“We had a lot of Drama in the Markets this Week,” Thanks to the Bank of Japan

Erode that confidence, and you have a crisis on your hands.

Japan has invented QE and zero-interest-rate policies. It conducted umpteen iterations of them over the past two decades. Throughout, it has demonstrated and documented with ample evidence that QE and ZIRP do not stimulate demand in the economy, though they can have all sorts of other effects. Now once again, Japan is out on front.

This week, something interesting happened, even by the standards of the NIRP-absurdity currently in vogue. The 10-year yield of Japanese Government Bonds (JGBs) rose sharply. It had been negative ever since the BOJ announced its negative interest rate policy in February and had dropped as low as -0.30% by late July.

But on July 28, the BOJ, to show it’s easing further, expanded its QE program by announcing yet another stock market pump-up scheme: it would nearly double its annual purchases of equity ETFs from about ¥3.3 trillion to ¥6 trillion ($60 billion).

At that point, 10-year JGBs began to lose ground and yields began to rise to where they nearly kissed 0% last Monday and Wednesday. On Friday, the 10-year yield edged down to -0.03% (there’s still a decimal difference between where it had been at the end of July, -0.30%, and today, -0.03%). So something is up.

Here’s Christine Hughes, Chief Investment Strategist, at OtterWood Capital

We had a lot of drama in the markets this week courtesy of confusing information out of the Bank of Japan (BOJ).

Many of the macro problems currently plaguing the developed world started in Japan decades ago (deleveraging, deflation) so changes in Japanese bond yields tend to lead global yields. Also, Japan has been a pioneer in terms of experimenting with unorthodox monetary policy. We had another taste of it this week.

News that the BOJ would carry out a “comprehensive assessment” of its monetary policy next week saw the biggest weekly rise in the long-end of the JGB curve in over 3 years sending bond prices plummeting worldwide. Also BOJ board members have leaked policy options to the press to gauge the market’s reaction (see here for details).

So far, we’re having an important problem with confidence in the BOJ. Firstly, while they have jawboned long bond yields higher, inflation expectations have actually dropped. These two metrics are supposed to move together. It means the market is not buying the BOJ’s rhetoric. This is not good.


Secondly, Japanese banks have fallen while the BOJ has jaw-boned the yield curve steeper (see here for more on what the yield curve is). This too means Mr. Market is balking at the BOJ’s latest policies. Not good either.


Markets are quickly losing faith in central banks this year and of particular concern is the recent dismissal by the market of the BOJ’s latest experimentation with the yield curve. In a world where our currencies are not backed by anything finite like gold, confidence is critical. Erode that confidence, and you have a crisis on your hands. Market reaction to any actual announcements out of the BOJ next week will be important. By Christine Hughes, OtterWood Capital.

The two biggest buyers of the shares of Japan Inc. are flying blind, and they don’t care. Read…QE, End of the Private Sector? Japanese Government Now Largest Shareholder of 474 Big Companies

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  44 comments for ““We had a lot of Drama in the Markets this Week,” Thanks to the Bank of Japan

  1. Its a “Tinker Bell” economy. Every time some one says “I don’t believe” another central bank[st]er’s wings fall off and they die…

  2. Robert says:

    “Bank of Japan Haruhiko Kuroda frankly admitted in June that his policies are guided by imagination — specifically, the Japanese public’s willingness to imagine they’re working.” [Bloomberg] “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.” And so he has been printing money like mad- that is what monetizing the debt is, after all, and yet all one hears in the MSM is that “despite everything, the BOJ is unable to stimulate inflation.” Who the hell would buy a Japanese T-bond? By imposing increasingly negative interest rates on the starving old ladies (so much for veneration) he had kept nominal bond prices up- in yen, that is- and guess what: of late, rates are headed up (all the way to zero[the Jap Zero?]- and anyone who was foolish enough to buy their bonds took a hit. And anyone who thinks there is no inflation has never visited the country.

    • MC says:

      In which case Mr Kuroda had better start flapping his arms.
      A good chunk of the Japanese people stopped believing in him years ago and it seems the big investors, both domestic and foreign, have followed suit recently.
      All his policies are achieving right now is keeping the Japanese government solvent.
      They failed to “thrash” the yen as much as Toyota and Mitsubishi wanted but generated a whole lot of “unwanted” inflation (food, energy etc).
      They failed to send the Nikkei 225 skyrocketing.
      They failed to reignite the 80’s housing bubble despite massive REIT purchases: outside the prime markets of Tokyo and Osaka prices are still declining in absolute term. Inflation adjusted it means Japanese homeowners are getting fleeced.

