takes you from 4% to 6%. The extra 0.1% is the same as when Everest was estimated to be 28,000 feet high so they made it 28,002 as otherwise they thought they would not be believed.

They then ram their point home in case we missed it.

If we consider the inflation target at 4 per cent instead of the threshold level of 6 per cent, the long-term growth rate would decline by about 80 bps.

By contrast if you miss the inflation target on the upside the issues created are relatively smaller, in fact much smaller.

On the other hand, if we consider the inflation target of 8 per cent instead of the threshold level of 6 per cent, the long-term growth rate would decline by only about 30 bps.

I suppose it is kind of them to so explicitly confirm one of the themes of my work.

 Thus, the trade-off between long-term inflation and growth is not symmetric on both side of the threshold inflation.

If you prefer it can be expressed in terms of economic growth.

When the inflation target is less than the threshold level, the sacrifice is 0.4 per cent point growth per one per cent point reduction in long-term inflation. However, if the inflation target exceeds the threshold level, the sacrifice of growth is only 0.15 per cent point per one per cent point increase in the long-term inflation.

Extraordinarily clever for a number if not picked at random has in fact been pulled out a hat.

The claimed gains are put up simple terms for politicians.

If the threshold inflation rate is somehow considered to be too high, the policy makers can choose a lower inflation target only by consciously sacrificing long-term real growth of GDP.


In a country with so many poor I am sure that pretty much everyone reading this with thing of it as a big deal.

 Of course, there are arguments in favour of lower inflation rate in terms of its favourable redistribution impact particularly on the poor and the financial stability concerns.

The problem here is one of the swerves in this type of analysis which appears in the early part.

The Keynesian analysis of non-neutrality of money assumes that nominal wages are more rigid than prices. Increase in money resulting in higher price level, therefore, leads to a decrease in real wages that would bring about an improvement in real economic activity (Rangarajan, 1998). This was loosely interpreted to mean higher inflation resulting in higher growth.

They deny this is being used and instead point to this.

 In an open economy, the rate of inflation can become an important determinant of the steady state rate of growth. It can influence TFPG through its effect on investment and effectiveness of research and development expenditure (Briault, 1995).  ( TFPG = Total Factor Productivity Growth )

Thus they are in fact assuming that higher inflation leads to higher economic growth via what we have come to call the “productivity fairy”. Personally I do not see a link between inflation and productivity. Also on the dynamic world in which we live and exist there is no “steady state rate of growth” and the conclusion is thus castles in the sky.

 Thus, the steady state growth would occur at the threshold inflation in an economy left to market forces. Since this is a base case, the government can avoid unnecessary adjustment costs in practice by targeting long-term inflation and growth respectively at the threshold inflation and steady state growth.


The conclusion is an interventionist and central planners dream. It feels like something from the 1960s and 70s with a “white-heat of technology” add on. In the credit crunch era we have seen a familiar trend where such ideas start with a single central bankers and the spread. Some years back it was Charles Evans of the Chicago Fed pushing the higher inflation target line and now we see it has become official policy.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.

Actually that is now out of date as inflation is not only above target but if the May CPI reading is any guide may well be considerably above it.

Where this falls down is that the research is designed to come to the conclusion that it does. I have already highlighted the productivity issue and with it comes the related one of wages and real wages in particular. This has been a troubled area for years and maybe decades for example the “lost decade” in Japan is one of a lack of real wage growth and my home country the UK has struggled too. Thus, in my opinion, and there is plenty of evidence to back it up you cannot simply assume higher inflation will lead to higher wage growth. The nominal wage rigidities of economic theory have got worse. We see examples of this regularly in the news and this may well be backed up by official numbers too.

Real average hourly earnings for all employees decreased 0.2 percent from April to May, seasonally
adjusted, the U.S. Bureau of Labor Statistics reported today…..Real average hourly earnings decreased 2.8 percent, seasonally adjusted, from May 2020 to May 2021.

Then we have the issue of assuming a steady-state for an economy at a time when we have seen waves of uncertainty. It is hard not to laugh as the theorists describe their theoretical world but describe one which has not much of a relation to the real one leaving us Seasick like Steve.

Cause I started out with nothing
And I’ve still got most of it left


Japan is struggling with its economy and coronavirus as well as the Olympics

The Coivd-19 pandemic has highlighted many of the issues we have been noting in Japan in its “lost decade” period which now of course has run for decades. The most recent has been a growing list of countries recording low birth rates which reminds us of Japan and its issues with that an consequently demographics. Next comes the increasing use of QE ( Quantitative Easing) bond buying around the world which echoes the behaviour of the Bank of Japan.That leads into increased public-sector borrowing and high levels of public-sector debt where Japan is something of a leader of the pack. For the more thoughtful there is also something which was true even pre pandemic which is that economic growth was catching a bit of the Vapors even before Coivid-19 hit.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

That is an issue once the pandemic is over as we wait to see if the developed world continues to find economic growth hard to find. But for the moment let me point out another feature of Japanese life which is a contradiction to stereotypes but is so often true.

