Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

And there’s a bitter irony.

The Bank of Japan’s surprise Negative-Interest-Rate party for stocks set a new record: it lasted only two days.

Today a week ago, the Bank of Japan shocked markets into action. As the economy has deteriorated despite years of zero-interest-rate policy and Quantitative and Qualitative Easing (QQE) – a souped-up version of QE – the BOJ announced that it would cut one of its deposit rates from positive 0.1% to negative 0.1%.

Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe – the Eurozone countries, Switzerland, Sweden, and Denmark. But it was just another desperate move, a head fake, and once the dust would settle, the hot air would go out [read…QE in Japan Nears End: Daiwa Capital Markets].

Now the dust has settled and the hot air has gone out.

On Thursday, January 28, the day before the announcement, the Nikkei closed at 17,041 down 19% from its Abenomics peak of 20,953 in June 2015. Today, it closed even lower.

This situation is a bit of an embarrassment for the BOJ which has pushed Japanese asset managers of all kinds, including pension funds, particularly the Government Pension Investment Fund (GPIF), the largest such pension fund in the word, to get off their conservative stance, sell their Japanese Government Bonds which made up the bulk or entirety of their portfolios, and buy risk assets with the proceeds.

This they did, near the peak of the Abenomics bubble. While the BOJ was eagerly mopping up JGBs, the asset managers bought mostly Japanese equities, but they also bought global equities and corporate bonds. And the mere prospect of all this buying, the front-running by hedge funds, and then the actual buying drove up Japanese stock prices in 2014 and early 2015. The bet seemed to work out. Wealth had been created out of nothing. A few more years of this, and it might actually resolve the Japanese underfunded pension crisis.

Then the party stopped, and Japanese stocks swooned. In the second quarter of fiscal 2015 (June through August), the most recent report available, the GPIF lost ¥7.9 trillion, or 5.6%!

It was its first quarterly loss since 2008 during the Financial Crisis. Its decision to yield to the pressures of the government and the BOJ to plow into Japanese stocks, global equities, and corporate bonds, when they were at the peak, has turned into a fiasco.

So now the BOJ is trying to re-inflate these assets. For over two years, BOJ Governor Haruhiko Kuroda has been giving whatever-it-takes and no-limits speeches that were once lapped up by hedge funds and that fueled the big Abenomics rally, but that have since become ineffectual, and perhaps the butt of many jokes, as Japanese stocks continued to swoon.

Hence, on Friday last week, the bazooka: negative rates. After some volatility, the Nikkei soared 2.8% for the day. On Monday, it gained another 2%. But then the hot NIRP air came out of the market, and the Nikkei has dropped every single day since. Today, it closed at 16,819, having given up all of the two-day NIRP party gains, plus some. It’s now down 19.7% from its Abenomics high.

Pension fund beneficiaries in Japan will be ecstatic when they learn what this strategy is doing to their future.

That two-day 4.8% NIRP bounce set a new record for brevity and shallowness. In the Eurozone, the expertly managed rumors and eventual announcement of NIRP and QE powered a majestic rally in late 2014 and early 2015. But shortly after they actually kicked in, the house of cards came tumbling down.

Since the peak in April 2015, the DAX in Germany has plunged 25.1%, the CAC 40 in France 20.5%, the MIB in Italy 28.6%, and the IBEX 35 in Spain 28.4%.

Turns out QE and NIRP aren’t even doing anything for the real economy: after growing a measly 0.3% in the third quarter, Eurozone GDP is now expected to have grown another measly 0.3% in the fourth quarter. Those are the optimists that forecast that.

Like Kuroda, ECB President Mario Draghi has been out there with his speeches, signaling wildly about more easing, more NIRP, more or longer QE, more whatever-it-takes … to accomplish what exactly?

No one knows. Because these NIRP economies are sinking into the mire, stocks have crashed, and inflation, which these central bankers would love to heat up, remains stubbornly near something resembling price stability.

But there is a major asset class that has forcefully reacted to NIRP and QE: government and high-grade corporate bonds. In the NIRP economies, government bond prices have jumped, and yields have plunged. The German 2-year yield dropped to negative 0.5%, the 5-year yield to negative 0.25%. The 10-year yield, now at 0.29%, is barely positive. And the 30-year yield hovers at just 1%. In Japan, everything below the 10-year yield is negative. The 10-year yield, currently at 0.03%, could dip into the negative at any time.

The bitter irony for Japanese pension funds? The very JGBs that they sold to the BOJ upon the BOJ’s urging have since soared in price, while the prices of the risk asset they bought upon the BOJ’s urging have plunged.

So for government bond markets, the message is clear: central banks that print their own money rule. And for stock markets, the message is even clearer, and very ominous: The power of central banks to inflate stock prices, or even just prop them up, is toast.

But that’s apparently not going to discourage the Fed. Read… Negative Interest Rates Already in Fed’s Official Scenario

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  24 comments for “Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

  1. Vespa P200E says:

    Sadly the CB cabals are resorting to financial wizardry in the hopes of reviving the moribund economies under tight leashes from the bankster handlers.

