Why the Bank of Japan Can’t Stop a Sudden Collapse of the Yen

On Friday morning in Tokyo, the Nikkei stock index was up again, at 20,600, highest in 15 years. Since “Abenomics” has become a common word in December 2012, the Nikkei has soared 128% on a crummy economy, terrible government deficits, and an insurmountable mountain of government debt. This 10-day run of straight gains, or 11-day run if Friday plays out, is the longest glory streak since February 1988 when Japan was in one of the craziest bubbles the world had ever seen.

The subsequent series of crashes had the net effect that the Bank of Japan became engaged in propping up the stock market not only by pushing interest rates to zero and dousing the market with money via waves of QE, but also by buying equity ETFs and J-REITs.

Prime Minister Shinzo Abe has made asset-price inflation his top priority. Under pressure from the BOJ and the government, state-controlled entities – such as the Government Pension Investment Fund with ¥137 trillion in assets – are dumping Japanese Government Bonds into the lap of the BOJ and are buying stocks with the proceeds.

Foreign hedge funds have jumped into the fray, which is the hot money that can evaporate overnight. But fear not, every time the Nikkei drops 100 points or so, the BOJ starts buying, or creates the perception that it’s buying, and within minutes, stocks shoot back up. It’s part of the BOJ’s relentlessly communicated policy to inflate asset prices come hell or high water.

And hell or high water may now be on the way.

Ultimately, monetary policies hit the currency. So the yen has sagged about 35% since Abe took over. On Thursday in Tokyo, it hit ¥124.3 to the dollar, the lowest since December 2002. Friday morning, after some jawboning by the government and the BOJ, it recovered a smidgen.

This is still on the BOJ’s wish list. But with a limit. Major Japanese companies, such as Sony, are already complaining: they’ve been offshoring production, and now their products have to be imported into Japan, but the yen makes imports very expensive. Raw material importers are complaining. Energy users are complaining. It’s the worst sort of inflation.

But the yen has done wonders for Japanese investments overseas and for Japanese multinationals. They’re converting overseas profits into sagging yen. These paper profits are hoped to stimulate more feverish buying in the stock market. Sort of an endless loop: the lower the yen, the higher the paper profit, until the yen approaches zero and profit infinity, or something.

This is what started to happen last fall to the Russian ruble. When it happens slowly, central banks welcome it as part of their currency war. But if it happens rapidly, it causes all kinds of economic mayhem. Wealth destruction hits coddled investor classes and corporations, and this must be stopped.

The Russian central bank jacked up its benchmark interest rate to 17% and sold large amounts of dollars and euros and bought rubles with the proceeds. It stopped the ruble crash!

The central bank did because it could. Unlike the Japanese government, the Russian government isn’t drowning in debt. Much of the nation’s debt is held by state-owned corporations that could borrow cheaply in dollars and euros overseas, at least until the sanctions set in. And the government has oil and gas revenues, though they’re lower than they used to be.

Japan can’t do any of this to stop a sudden plunge in the yen.

The BOJ cannot raise its benchmark interest rate to 17% or 10% or even 2%. It would bankrupt the country instantly. The BOJ must keep even long-term rates near zero.

And it cannot sell its ample foreign exchange reserves and buy yen with the proceeds because it would be a total and instant reversal of QE! Instead of buying assets and handing out yen, it would have to do the opposite without warning, in one fell swoop. It would have to abandon QE and at the same time buy back the yen it had until then dumped into the market.

Asset prices – its carefully constructed house of cards – would crash unceremoniously. Interest rates would soar across the spectrum. Much of Japan’s paper “wealth” would go up in smoke. And the government, which borrows nearly 50% of its total outlays, could no longer borrow. It would be reduced to where Greece is today. Only worse.

And that will never be allowed to happen. So the BOJ can’t do what Russia did. It can only jawbone the markets. It can talk of the yen-selling being “overdone.” It can regret the “rapid decline.” It can say that “excessive exchange-rate volatility is undesirable,” as a government spokesman just phrased it.