Hospitals in Japan’s second largest city of Osaka are buckling under a huge wave of new coronavirus infections, running out of beds and ventilators as exhausted doctors warn of a “system collapse”, and advise against holding the Olympics this summer. ( Reuters)

Mask wearing was not unusual when I worked out there in the 1990s so you might think they were equipped to keep things relatively under control. But as the vaccine scheme shows it has not worked out like that.

Japan opened large-scale vaccination facilities on Monday morning in Tokyo and Osaka Prefecture. Officials say they aim to inoculate Japan’s 36 million seniors by the end of July. ( NHK)

That all seems rather tardy especially for a country planning to host an Olympics in a couple of months as NHK goes on to point out.

A woman said she felt like she has had to wait a long time to get her vaccination compared to other countries, and they could have started earlier.

Also even the new effort looks to leave them short of the target above.

The Tokyo facility will administer 5,000 shots a day, while the one in Osaka will give out 2,500. The government says it hopes to double their combined capacity in the future.

Sop rather like with the nuclear power programme Japan trips up when you think it should be in an area of strength.

The Economy

Last week we were told this via Japan Today.

Japan’s economy contracted 1.3 percent in the three months to March after the government reimposed virus restrictions in major cities as infections surged, data showed Tuesday.

We can use this to look back.

Japan’s economy registered its first annual contraction since 2009 last year, reeling from the effects of the pandemic despite experiencing a smaller outbreak than many countries.

Revised figures released Tuesday showed the annual contraction was marginally better than initially estimated, at -4.7 percent, from the earlier -4.8 percent figure.

Regular readers will be aware that the 2020 fall came on the back of an economy that was already struggling because of the latest rise in the Consumption Tax.

Unlike many other places Japan may well be turning lower again this quarter.

Economists warn that the slowdown is likely to continue, with the government forced to impose a third state of emergency in several parts of the country — including economic engines Tokyo and Osaka — earlier this month.

The emergency measures are tougher than in the past, and have been extended to the end of May and expanded to several other regions in recent days.

Thus domestic demand may see its largest pandemic hit so far. There is also the debate over the Olympics which is already a year late. Will it happen? Due to the concept of face I expect Japan to do everything it can to hold it but if it cannot a lot of spending has been wasted. Then for a manufacturing economy there is this too.

Oshikubo also noted that a global semiconductor shortage caused by surging demand for chips used in personal electronic devices and modern vehicles remains a risk.

“We expect choppy waters ahead for manufacturing in the next quarter,” he warned.

Business Surveys

The IHS Markit survey on Friday was not optimistic.

Flash PMI data indicated that activity at Japanese private sector businesses saw a renewed reduction in May. Output fell at the quickest pace for four months, while the contraction in new business inflows was the fastest since February.

There was growth in manufacturing ( 53.1) but the decline in services ( 45.7) pulled the overall economy into decline. This leaves the Bank of Japan in a bit of a cleft stick because only a few days ago Governor Kuroda told us this.

Thereafter, as the impact of COVID-19 subsides, it is projected to continue growing. After having registered a significant negative figure of minus 4.6 percent for fiscal 2020, the real GDP growth rate is projected to be 4.0 percent for fiscal 2021, 2.4 percent for fiscal 2022, and 1.3 percent for fiscal 2023 in terms of the medians of the Policy Board members’ forecasts in the April 2021 Outlook Report. Compared with the previous Outlook Report released in January, the projected growth rates are higher, mainly for fiscal 2022.

So it has revised things up just as the situation gets worse.

Monetary Policy

In essence the Bank of Japan has set all official interest-rates between -0.1% overnight rate and the 0% target of yield curve control for the Japanese Government Bond market. There has been a modification because during the peal of the crisis YCC was holding bond yields up rather than pushing them down so we now have a range.

The Bank made clear that the range of fluctuations in long-term interest rates, or 10-year JGB yields, would be between around plus and minus 0.25 percent from the target level, which is set at “around zero percent.”

That was quite a defeat for the central planning philosophy because if you spend some 536,666,804,633,000 Yen on something you are planning to raise the price rather than reduce it.

Moving onto equity buying the official view is this.

The third policy action concerns ETF and J-REIT purchases. These purchases aim at exerting positive effects on economic activity and prices by lowering risk premia in the markets

If so what is going to do now the Nikkei-225 index is at these levels as today it closed at 28.364? What will be done with the 36 trillion Yen that has already been bought?


There are tow numbers which we can use to look at Japan and the first is inflation where policy is for example to raise mobile phone costs.

Compared with the previous report, the projected rate of increase in the CPI for fiscal 2021 is lower due to the effects of the reduction in mobile phone charges.( Governor Kuroda)

The aim to increase inflation to 2% per annum is never explained apart from being an international standard and has been widely ignored in Japan as inflation has been dormant during the lost decade period.

