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Japan: New Central Bank Chairman, Same Infinite Stimulus

Kuroda Hiruhiko (Chairman Kuroda) was appointed to chair the Bank of Japan - the 2nd largest in the world by assets - in 2013. On February 14th, the Japanese government nominated Kuroda's successor, Kazuo Ueda. Investors have speculated for months as to how the leadership change will affect the BOJ's decades-long stimulus program. The reporting in Nikkei Asia reflected this.

In many ways, Japan has been a dress rehearsal for future policy among other central banks for decades now. In the late 80s the country had a real estate boom financed by a surge in credit creation, and with that credit, private debt. In 1990 that boom turned to bust in the usual way: the credit tap closed and the prices of assets supported by that credit creation, fell. The Nikkei chart is just one of many that illustrates the crash.


Nikkei 225 Japan Stock Index

The Bank of Japan first cut its deposit rate below 1 percent (to 1/2 percent) in 1995, six years ahead of US Fed Chair Alan Greenspan cutting rates to 1 percent in response to the NASDAQ crash and 9/11. The BOJ has held its policy rate below 1/2 percent for 20 of the last 23 years, and below zero since 2016. US Fed Chair Ben Bernanke cut rates to zero in October 2008.

BOJ Deposit Rate (analogous to US Fed Funds)

Japan was the first central bank to use Quantitative Easing to try to boost the GDP growth and inflation rates in the country, beginning in 2001.

In three sentences, QE is the large scale purchase of assets by the central bank from banks and nonbank financial institutions. If the US Fed does $1 trillion of QE, the end result is: an additional trillion dollars of deposits held by nonbank financial institutions, an additional trillion dollars of bank reserves held by banks, and the transfer of $1 trillion of bonds from financial institutions to the Fed.

From 2001 to 2005 the BOJ accumulated 35 Trillion Yen in bonds (about $250B). Policy normalized from 2006 to 2009, until the response to the global financial crisis entailed a return to QE and rate cuts.

The BOJ also started "yield curve control" in 2016. Central banks typically make "monetary policy" by manipulating a short term interest rate, yield curve control goes beyond that to exert direct control over long term interest rates, too. In this case, the BOJ controls the yield on 10 year Japanese government bonds by promising to buy an infinite amount at a particular yield. That yield was once zero percent and is now a positive 1/2 percent.

Japanese 10 Year Government Bond yield

While central banks around the world are raising interest rates and unwinding Quantitative Easing in an effort to get their inflation rates back down to the nearly global target of 2 percent, Japan is trying to stimulate inflation up to 2 percent.

To that end, Ueda said he supports continued stimulus during his first testimony before the Japanese legislature, a continuation of the last two decades. His words spoiled hopes of returning to a real market for Japanese government bonds. With the central bank controlling the yield, activity in the10-year bond market fell off a cliff as investors have little incentive to buy or sell.

Traders who shorted Japanese 10 year bonds in a bet on the BOJ breaking with yield curve control are probably sweating bullets, as Ueda has reassured the world that he is committed to low interest rates and unlimited asset purchases for the foreseeable future.


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