    I think QE I worked, II kind of and III lasted too long (almost 2 yrs) to help elect comrade ObaMao and allow Benny to hand the baton to Janet still looking like white knight and of course enrich the bankster handlers.

    ZIRP lasted too long and geesh look what happened to 10 yr Treasuries yielding lower since Janet grudgingly raised the rate in Dec to save her fleeting credibility.

    So BoJ CB out of pure desperation follows the EU CB brethren into NIRP territory but alas it is not working for Kurosda-san with capital fleeing to greener pastures (guess 1 way to blow up the rather crowded Yen/USD carry trades). And the wonder boy of all China the center of the admiration from the West about how it has engineered economic wonder is about to face the music that much of the easy money lent are really NPLs with the common folks up in arms about the housing plateau (as one can build so many ghost cities), bear market and P2P Ponzi scheme not to mention factory closures and end of building boom with small and big SOEs shutdowns leading to unemployment.

    We indeed live in interesting times with CBs out of bullets and if anything easy money/credit/debt is yet to come to roost…

  2. Mark says:

    Four new printing presses (KBA printing press) delivered to Ottawa and installation in process.
    Anyone guess what is future outlook in Canada? This info is from very reliable source.
    We are not moving to cashless society, this is called “no value society”.
    “If you can’t fix it, paper it.”

  3. Dan Romig says:

    “Free Markets” rule!

    Anyone know where I can find one on Planet Earth right now?

    • Vespa P200E says:

      There is no longer free market… Milton Friedman is rolling in his graves…

      What we have for the TBTF banksters are:

      1. Socialism – When faced with losses via outright bailouts where ultimately the losses are shared with taxpayers.

      2. Capitalism – where the profits are kept by the greedy banksters and sock the taxpayers with exorbitant interest auto/credit card loans on the money banksters got at ZIRP. And yeah they buy 2% Treasuries from treasury using ZIRP from the Fed – talk about symbiotic money making scheme for the banksters in the interest of the Treasuries and Fed. And do the dirty front running the Treasuries auction to coax in Chinese (and their cohort Belgians) to pay more – rigged bidding.

    • hidflect says:


  4. Spencer says:

    Looks like the green they used on gold did not work today. I love that color, gold.

    Have a pleasant weekend, I am.

    • hidflect says:

      Make even more money with gold miners like ASX:EVN than going long on gold.

  5. walter map says:

    Many years of research convinces me that all these distortions are the direct and indirect results of grossly inadequate regulation of the financial industry, one way or another.

    Twenty or thirty case studies drawn from any articles posted here make it more or less obvious. But to say what happens is not enough. The need is to say why it happens and what should happen instead.

    Nobody can argue with me about this. At least not honestly.

    We should think talk that. And then we should talk about that.

    • wkevinw says:

      Most problems in the world today are from not enforcing laws/regulations. We have plenty of regulations. You have to have leadership skills and understand incentives (e.g. micro-economics) in order to effectively enforce laws.

      Several people had ideas of how to regulate financial institutions properly, e.g. Sheila Bair. She proposed to go into the big banks and treat them just like the smaller banks- kick out the management, “sell” to another institution, change the capital structure (equity and bonds both lose). Lower level employees and depositors lose nothing (at least below insured amounts).

      She was not taken seriously. This is one of the big reasons we have what we continue to have.

      Oh, and some of the banksters should be in jail, another failure to enforce laws by attorneys general.

      Oligarcy/crony-capitalism on full display.

  6. VegasBob says:

    The lessons that central bankers have yet to learn are these:

    1. Interest rate manipulations (e.g., ZIRP) may pull demand forward temporarily, but the effect will reverse itself out over time.

    2. Money-printing (aka QE) benefits only those with first access to the freshly counterfeited cash, i.e., the already wealthy.

    3. Negative interest rates are an academic absurdity completely devoid of common sense. That such idiocy can be contemplated as serious monetary policy is a testament to the desperation and stupidity of those who advocate such nonsense.

    4. Debt levels cannot expand faster than income forever. Eventually the cost of debt service consumes a greater percentage of income than a borrower can possibly repay.

    5. Eventually arithmetic reality will assert itself despite the central bankers’ policy manipulations.

    When #5 happens, and I think it is in the process of happening NOW, look out below!

    • Kam says:


      Excellent summary. I’ve added a few notes:

      The lessons that central bankers have yet to learn are these:

      1. Interest rate manipulations (e.g., ZIRP) may pull demand forward temporarily, but the effect will reverse itself out over time.

      2. Money-printing (aka QE) benefits only those with first access to the freshly counterfeited cash, i.e., the already wealthy FRIENDS OF THE BANKING ELITE. OUR MODERN DAY PRINCES.

      3. Negative interest rates are an academic absurdity completely devoid of common sense. That such idiocy can be contemplated as serious monetary policy is a testament to the desperation and stupidity of those who advocate such nonsense. THOUGH NIRP DOES ACHIEVE THE SAME OBJECTIVE OF ZIRP- TRANSFERRING WEALTH OF THE MANY INTO THE HANDS OF THE FEW.