There is a counterpoint which is that Bank of Japan policy switched via QE ( now called QQE) to boosting asset prices such as equities and bonds. The latter helps oil the wheels of all the debt.

Japanese government debt rose ¥101.92 trillion ($940 billion) in fiscal 2020 to a record ¥1.2 quadrillion, showing the largest annual increase as a result of the fiscal response to the coronavirus pandemic, according to the Finance Ministry.

Marking a record high for the fifth straight year, the outstanding balance as of March 31 means that debt per capita stood at ¥9.70 million based on the estimated population of 125.41 million on April 1. ( Japan Today)

The debt burden is not one of increased interest costs as the Bank of Japan has seen to that. But the total which according to the IMF will be 256.5% of GDP this year is an issue when we note that the population and in particular the working age population is declining. Also there are areas where it plans to spend more.

Japan to end its 1% GDP cap on defence spending – “must increase our defense capabilities at a radically different pace” ( ForexLive )


Are central banks directly financing governments or just pumping up asset prices?

This morning has seen policy announcements from two of the world’s main central banks. First from Japan which has taken policy further than anyone else and then from the world’s oldest central bank the Riksbank of Sweden. However there was a claim yesterday in The National that the UK and the Bank of England in particular has taken things even further than the Bank of Japan.

When it came to the pandemic, the Bank of England side-stepped QE and started buying government bonds (debt) directly. This has provided the money needed to support the UK economy during the pandemic.

This is from a comment piece by Jim Osborne of the Scottish Banking and Finance Group and it continued in the same vein.

While the Bank of England has been directly financing the UK Government, it has also provided loan guarantees to the private banks to encourage them to lend to businesses and support them through the prolonged lockdown of the economy.

A sort of doubling down on the direct financing front. and then we have something which even the most extreme central bankers may balk at.

The Bank of England has always been able to provide direct finance to the Government – it is the primary function of a central bank.

The first bit is true it can but if something is a primary function you might expect it to be used whereas in fact it has not done so since the early part of 2009. You may remember the media furore over the potential re-activation of the Ways and Means account in April of last year. The media have been much quieter about the fact that the amount there has remained at a nominal £370 million and in fact has been that since the spring/summer of 2009. It was used when the credit crunch hit for a few months and rose to just under £20 billion but has not been used since.

As for Bank of England QE purchases of which there will be another £1.48 billion this afternoon these are not direct financing either.It follows a rule that it does not buy a bond for a Beatles week ( 8 days for non Beatles fans). So it is smoothing the road but it is not directly financing the government as claimed.

Bank of Japan

This morning brought a case of steady as she goes from the Bank of Japan.

The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

This does give some food for thought on the issue of what is the primary function of a central bank now? The inflation targeting theme has been in choppy waters in Japan for several decades.

Bank of Japan Gov. Haruhiko Kuroda will fail to reach his goal of stable 2% price growth during his term, after what will have been more than a decade of stimulus to stoke inflation, according to the bank’s latest forecasts.

Even with an economy expected to show a faster recovery from the COVID-19 pandemic, a slew of rising commodity costs and global expectations for accelerating inflation, the BOJ still couldn’t find enough positive factors to see price growth averaging 2% by the end of March 2024. ( Bloomberg)

I am trying to think of anyone or anything which has been more of a serial failure than the Bank of Japan on this front. Remember that Governor Kuroda was supposed to be the equivalent of a central banking storm trooper and he had indeed performed that role as highlighted below.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180
billion yen, respectively, on annual paces of increase in their amounts outstanding.

For newer readers the ETF purchases are how the Bank of Japan buys equities. This is how it acquired the moniker of The Tokyo Whale as its holdings have now passed 36 trillion Yen. Whilst we get a perpetual stream of presumably leaked articles in the media that it will buy less the reality is always of more. That has been highlighted this month because it bought another 70 billion Yen on the 21st when the market had the temerity to fall towards 28.500 in terms of the Nikkei 225 index.

So in fact if we were looking at a primary function for the Bank of Japan you could make a strong case for it being pumping up asset prices. Its enormous Japanese Government Bond purchase programme pumped them up and in the Abenomics era it was driven the Nikkei 225 from around 8,000 to 29,000. Rather curious because neither are in its inflation measure. Actually they seem finally to be driving house prices higher again because December (2020) saw 1.6% monthly growth meaning annual growth was a bit under 4%.

Meanwhile as we have already noted there is no consumer inflation to speak of. This is signaled by this morning’s measures of underlying inflation release which shows it at depending which measure you choose either 0% or 0.1%.

Riksbank of Sweden

We see a familiar pattern highlighted by this from @LiveSquawk earlier.

Riksbank’s Ingves: Economic Picture Has Brightened Monetary Policy Needs To Remain Very Expansive

Or if we put it more formally they expect this and the emphasis is mine.

The differences between various sectors and groups on the labour market are expected to remain high, but overall economic activity is expected to approach more normal levels towards the end of the year.

So if you take the view that policy changes require 18/24 months then you take your foot off the accelerator?