      It must be explained here why Shinzo Abe, Kuroda’s patron saint, manages not merely to hold on to power but to increase his majority with every election.
      The reason is fewer and fewer Japanese voters are bothering flocking to the polling stations. Granted, they were never truly enthusiastic about voting (even in the late 60’s/early 70’s, when Japan was booming and overtook Western Germany as the second economy in the world, the percentage of voters never reached 70%) but right now they are downright disillusioned about the present political system: latest elections saw a measly 42% of voters showing up, down from the previous 48%.
      It’s the same phenomenon observed all over Europe, with the difference there isn’t a true opposition to contest the ruling party. A modern day Kenseikai (a fiscally conservative party which tried stemming the rising tide of militarism in 20’s Japan) would probably made Abe’s and Kuroda’s lives a whole lot harder.

      • RE: … They failed to reignite the 80’s housing bubble despite massive REIT purchases: outside the prime markets of Tokyo and Osaka prices are still declining in absolute term. …

        Demographics may be a major part of the problem in that the population is shrinking thus increasing supply in relation to demand. https://en.wikipedia.org/wiki/Aging_of_Japan

        There is also the social problem that the Japanese young adults have adopted (or been bullied) into a late middle age life style, which does not include any sort of life outside of work, and thus a marked drop in the formation of new families, which would need housing. https://www.theguardian.com/world/2013/oct/20/young-people-japan-stopped-having-sex

        • kitten lopez says:

          Mr McDuffee–
          chilling article about Japanese young adults’ aversion to sex and intimacy. we’re seeing the SAME thing here in SF!!!! i could write a screaming RANT on this (and have) but not now. it’s SUNDAY…it’s gorgeous outside…


      • Thomas Malthus says:

        ‘Haruhiko Kuroda frankly admitted in June that his policies are guided by imagination’

        That is the motto of DelusiSTAN – if you can imagine it — then it can happen…

        This came second in the reality teevee contest held by DelusiSTAN to choose their national anthem


        I ‘imagine’ I don’t need to inform anyone which song won…. :)

  3. Maximus Minimus says:

    When the yield is negative, bigger number means higher prices, right? The bank of Japan probably employs expert mathematicians to tell it which way is up or down, but I am out of my wits.

  4. Lolo Gecko says:

    … things are swell … and they will get … even sweller ….

  5. dave says:

    seesaw battle with usd and yen. one goes down the other tries to drive the other up. both cant go down at the same time when both should go down at the same time. yellen says maybe a raise hike, yen goes down. no rate hike yen goes up boj QE’s yen goes down.

  6. OutLookingIn says:

    This is why the “War on Cash” has heated up over these past few weeks.
    For negative rates to “work” the central banks must outlaw all coin and cash, to prevent those who seek wealth safety by hoarding cash.

    The actual amount of real physical coin and cash is quite small at $1.38 trillion, bank accounts contain $10 trillion, stocks at $20 trillion, bonds at $38 trillion, and finally derivatives at $220 trillion.

    History is replete with the practical defaults of sovereigns through inflation and deflation. The past is also littered with dead fiat currencies that succumbed to monetary abuse.
    However, those who attempt to abuse gold find it cannot be replicated except by deception and the abuse of power, which invariably ends with the financial ruin of those responsible.

    This is why TPTB cannot control and cap the price of precious metals for much longer. Those who are seeking wealth safety have been diverted by negative rate bonds and from cash, by the “War on Cash” and into gold.

    • Jungle Jim says:

      The problem with the elimination of physical cash is that it would all but destroy the US Dollar as the world’s reserve currency. People in other nations would no longer see Uncle Buck as a safe haven and start dumping him. That would be a major blow to US world leadership/domination.

      The secondary issue is that it would amplify our dependence on the internet and make it an even more attractive target for unfriendly governments, non-state terrorists and good old homegrown crooks. And to frost the cake, we would be even more vulnerable to power outages in our increasingly rickety electrical power grids.