Jawboning works. Until it doesn’t. At some point, the markets want to see action. They want to see someone else buy yen. But the BOJ can’t be that buyer. It can only jawbone.

To keep the nation from descending to where Greece is, the BOJ will keep its iron fist on the government bond market. It will keep interest rates near zero. It will keep JGB prices inflated. And it will keep the government funded. It will do so by buying JGBs and handing out yen, no matter what.

The rest is secondary – the yen and the stock market, both. So when the yen begins to crash past all jawboning, there might not be much of a floor underneath it.

If Japan is lucky, there won’t be a sudden ruble-like 60% crash in the yen, on top of the 35% swoon it already experienced. Or it may come years down the road when another government is in place and when a different crew runs the BOJ. That’s the plan for those folks today. After us the deluge. But if something nevertheless triggers it in an untimely manner, or if it starts coming unglued on its own, it will get ugly. It will be the mother of all currency debasements.

Some companies are already placing their chips. Apple is planning to issue its first yen-denominated bonds next month to benefit not only from the ultra-low interest rates, but also from a potential yen crash that would wipe out much of the dollar value of these bonds.

Wall Street has already jumped on the opportunity. It has created a special sausage maker: US junk goes in; yen-denominated Triple-A-rated bonds come out. Read… How Wall Street Is Exporting Toxic Junk Loan Waste To Japan

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  34 comments for “Why the Bank of Japan Can’t Stop a Sudden Collapse of the Yen

  1. Mark B Spiegel says:

    This is absolutely correct to a certain point, but you’re not following things through to their inevitable conclusion. Of COURSE the BOJ can’t afford to let interest rates climb, but you’re assuming (incorrectly, I believe) that if the yen wildly crashes they can prevent such a climb. What do you think will happen if USD/JPY goes to 250, 300 or 350 and the peoples’ buying power is absolutely destroyed? The BOJ will HAVE to stop printing yen to buy the bonds and will instead outright default on them. That’s why although I’ve been hugely short yen since early 2012, I’ve also been significantly short JGBs for around the last six or so months (from around 50bp on the 10-year). It’s impossible to lose much beyond a small cost of carry, and as the yen can crash at any time (Japan’s printing over 3% of its monetary base every MONTH), so can those bonds.

    • Wolf Richter says:

      Mark, I can see your logic from an American point of view, but not from a Japanese point of view.

      The BOJ and top people in government understand that much of this paper wealth the Japanese sit on (JGBs they hold directly or indirectly as assets) will sooner or later go up in smoke. The way they will try to let it go up in smoke is via a yen devaluation. But they want it to be orderly and slow-moving so that the players can adjust to it, and so that it drags out into the next generation. That’s the ideal outcome for them.

      If the BOJ loses control over the yen, this adjustment, rather than taking many years, will take place suddenly. But they will NEVER officially default on JGBs. They don’t need to, and they can’t afford to. The government continues to borrow nearly 50% of its outlays. There is zero mood to change this in a significant way. They’re just dabbling at the margins. So they MUST keep up the charade of the JGB being a safe investment, even if it loses purchasing power.

      And the BOJ can buy every single one of them, if it wants to.

      The yen will only drop so far. When it gives Japan too much of an industrial advantage as an exporter, it will stop falling, or other countries will respond.

      I think shorting the yen will continue to be a great bet. But I have said for years that I wouldn’t short JGBs. I no longer have any money on line on this, so I hope you’re going to come out OK.

      • Mark B Spiegel says:

        Wolf, here (in your response) is what I see as a logical inconsistency:

        “…they MUST keep up the charade of the JGB being a safe investment, even if it loses purchasing power. And the BOJ can buy every single one of them, if it wants to. The yen will only drop so far. When it gives Japan too much of an industrial advantage as an exporter, it will stop falling…”

        I don’t think you (really, Japan) can have it both ways, in that if it keeps printing enough yen to “buy every single one of them” there’s no way in heck the yen will stop falling. At some point they’ll have to stop printing and they WILL default. Please explain to me why you think they can both “buy every single one of them in perpetuity” AND “the yen will stop falling” (assuming, of course, that the rest of the world isn’t monetizing its own debt even faster)… Thanks.