Expansionary monetary policy in the years ahead is needed to support the economy and inflation. The Riksbank is therefore continuing to purchase assets within the envelope of SEK 700 billion and to offer liquidity within all the programmes launched. The Executive Board has also decided to hold the repo rate at zero per cent and it is expected to remain at this level in the years to come.

So that’s a no as there is still quite a bit of QE to come.

Through the asset purchase programme, the Riksbank’s holdings of securities had until 23 April 2021 increased by SEK 453.5 billion.


We see several things today. The initial point made by The National of the Bank of England directly financing the UK government is not true. But there is a point to day that the primary function of central banks is to pump out asset prices or if you prefer to create asset price inflation. So far the Bank of Japan is alone in driving equity prices higher as well but the list of central banks driving bond prices higher and thus gifting their respective government’s lower debt costs gets ever longer. These days they also do the same for larger corporates.

The problem with this is two fold. By now we see that QE has not created the consumer inflation promised although of course there is a big issue here about how it is being measured! Also as we noted yesterday looking at commodity prices some is on its way.But more fundamentally even before the pandemic economic growth was struggling in many places even before the present virus pandemic. This poses a problem because we have just seen a lot more of what looks like in the medium to long-term to restrict economic growth. Also younger readers will no doubt be mulling the way that assets are increasingly being priced beyond their reach as a matter of official policy.



By owning 7% of the Japanese equity market The Tokyo Whale has beached itself

The weekend just passed has seen quite a few developments which cover Japan. The first comes from a really extraordinary piece in the Wall Street Journal which has an eye-catching headline.

The central bank now owns about 7% of all the shares traded on Tokyo Stock Exchange’s first section.

Of course if you keep buying you end up with a large holding. This is the road on which the Bank of Japan has become called The Tokyo Whale. It is also significant for the article that the Bank of Japan has bought twice this month as it bought around 50 billion Yen’s worth of shares on the 4th and 5th of this month. Actually it buys some 1.2 billion everyday as part of its programme to improve “physical and human capital” and it is revealing that in the scheme of things it is not a big deal in itself.

Here is how the WSJ covers the programme.

Over more than a decade, the Japanese central bank, uniquely among its global peers, has poured hundreds of billions of dollars into local equities and now owns about 7% of all the shares traded on the Tokyo Stock Exchange’s first section. With stock prices near a 30-year high in Japan, shares bought by the central bank years ago  have surged in value.

Rises in share prices tend to happen when there has been a very large buyer with in theory infinite pockets which in practice has been heading in that direction. This has been the clearest example of a central bank offering a direct put option for those holding shares because it buys whenever the market falls and then the pandemic hit increased its daily purchasing clip to over 100 billion Yen. In addition to that there are the other monetary easing efforts of the Quantitative and Qualitative Easing policy or QQE of the Bank of Japan. This matters because look at the next bit.

Instead of winning praise for its investing acumen, though, the BOJ faces growing pressure to stop acting like the Tokyo whale and find ways to spread the wealth. Some are calling on the BOJ to hand out shares to the public or use its gains to seed corporate innovation, in an echo of debates in the U.S. about whether the stock market’s gains are benefiting ordinary people.

So if you rig a market such that the roulette ball nearly always comes up black that is now “investing acumen” is it? Spreading the wealth is not so easy when there is an element of Imagination about it.

Could it be that… it’s just an illusion?
Putting me back in all this confusion?
Could it be that. it’s just an illusion, now?
Could it be that… it’s just an illusion?

If we look at the “investing acumen” the Nikkei 225 has risen from around 8000 to around 29,000 but unlike other investors the Bank of Japan sets economic policy as well. It has surged again from the lows ( 16,538) of last March but again this was driven by Bank of Japan buying. I note that the “acumen” required purchases twice this month at around 29,000 to keep it going.  As to “corporate innovation” it is doing exactly the reverse by buying what are the bigger companies and ossifying the economic structure. Even the Japanese owned Financial Times has been pointing this out.

“Japan today cannot even ride the waves of technological and industrial innovation, let alone create them,” says Kazuto Ataka

This repeats the mistakes of the 26th of November last year.

TOKYO—One of Japan’s biggest stock investors just reported record gains of more than $50 billion after a well-timed bet…….That’s because the hot-hitting portfolio manager is Gov. Haruhiko Kuroda, head of Japan’s central bank. Mr. Kuroda has led the Bank of Japan ’s push, unusual among global central banks, to invest in the Tokyo stock market as a way of rousing the nation’s animal spirits.

It has been a rigged game and “rousing the nation;s animal spirits” is simply extraordinary.

The superb timing helped the central bank report a record jump for a six-month period in its stock portfolio’s gains when it released its semiannual financial report Thursday.

It front ran itself? Let me leave it there by pointing out it is only a profit when you take it. The larger your position the more risk you have taken on.

Bank of Japan share price

I have to confess the recent surge had me wondering if some thought that there might be a distribution of equity “profits” in the offing. Anyway best of luck being a minority shareholder.