      • dave says:

        but isnt the inflation of the usd after people drop the currency wanted? dont they want to inflate the dollar to eliminate debt? usa debt freedom? i keep hearing deflation is the enemy. for me being joe nobody, i want deflation, too fricken expensive to live. as i have said before, if i could make half what i make now, working in a factory, and still keep my head above water, im in. life is too expensive. when its cheaper to buy another tv, car or whatever than it is to fix it, you have a problem. here in ontario, hydro is going up again. why? because we use less of it. we use too little and the costs are too high not to use it. so we jack up our rates. just looked at my water bill, i conserve water and i am only using about 2CM a month, so i dont use a lot my actual fixed costs are higher than my water usage. its too expensive for a family to run a house. its a very simple yet complicated situation. if expenses are too high consumers consume less and you get no growth.
        the central banks should loan people money, instead of buying bonds. get people to refinance debts eliminate costs for negative rates. then people can go spend again. how about zero mortgage rates, charge a fee up front on a home. get home ownership up.

        • Jungle Jim says:

          “but isn’t the inflation of the usd after people drop the currency wanted?”

          Dave, your point is valid, they do want to inflate away the US National Debt, but they are not enthusiastic about the side effects they are likely to create. Think of the Law of Unintended Consequences.

          In the last fifty years, the US has derived more power from its reserve currency status than they have from the US Navy.
          If people in other countries aren’t willing to hold and use our currency, the resulting picture won’t be a Monet.

          The principal anti-cash Jihadist is Kenneth Rogoff, a professor at Harvard. He sounds plausible until you stop to think about what he is suggesting. Of course Ben Bernanke sounded reasonable about QE too, and look what that really did.

    • CrazyCooter says:

      One thing to point out though is that FRNs are from the fed (a private bank) and are a liability of the fed, where as coins are from the Treasury (a department of the US government). Now, I know the amount is modest, but those coins are actually asset backed by the base metals from which they are made (i.e. they are not a liability of the Treasury and have a modest intrinsic value).

      This matters because if the Fed ever blows up, those coins are still money good (i.e. the Fed is not the Treasury) – and thus coins are not the same as FRNs. And I would wager that rather than re-mint coins for new face value of a new dollar issued post-Fed, the Treasury issued coins in circulation will likely be kept on par with a new dollar issuance.

      My point? Screw hording cash – horde change! Kyle Bass liked nickles for a reason (the base metal was actually worth more than the face value at the time he bought them).



      • dave says:

        here in canada got rid of the pennie. copper i believe.

        also jungle jim, it seems no matter what happens there are the laws of unintended consequences. im sure what we are experience was unintended. i hope. everything im seeing will be going down. nowhere to hide. maybe there needs to be a third choice in currencies. not sure a gold standard will ever play out, seems there is so many against. maybe a world currency? i heard someone talk about an imf currency. i just know the euro’s future is very cloudy the sterling is better off alone but will probably not reach any new highs. down to yen greenback the problem i see at moment, its a two horse race both want to depreciate but cant against the other.
        been doing a lot of research listening to a lot of smart people with slightly different angles. a stand alone saying deflation, stagnant deflation, you hear some are saying inflation, hyperinflation. both are unintended consequences.

        • nick kelly says:

          Copper! Are you kidding? That went the way of silver dimes 20 years ago.
          Before we said good riddance to it they were using zinc or something.

      • Thomas Malthus says:

        I often wonder…

        Why is it that a private company has the right to print the world’s reserve currency….

        Money = Power

        Issuer of the World Currency = Absolute Power

        Follow the money…

        • John Doyle says:

          No need to worry. It’s not true.

        • Thomas Malthus says:

          Actually I don’t mind it… someone has to run the show …

          The Brits were all about the school tie… at least the Fed operates mainly on merit.

          I don’t have a school tie… but I rate reasonably well in terms of merit….

    • Needbe says:

      Like any war, the War on Cash is liable to be costly. It could cost you your cash.

    • Lee says:

      Not in Japan.

      Cash is King and always will be.

      It is different in Japan and good for them.

      It is not like in the former western so called democracies where even the fact of carrying cash can make you a criminal.

      How much cash can you get out of an ATM in Japan now?

      Is it still 1,000,000 a pop? (US$10,000 or so………..)

      Can you even imagine getting that much cash out of an American bank from a teller? You’d have to fill out all sorts of forms, your name would go on some list, and you’d probably get a call from several law enforcement agencies, a visit from the IRS and who knows what else.

      Funny how countries such as Japan that were looked upon as being less free than the USA are now in fact much freer, less spying on its citizens, and free to say what they want as well as fewer restrictions on economic activity and regulation.

      And why Japan’s economy might not be growing fast, it still plugs along. It only sold some US$600 billion of goods to other countries in 2015.