        • Wolf Richter says:

          The dollar lost 99% or so of its value over the past 100 years. No official default. Japan will not default on its JGBs either. They’ll simply devalue them via the yen.

        • Mark B Spiegel says:

          ” Japan will not default on its JGBs either. They’ll simply devalue them via the yen.”

          So you’re really saying that there’s no point at which a screaming Japanese public will force an end to the hyperinflation (or even just “high inflation”). I guess that’s where we disagree, because while there are certainly cultural differences, people are people and there’s only so much pain they’ll tolerate.

        • Wolf Richter says:

          I don’t think there will be hyperinflation. But that’s a risk. When hyperinflation kicks in, all bets are off. I just think that’s unlikely. Russia didn’t get hyperinflation though the ruble plunged 60%. It already had quite a bit of inflation, and it got more, but not hyperinflation. So I don’t think that’s a scenario I would plan for. I think the outcome will be something a lot less dramatic, but still painful for the Japanese people (Russian people too got hit hard when the ruble plunged).

        • NotSoSure says:

          I have the most superficial understanding of the Japanese culture, but @Mark, they are quite different. Fukushima vs Katrina is one example. Another example is the Shinkansen. Just look at their statistics in terms of lateness. Out of this world. It’s the first time I came to understand how people can be the superior part of the system, not otherwise.

          I have lived on and off in the Bay Area for more than 12 years. The BART and the Muni still provides a constant source of ugly entertainment till now.

          America == 3rd world country.

  2. michael says:

    I feel sorry for the average Japanese citizen. Hopefully Abe and the rest of the roaches in the government will suffer more. I know, useless sentiment.

  3. Vespa P200E says:

    The once moribund “sickman” of Asia came back to life 3 yrs ago with BoJ learning from the Fed on QE to oblivion except that BoJ doubled and maybe tripled the scale via buying equity ETFs and J-REITs. Heck maybe Janet, Mario and whoever in BoC will mimic BoJ’s formula and all FIAT based global currencies in unison collapse (?)…

  4. NotSoSure says:

    I am jealous of the fact that you are in Japan, my number 1 most favorite country to visit. The Japanese government can’t stop the slide, but as you mentioned in your comment, other countries can.

    Who are you gonna call? Not the Ghostbusters, but there’s always the Fed and the Chinese central bank. Heck, you can throw in the ECB as well.

    • Wolf Richter says:

      I’m actually not in Japan (but in San Francisco). We used to live there. My in-laws live in and near Tokyo. And we have lots of friends there. But from the way the first sentence in the post was written, I can see why you might have placed me in Japan. So I fixed it. Thanks!

  5. Al Tinfoil says:

    Noooo Problem. If the yen or JGB go south too quickly, a mystery buyer in Belgium will jump in to purchase and push up the values. We have seen this before.

  6. Julian the Apostate says:

    I don’t see how this can go on for another generation, but then, I don’t see how it’s gone on for this long. Perhaps that was the point of crippling education, so rational analysis can’t reach critical mass, extending the bubble on the backs of the true believers in fiat ascendency. Zombies indeed!

  7. Dan says:

    Interesting, yes they are heavily indebted but still they are the largest holder of treasuries… what will japan do with all the treasuries they own??? will they sell them all to prop up the yen???

    • Wolf Richter says:

      That’s exactly what I said they cannot do (Treasuries being part of their foreign exchange reserves) because it would be like totally unraveling QE and doing the opposite of QE: buying yen and selling assets. It would crash their asset prices, including JGBs, drive up their yields to levels where the government can no longer afford the interest payments. It will put them where Greece is. They’ll never do that.