No Change of Policy Ahead

Bank of Japan Governor Kuroda spoke in the Japanese parliament on Friday and the prepared text told us this.

In doing so, since the framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control has been working well to date, the Bank judges that there is no need to change it.

This had an immediate impact on the bond market although some of this has faded Perhaps investors have been reminded of when he assured the Japanese parliament there was no intention to apply negative interest-rates and then applied them only a Beatles week ( 8 days) later.

As to equities according to Reuters he went further.

“We have been and must continue to buy ETFs flexibly. We’ll discuss at the March review how specifically we could make our purchases more nimble,” Kuroda said.

The key would be to make the BOJ’s ETF-buying programme nimble so that the central bank would step in only when markets become volatile and lead to a sharp rise in risk premia, he added.

No doubt he will explain to us at some future date exactly how a Whale can be nimble! Also may I point out that for all the regular rhetoric about reductions the annual target for purchases has so far gone 3 trillion, 6 trillion, 12 trillion…

The Yen

Here there has been a shift as the US Dollar has firmed a little presumably in response to the higher bond yields we have been noting. This has meant the Yen has weakened to 108 versus the US Dollar as opposed to the 103/4 we had become used to. The Pound has also risen to 150 Yen another development which the Bank of Japan will welcome.


There has been some extraordinary reporting on the equity holdings of the Bank of Japan. But they forget that the present share price relies on its enormous buying. No doubt other investors have front-run it so there has been a bow-wave in front of the Whale itself. Next comes the issue that even at around 29,000 it still feels the need to buy which is revealing and tells the lie to this from the Asia Nikkei last December.

If the Bank of Japan were a hedge fund, it would be congratulating itself on a blowout year, and getting ready to pay out enormous bonuses………A highly successful contrarian call,

In fact so successful that they er well….

If the BOJ carries on with its current strategy, it will eventually end up owning enough of the Japanese economy to gladden the heart of Karl Marx.

Indeed it seems to be a policy with no end.

So, what to do? The BOJ could sell its holdings, but ETFs have limited liquidity. Winding down such an enormous portfolio might cast a pall on investor sentiment for years.

So far it had been just that.

Intended to be a temporary measure, the policy has endured much longer than expected,

Not on here it has not as it has been obvious to us it is like the film “No Way Out”. Or as Joe Walsh put it.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door


Can central banks ever unwind QE?

As we look around we see that much of the present economic situation is grim and disappointing, but looking ahead there is hope for recovery and improvement. Much of that is based on vaccines but also some countries have kept the Covid-19 virus under more control anyway. This poses quite a problem for central banks who have deployed monetary policy about as fully as they can. Some of you may remember the previous Bank of England Governor Mark Carney denying that monetary policy was “Maxxed Out”. But now we face a situation where the official Bank Rate is at 0.1% or 0.4% below the level he assured us was the “lower bound” for it.

If we switch to QE (Quantitative Easing) or bond purchases we have also seen intervention on an extraordinary scale with the numbers being updated for the UK by the Bank of England yesterday.

The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the
issuance of central bank reserves, at £20 billion. The Committee voted unanimously for the Bank of England to
continue with its existing programme of UK government bond purchases, financed by the issuance of central
bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so
the total target stock of asset purchases at £895 billion.

In terms of progress towards that this is where we are.

As of 3 February 2021, the total stock of assets held in the Asset Purchase Facility had reached £759
billion, an increase of £14 billion as part of the £150 billion programme of UK government bond purchases
announced on 5 November 2020.

They are progressing at £4.4 billion a week and also announced that would be the future pace at least until their next meeting.They would argue that this fits with this.

The February Report projections assumed a 4% fall in GDP in 2021 Q1, leaving it around 12% below its
2019 Q4 level.

But things get more difficult as we note it will continue long beyond that into this.

GDP was projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme
was assumed to lead to an easing of Covid-related restrictions and people’s health concerns. Consumer spending was expected to rise materially, supported by households running down around 5% of the large pool
of additional aggregate savings accumulated while spending on some activities was restricted……. GDP was projected to reach its 2019 Q4 level in 2022 Q1.

That is rather awkward because they are supposed to be setting monetary policy two years ahead ( as that is the time it takes policy decisions to impact on inflation). So as we are at what might be called emergency squared levels ( as after all a 0.5% Bank Rate was an emergency measure) they have a problem.

The Policy Response

There was a minor one and then a more major shift.

The Committee continued to envisage that the pace of purchases could remain at around its current level initially, with flexibility to slow the pace of purchases later.

That is the more minor one and whilst it looks like a response to an improving economy by reducing purchases it has quite a flaw. Having set a target of £150 billion extra that simply means they will be buying for longer and may end up like the Riksbank of Sweden with a procyclical policy or pumping up a boom.

The more major response was this.

the Committee agreed to ask Bank staff to commence work to reconsider the previous guidance on the appropriate strategy for tightening monetary policy should that be required in the future.