      4. Debt levels cannot expand faster than income forever. Eventually the cost of debt service consumes a greater percentage of income than a borrower can possibly repay. AND EVERY DOLLAR PAID DIRECTLY OR INDIRECTLY FOR INTEREST ON CONJURED DEBT IS A REDUCTION IN FUTURE INCOMES ( SPENDING POWER) THEREBY NULLIFYING THE STATED OBJECTIVES OF ZIRP/NIRP- THAT IS, GETTING THE ECONOMY TO GROW.

      5. Eventually arithmetic reality will assert itself despite the central bankers’ policy manipulations. BUT NOT WITHOUT THE MANY SUFFERING AND THE FEW ROLLING IN GLUTTONY.

      • nhz says:

        I don’t agree about points 2 and 3: QE and negative interest rates (in Europe) have hugely benefited a large group who are not wealthy at all: those with huge personal debts or huge mortgages.

        Especially for the baby boomer generation (who often own ‘millionaire’ homes in Europe) this is working miracles: yes, in many countries the pension fund money will evaporate within 10-20 years due to the current policies, but that’s a problem for the next generation. For now the boomers are still collecting their generous pensions (that they didn’t really pay for). And yes, the current absurd valuations of homes will come down again when interest and mortgage rates revert, but that could take a long time – for now the owners can (again) sell their homes for top dollars or keep living in their mortgaged home for a cost that is way below the real cost (in my country 2-4x lower than cost of renting a similar home, rest of Europe less extreme but often similar problem).

        So it isn’t only the 0.1% of parasites at the top that benefit, it is also a huge percentage of the population that benefits (at the expensive of others, and most of all at the expense of future generations). And that’s why it will continue for much longer.

        I don’t know about the US, but in Europe those on social security have been doing very well over the last ten years, often their spending power has increased. Spending power for government workers has increased even more. Unlimited funds available for migrants as well. And why not, government gets paid for borrowing money! Only the real middle class, those who are self-employed or work for companies outside the government-subsidized circus have been squeezed by a declining real economy, increasing taxes, surging rents and other ‘stealth’ inflation.

    • Petunia says:

      I was listening to one of the forums broadcasted from Davos and stupid doesn’t do it justice. It is a bunch of mumbo jumbo from guys who want to sound smart about stealing everybody’s pension money. Please try and listen to one of these sessions and you will never invest again.

  7. John Doyle says:

    Like, who cares what gyrations are going on with pension funds and the like?
    The Japanese Central Bank can always make up for any losses at any time of its choosing and every time in full.
    That’s what being monetary sovereign can do, and why Greece is in such a pickle now. It forgot to understand how vital it is to be MS!!!

    • Wolf Richter says:

      The Bank of Japan cannot create wealth. All it can do is create electronic numbers. That’s not the same as wealth. Over the longer term, a pension fund needs wealth to pay retirees, not electronic numbers. You can’t “print” wealth, as much as you would like to. You can only “print” electronic numbers, which has the effect of dividing up the existing wealth into smaller pieces and redistributing it.

      • The Rover says:

        So Wolf what’s your interpretation of A Smith’s natural price of goods vs the ‘market price’ and how it relates to wealth?

        This is all semantics, but suggest you read (and it’s a tough one it is as it is mostly prelude and requires an understanding of how F*d up many basic empirical scientific methods are. Hence we have F*d up economic assumptions based upon highly flawed interpretations of how scientists supposedly think about the world around us.

        All the while many scientists understand the nuanced flaws while the layman -Ivy losers who create economic theories barge forward, while sinking into the quicksand beneath. (i.e understanding the difference between median vs mean, but taking it to the level of Boltzman distributions).

        Nicholas Georgescu-Roegen-

        “The Entropy Law and the Economic Process”

        Be warned ! Reading this book is a process!

  8. Jonathan says:

    Japan policymakers:

    1. Keep printing money.
    2. ???
    3. Economy will recover!

  9. Winston says:

    It’s always amazing to me that despite the fact that their economic projections are always way off, central bankers worldwide never admit that the economic theory upon which they base their models must be severely flawed. No one in real authority ever seems to bring up that obvious point either. Of course, when it comes to central banks, the member banks in the cartel are the ones in “real authority” in the U.S. at least. What I’d like to hear is more Congressional testimony questions like, “You people don’t seem to actually know what the hell you’re doing,” but since the banks “frankly own the place” according to Sen. Dick Durbin, I can understand why I don’t.

    • Jonathan says:

      What is just as amazing is the same cartel and economists labeled us as “consumers” that we have an unwritten obligation to support their greed fueled lunacy.

  10. d says:

    Then only time CB’s ever agree, is when it involves reducing the value and power of the US $, apart from that. They are all trying to game the system, Selfishly for national economic advantage.

    In an financially interconnected world, interconnected and agreed CB policy is required. With the Major gamer china in the mix, using a different rule book from everybody else. Chaos must ensue.

    Hence globalization in its current form must be judged a huge failure.

    TPP may be the first step in some group rule changes. As china can only get its goods in, through third party back doors until it agrees to play by the same rules as everybody else.

    TPP will change chinas behavior, as to whether it will be a positive change, time will answer that.

  11. mark says:

    There is only one regulation needed in a truly free market…the risk of failure.

Comments are closed.