      Russia did that because it could. Japan cannot.

      Japan can invest those dollars overseas in other assets (switching from Treasuries to buildings, for example), but they can’t sell them to prop up the yen. It would bankrupt the government. It’s an ironic prison. But that’s what a dependence on QE and ZIRP does; it perverts everything.

      • a Texas libertarian says:


        You said that the BoJ cannot sell their treasuries, because they need them as asset reserves to prop up their JGBs and other asset valuations, and yet you mention that they can invest these same treasury holdings overseas?

        Forgive my ignorance, but isn’t this the same thing? After all, the BoJ must “sell” its treasury holdings in exchange for new investments overseas. Are you saying that it depends on what the BoJ buys with their treasuries?

        • Wolf Richter says:

          If they sell their Treasuries (or other foreign exchange reserves), and invest the proceeds overseas in other non-yen investments, there is no change. They’re just swapping one foreign-currency denominated asset for another. But if they’re selling Treasuries and buy yen with the proceeds to prop up the yen, they’re in effect reversing QE.

          Right now, they’re BUYING assets (JGBs, equity ETFs, etc.) and selling yen. They’re doing this to keep the government liquid, interest rates at zero, repress the value of the yen, pump up all asset prices, etc. If they sell Treasuries to prop up the yen, they would instantly reverse all this. The fireworks would be spectacular. They’ll never do that. That’s a self-destructive option.

  8. Julian the Apostate says:

    I remember a piece a while back, I think on Zero Hedge, about salarymen beginning to crack under the strain, self medicating to the point of acting out in public. As I understand the culture, this is a very unJapanese thing to do, as they are shame based socially as opposed to guilt based here. Could this be where their structure will crack and splinter rather than the financial level?

  9. Bad boy says:

    Hi, I do live in Japan, I have 3 paid in full properties one that is rented.
    I also have PM’s and 0 dept.
    I don’t do stocks or anything of that sort.
    What is your take on my position?
    Any advice would be accepted with gratitude.

    • Bad boy says:


    • Wolf Richter says:

      My advice has as much value as I charge for it, which is zero :-)

      But here it is: Enjoy life! Sounds like you’re in a good position to do so.

      • Badboy says:

        Thank you.

        • Dead at 18, Buried at 65. says:

          Hi bBdboy,
          You could always consider stocking up on food. A good 3 months supply- minimum!
          Then there is items to trade. Those items are : –
          Tobacco and cigarettes
          Alchohol – Hard Spirits are the best!
          Soap and tampons – including hygien sprays.
          Bulk coffee and tea
          Bulk Condoms. – see the prices in Venezuela
          Bulk Toilet paper
          Perfums and Aftershaves – as many as you can get. Including,…
          Bulk razor blades.
          Bulk Powdered milk and,…
          Bulk nappies.

          If you do this, it will ensure that you will be richer/wealthier and always far better off then everyone else!!!

          …When you have to leave Japan, make sure you find a good continent like Australia and live deep inland as much as possible before 2019!!! ;)
          (you won’t understand now, but you will not too long from now)

  10. mick says:

    I personally don’t believe that perpetually playing this fiat game is the plan. Yes, I know “they have to” if they want to avoid financial Armageddon, but that’s where my opinion differs from most.
    I look at history and see that our rulers are in fact not benevolent, they start wars which kill citizens so they can hold onto power, for as trivial reasons sometimes as the need for a distraction from their corruption.
    I consider that si since the FED was instituted, booms and busts have been the norm, far more than before. I could go on, but suffice to say, I don’t believe they need to uphold the economy at all times. Sometimes they view a crash as serving their best interests, timed right, and done right.
    Otherwise, you have to buy the suggestion that events like 2008 and 2001 were accidental, which I do not. They have complete control over markets and would not let a laughable 9 billion Lehman default crash their system unless they wanted it to.

  11. Cocoabean says:

    Why aren’t the Mrs. Watanabes of Japan buying physical gold hand over fist? Instead, they’d rather buy into the Ponzi-like paper asset markets.