Okay. Now that is good because as you can see below the previous stance was really rather silly.

That previous guidance stated that the stock of purchased assets would be expected to be maintained until Bank
Rate reached a level from which it could be cut materially. And, in June 2018, the Committee had agreed that it
intended not to reduce the stock of purchased assets until Bank Rate reached around 1.5%.

The reason why that was silly is that you are setting out to reduce the price of your bonds by acting like that. So the Bank of England will not only have overpaid on the way in but will have got a lower and depending on circumstances a much lower price on the way out. At a time when central bank ethics are being questioned ( ex central bankers accepting large sums from hedge funds) giving markets an unnecessary free lunch not only looks bad it is a type of soft corruption. There are elements of this that are simply an exchange between the Bank and HM Treasury but it is not only that as private players are involved.

The trail now goes cold and this is because in my opinion they simply want to make it look like they might so this whereas in reality they have no intention at all.


Any reversal here is more problematic and relates to any area where you buy private-sector assets. I pointed out above that even with sovereign bonds not all of the transactions are on the state balance sheet well here many of them are not. We can take that further by looking East.

The Bank of Japan has taken over as the biggest owner of the nation’s stocks, with the total value of its holdings climbing well above $400 billion.

Massive exchange-traded fund purchases by the Bank of Japan to support the market amid the pandemic this year combined with subsequent valuation gains pushed its Japanese equity portfolio to ¥45.1 trillion ($433 billion) in November, according to estimates by Shingo Ide, chief equity strategist at NLI Research Institute. ( Pensions and Investments)

That is from December and is already out of date because it bought on four more occasions in January. Actually it buys every day for “investment in physical and human capital” but at 1.2 billion Yen they are relatively minor. Although of course it is revealing in itself that 1.2 billion is relatively minor.

The problem here is based on the fact that you have created a false market. What I mean by that is that you put it at a price that it would not otherwise be. This has been an explicit policy aim of the Bank of Japan via the way it bought on down days and last year in increasing amounts. So whilst from a narrow point of view the 437 point rally this morning to 28,779 looks great there is a catch. How do you ever sell your position without sending the market back down? So whilst The Tokyo Whale has a large marked to market profit how does it ever take it? At the extreme we have recently been taught by GameStop the difference between realised and unrealised profits.

Maybe there will be a surge into Japanese equities and it can exit but the catch is that we are near thirty-year highs, so what is high enough?


So there is an issue for reversing QE for both public-sector assets ( government bonds) and private-sector ones ( equities and corporate bonds). The problems are now two fold. The first is something that has been around for a while. Economies have not grown fast enough ( or in some cases at all) in general to help oil such a move. The brief opportunities have been missed ( I wrote a piece in City-AM in September 2013 suggesting it for the UK).

The next is that markets have become dependent on it. For example if we look at the Nikkei 225 equity index we see that it began the year over 27,000 but even so the Bank of Japan bought some 50 billion Yen on four occasions in January. So at what level does it think it can stop? After all we are near to thirty-year highs.

That factor is even more important when we look at bond QE. Government’s have become dependent on the low bond yields that all the QE has created. This is all put very neutrally by the Bank of England.

The recovery in global GDP continued to be supported by policy measures.

So how do they stop? Especially as we note that those coming to power ( assuming Mario Draghi does in Italy) are calling for “More! More! More!”

“Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.” “Such an increase in government debt will not add to its servicing costs.” ( Financial Times op-ed)

Japanification and Turning Japanese

As we approach the end of 2020 the subject of Japan and its economy should be in our thoughts.There is the traditional Japanese policy of introducing moves when us gaijin are celebrating Christmas and the New Year. Also there is the issue of us turning Japanese a subject we have been noting for years but has been rebadged as Japanification.

Interesting article in Asia Times, addressing how the Japanese government basically nationalized the Japanese stock market ( The Market Ear)

Here is the Asia Times.

The concept of a creature dining on its own tail – suggesting a self-generated growth cycle – is a macabre one. So how about blowing it up to its logical limit: A whale eating its own tail?

In fact, this “whale of a tale” – excuse the puns – is exactly what is happening in Japanese financial circles.

Slightly different from The Restaurant At The End Of The Universe where it is a cow which advises you to eat it but in line with out Tokyo Whale theme. It then goes further.

The Bank of Japan recently became the nation’s top holder of stocks, owning more than US$430 billion’s worth. That means Japan’s monetary authority is now the nation’s investment “whale” – pulling the title away from its Government Pension Investment Fund, or GPIF.

There are several contexts here. It is interesting that the state and the central bank are not being separated in a trend I welcome. It is only really those who want a job at a central bank who plug the line that they are independent these days. On a technical level such purchases have to be backed by the national treasury in case of losses at which point the central bank is singing along with Colonel Abrams.

Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trapped
Can’t you see I’m so confused?
I can’t get out

As to nationalisation I think we are on that road but not fully there yet. You can indeed control something by owning less than 100% of it but I do not think that 35.1 trillion Yen and rising is enough. So far in December the Tokyo Whale has contented itself with a light snack of 1.2 billion Yen a day of purchases. On the other side of the coin it has been associated with a much higher equity market with a succession of near 30 year highs being recorded on its way to 26.732.

Looking at from a flow point of view with the Tokyo Whale buying large amounts on down days we do get closer to a nationalisation point of view. Anyway it is in at around 19,500 so has a profit which is over 10 trillion Yen according to the NLI ( Nippon Life) Research Institute. Of course taking the profit is rather problematic because we are at these levels because of the purchases. A perspective on this is provided by the fall in March to 16.358 when the Tokyo Whale was losing quite a bit. Been quite a rocker ride since then hasn’t it? So well done if you have been long.

The Yen

Here I plan to look at the Yen versus the place which looks in most danger of Turning Japanese which is the Euro area. First let me address the US Dollar where if we ignore the March moves the Yen has been around 104 for a while. There is a cautionary note because many of you may remember that it going there in early 2019 in the “flash rally” was a shock and indeed an overnight one. So the Yen has been both strong and mostly stable neither of which fits with the Abenomics arrow for this area.

Now let me switch to this morning and here is the Reuters Global Markets Forum.

#ECB‘s Panetta Says Inflation Will Remain Subdued For A Protracted Period… Panetta Says For Monetary Policy, This Means Providing Certainty About Financing Conditions Well Into The Future; Says The #PEPP Envelope Can Be Further Expanded And Extended, If Warranted.

He could be describing Japan where inflation has been subdued for decades now. As of October there was a complete failure for the Bank of Japan as the CPI was -0.4% as opposed to the 2% which is apparently always around the corner. In the Euro area inflation was -0.3% and is expected to be -0.3% for November as well.

The idea of QE bond purchases being extended is very Japanese too as I stopped counting when we were on the nineteenth version of it in Japan. Indeed it must have been seen as a loss of face as it was officially renamed QQE to solve that problem. Or as the Asia Times put it.

Two years ago, the BOJ’s balance sheet surpassed the size of Japan’s $5 trillion economy amid governor Haruhiko Kuroda’s quest to end deflation.

Switching to interest-rates then in theory at least the Euro has the advantage in the global depreciation game with a deposit rate of -0.5% versus the -0.1% of the Bank of Japan. But the crucial point here is that it is the Euro which has been rallying and is at 126 Yen. It has a way to go to reach the 135 of January 2018 but over the past year it has been rising.

Conventional metrics may be failing us here and it may be the interest-rate differential that is weakening the Euro via a new carry trade. If so it may be stronger than it looks.

The economy

This is far from inspiring as this from the NLI ( Nippon Life) Research Institute highlights.

The real GDP growth rate is forecast to be minus 5.2% in FY 2020, 3.4% in FY 2021 and 1.7% in FY 2022. It will take
time for the level of economic activity to return to pre-Corona levels, as securing social distance will continue to curb the consumption of face-to-face services. Real GDP levels will recover to pre-Corona levels (October–December
quarter of 2019) in the July–September quarter of 2022. The economy will return to its most recent peak (July–
September 2019) before the consumption tax hike in FY 2023.

This morning has brought some slightly better news from the Tankan survey.

TOKYO (Reuters) -Japanese business sentiment improved at the fastest pace in nearly two decades in October-December, a key central bank survey showed, a welcome sign for the economy as it emerges from the initial hit of the coronavirus pandemic.

But companies slashed their capital expenditure plans for the year ending March 2021 and a measure of near-term sentiment worsened, as a resurgence of infections reinforces expectations any recovery in the world’s third-largest economy will be fragile.

Again we are left mulling something of a similarity between the Euro area and Japan in terms of economic prospects.


There is another familiar beat to all of this so let me dip back into last week.

TOKYO (Reuters) – Japan announced a fresh $708 billion economic stimulus package on Tuesday to speed up the recovery from the country’s deep coronavirus-driven slump, while targeting investment in new growth areas such as green and digital innovation……..The package, approved by cabinet on Tuesday, would bring the combined value of coronavirus-related stimulus to about $3 trillion – roughly two-third the size of Japan’s economy.

Money is being fed into the system and looking back this is a case of same as it ever was. Yet the problems do not get solved as we observe a feature of Japanification we have all copied which is the central bank financing its government via its bond purchases. Not explicitly but implicitly.

In spite of the issues with this we have copied it and I have pointed out before the Euro area seems nearest with its trade surplus and strong currency giving it a touch of The Vapors.

I’m turning Japanese
I think I’m turning Japanese
I really think so
Turning Japanese
I think I’m turning Japanese
I really think so



The rise and rise of negative interest-rates

This week is ending with a topic that has become something of a hardy perennial in these times. By these times I mean the way that the Covid-19 pandemic has added to the credit crunch. An example has been provided this morning by Bank of England Governor Andrew Bailey.