    Puzzling…and myopic.

    • Michael Gorback says:

      Gold/JPY has followed a similar pattern to gold/USD. Steady decline until about 2000, then tripling until about 2013. Unlike gold/USD, gold/JPY dipped in 2013 and has regained the lost ground. Possibly gold has done exactly what it’s supposed to do for the Japanese investor.

  12. Baruch says:

    Hey, if they can get those nukes on line quickly, before the next catastrophic earthquake, there’ll be nothing to worry about. The only problem is figuring out how to blame it on the Chinese.

  13. Lee says:


    I wonder how much of those US Notes and bonds are actually held by the BOJ and how much are held by private entities?

    Private entities will sell (dump) their foreign assets including government notes and bonds when and if needed and bring back the funds (in yen) to Japan.

    A whole bunch of those foreign assets were probably bought at 100 yen per US$ or less and combined with capital growth in the underlying asset as well as depreciation in the yen now have huge capital gains sitting on the books………..

    My target for the US$/Yen rate for 2015 was 125 yen per US$ and my SWAG is 150 per US$ by the end of 2016.

    Guess we will have to wait and see.


    Good for you, but could you sell the properties you own in the current real estate market in Japan for a profit or for that matter even sell them?

    I’ve been watching a number of properties for sale in Japan for the past few years and they are still on the market even though the price has been reduced by 20% or more………..

    IIRC the rate of capital gains tax on real estate held for 10 years or less is 90% unless the law has been changed…….

    Makes for a very illiquid market.

    • Wolf Richter says:

      Lee, foreign exchange reserves (including the ca. $1T in Treasuries) are held by the BOJ. These reserves have declined since their peak in 2011. The decline has to do with the big trade deficits Japan has been running since that time. But the the BOJ has also BOUGHT some in 2013 (with freshly printed yen), and perhaps since then, in order to force the yen down. It caught some heat over it at the G-7 because that’s considered going nuclear in the currency war.

  14. KS says:

    U wrote
    “.. If they sell Treasuries to prop up the yen, they would instantly reverse all this. The fireworks would be spectacular. They’ll never do that. That’s a self-destructive option.”
    If that is the case, that means that Japanese MP should go only one direction, or just stop buying JGB. At best, temporary solution (considering continuing fiscal deficits). At worst, Kamikaze.

  15. Don says:

    What would happen if the BOJ were to buy ALL of the available Japanese gov’t bonds? [& in effect, retire them]. Could Japan then afford to issue bonds at a ‘normal’ rate of interest, and start over again?

    • Wolf Richter says:

      Good question. And very tempting. Countries used to do this routinely, including France before the arrival of the euro. It always leads to a fairly rapid devaluation, and every 20 years or so a “re-valuation” where three zeros or more are chopped off, so 1,000 francs become 1 new franc. It’s not a great system and leads to all kinds of distortions. But the Japanese are headed that way. The end result is that such a country CANNOT persuade the markets, its own people, and its institutions to buy ANY of the bonds at an affordable yield because they know what’s going to happen next: more devaluation.

  16. Scott Miller says:

    I am a few days late reading this post, but here is my question:
    Can the BOJ simply put these bonds in the shredder and never sell them? Does anyone believe that the FED will ever sell the bonds that they have bought as well? I was always under the impression, maybe falsely so, that QE was a debt monetization to extinguish the debt via a currency devaluation. Global debt has followed an exponential growth pattern for the past 100 years. We are now at the very steep part of this exponential growth, the end of the hockey stick. It does not seem that it can continue much longer now. Am I wrong about that?

    • Wolf Richter says:

      Scott, they can put them in the shredder – and they might, figuratively speaking. In that case it is pure, unadulterated monetization of gov debt. They would admit officially that they’re printing money to pay for decades of government spending. It will accelerate the very problem of the yen spiraling out of control. Monetary policy always end up doing its job on the currency.

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