BoE’s Bailey: As You Go Towards Zero And Into Negative Territory, Academic Research Says Impact Of Structure Of Banking System On Transmission Tends To Increase Most Countries That Have Used Negative Rates Have Not Used Them For Retail Deposits ( @LiveSquawk)

This has reminded markets again about the Bank of England looking at negative interest-rates which as an aside is none too bright at a time when the UK Pound is seeing pressure. Perhaps he has gone native early and started the old tactic of talking it lower. But on the subject of negative interest-rates he is both reinforcing a point made by some of his colleagues and disagreeing with them. The agreement is with this bit from Michael Saunders on the

In my view, there may be some modest scope to cut Bank Rate further but, if we do, it may be preferable to move in relatively small steps.

The disagreement has been over the impact on banks with both Michael Saunders and Silvana Tenreyro claiming they can help them a view which I consider to be evidence free. It is also contradicted by this from the Saunders speech.

For example, if the TFS (or TFSME) interest rate is
below Bank Rate, then banks could borrow funds at the (lower) TFS rate and earn the (higher) interest rate
on reserves. This subsidy for banks would come at the BoE’s expense.

Firstly nice of him to confirm my point that such policies are indeed a bank subsidy. But why so banks need a different interest-rate to everyone else especially if they are unaffected.

But the clear message here has been the development of the effective lower bound or ELB. I still recall Governor Carney telling us this.

The Bank of England’s website says that the “effective lower bound” for the interest rate it sets, Bank Rate, is the current rate of 0.5%.

This is the level, according to the Bank, “below which it cannot be set” – the lowest practicable official interest rate. ( BBC March 2015)

Of course that became 0.1% when we cut to 0.1% and Governor Carney had previously contradicted his own rhetoric by cutting to 0.25% after the EU Leave vote. Well now according to Michael Saunders it has got lower again.

As discussed above, I suspect the ELB is probably somewhat below zero, but there is uncertainty around this. With this uncertainty, it may be preferable to make any further rate cuts in relatively small steps, less than the normal 25bp increments.

So 0.5% became 0.1% ( after they cut to 0.25%) and now it is somewhere below 0%. Were it not so serious this would be a comedy version of central banking 101. The other ridiculous part was claiming it was 0.5% when only across The Channel the ECB had cut below 0%.

The road below zero has been littered with official denials, although the record remains with Governor Kuroda of the Bank of Japan who imposed negative interest-rates only 8 days or a Beatles week after denying any such intention in the Japanese parliament.


We did not get an ECB interest-rate cut partly because they had reined back on that and partly because it looks as though there was some dissension in the camp.

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde brokered a difficult compromise this week to secure backing for a new pandemic-fighting package of measures, but her battle to convince sceptics among her colleagues and investors has only just begun.

Her claim that she had ended dissension has gone the way of well many of her other claims. But there was a nuance to the interest-rate debate as she simultaneously said down and then up.

She starts by saying “we are enlarging the volume of lending that can be obtained at those rates” And then says “we are slightly changing the reference period…. to make it a little more challenging” Seems at cross purposes… ( @LorcanRK)

It has turned out that there has been some potential tightening here, but I would not worry about it too much as once they realise it will hurt The Precious! The Precious! it will be changed. The interest-rate of -1% remains but how much of that banks can access has potentially been reduced.

I would not worry about this too much as once somebody points out to Christine Lagarde that she has made another mistake this will be reversed.

Bond Yields

We can continue the theme of mistakes by President Lagarde as someone was keen in the ECB messaging to make sure there would not be another “we are not here to close bond spreads” debacle.

We will conduct our purchases under the PEPP to preserve favourable financing conditions over this extended period. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy.

This was a subplot to the main event in this area.

Second, we decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. We also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

We can now move to what The Frenchman in the Matrix series of films would call cause and effect.


The 10-year Spanish bond yield turned negative for the first time ever. Still somewhat of a national embarrassment that Portugal went there first, I suppose. ( @fwred)

Fred has rather stolen my thunder about what had happened in anticipation of the move.

Yesterday Portugal joined the euro zone’s growing pool of negative yields as 10-year YTM dropped to -0.1% for the first time in history.



As I have been typing this there has been a reminder of old times for me and well you can see for yourselves.

Money Markets Assign 65% Probability Of 10 Bps Bank Of England Interest Rate Cut By March 2021 Vs 16% At Start Of Month ( @LiveSquawk)

It is hard not to laugh as a cut of 0.1% after cuts approaching 5% would do what exactly? But it would appear that for rate cuts central bankers keep singing along with the Average White Band.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

In terms of the UK we do already have negative interest-rates as both the two-year ( -0.14%) and the five-year yields ( -0.11%) are already there and as a real world issue they feed into mortgage rates because so many are at a fixed rate these days.

In terms of the world well it is arriving right now in a land down under.

An auction of three-month Australian notes on Thursday saw an average yield of 0.01%, with buyers who bid most aggressively at the sale receiving a yield of minus 0.01%. ( Bloomberg)

Adding in time to this.