      While the debt problem is a government one, the rest of the economy is generally ok – not flash and not going down the tubes………..yet.

      • Dave says:

        In the past, economies could get away with this as long as they maintained a positive balance of payments. Once this turned negative, their currencies collapsed. Look at the experience of Latin America. The only reason Japan is still afloat with its consistently shrinking internal demand is growth elsewhere in the world–particularly China and the US. Japan could pillage these markets through currency manipulation and unfair trade practices. Much of this foreign growth is evaporating now. I don’t think the government’s “Hate China” campaign, successful though it may be, will help Japan much either. This is especially true since 80% of foreign tourism dollars come from Chinese visitors–tourism is the only growing sector of the economy, and the only serious real estate investment is from China (aside from BOJ and Japanese Pension Fund purchases of REITs).

    • robt says:

      If the prices of precious metals is being ‘capped’ (i.e. price controlled), there wouldn’t be any available to buy except on the black market. The fact that you can buy as much as you want when you want refutes the whole idea of capping.

      • Steve says:

        In capping precious metals for so long they’ve effectively made the ROI not worth the investment. Not many are willing to gamble that the the powers that be will lose control of this manipulation, which is what would cause the true price discovery to take place. That is what is happening all around us at this moment, the powers that be are losing control.

      • dave says:

        it is. i have seen it a few times drop like a stone out of no where. or its suppressed long enough so positions can be made. a few billion sold here and there, and the price drops.
        i believe no matter what the outcome is precious metals will be a store for currency. i dont deal much with cash im too poor, so that war i can let go of. i use references of movies and music as often as i can. the movie john wick, breaks out a suitcase of gold coins to pay his way through the movie. i think jim rickards would be proud.

        • Steve says:

          While normally I would feel confident saying it will not get to that point of john wick, with the social problems we ALREADY have going on in this country at this moment, I’m not so sure. Another senseless cop shooting and series of bombings today I see.

      • Thomas Malthus says:

        Here is how you cap the price of gold…. you just release more paper gold into the market…


      • RE: … The fact that you can buy as much [gold] as you want when you want refutes the whole idea of capping. …

        Be reminded that in most cases what you are buying is paper, i. e. warehouse receipts for gold, and not gold itself. There is an infinite supply of paper and depository receipts available to keep the price down.

        AFAIK there are well over 200 X warehouse [depository] receipts for the amount of physical gold available in the market. This is to say that if 0.5% of the holders of depository receipts demanded physical gold it would cause a catastrophic “short squeeze,” and most likely even if 0.1% of the depository receipt holders requested physical delivery it would cause market chaos.

        Remember that the Deutsche Bundesbank (the German central bank) was not even allowed to see their gold, let alone inventory/weigh it, stored for them in the NY Federal Reserve Bank.

  7. Sound of the Suburbs says:

    All the Central Banker efforts go into inflating the markets.

    Everyone looks at the markets and concludes all is well.

    The real economy continues to deteriorate and eventually something major happens.

    The markets re-connect with the real economy and everyone realises they were looking in the wrong place.

  8. KM Tang says:

    Recall the heydays of Japan in the 80ies. For years it was the role model economy of the world. Remember Dr. William Ouchi Theory Z of Management? Widely quoted and studied in many business institutions in US. The long lasting predicament of Japan started sometime in the month of August of 1991. There was this seemingly innocuous occurrence of the bankruptcy of a restaurant owner in Osaka by the name of Nui Onoue. Her case was quickly inundated with financial scandals involving the then Industrial bank of Japan and some others. Who would have guessed then the severity of the downfall.
    Fast forward the August of 2007. I remembered that day I tuned on to BBC TV. With my wife we were watching the long queues outside Northern Rock. The reporter was then reporting about rumours on the run of the bank. Who would have guessed then the severity of this next downfall.

  9. Petunia says:

    Last month’s flood in Louisiana was a real eye opener for the cashless and gold crowd. The lights went out, the ATT phones went out, the city was crippled. No place to use your debit card or cash in your gold. Katrina 2.0 and just like Katrina, Fema was impotent.
    The likelihood of a cashless America is zero.

    • nick kelly says:

      For sure you can’t walk into a retail store and buy with gold (unless it the LA Pawn Stars shop where you can) but in any largish city gold can always be exchanged for cash on short notice.
      To be exchanged during an emergency-power out etc. it would have to be in bars or coin. The dealer will make time, unless he’s actually trapped in the wreckage.

      Gold isn’t just money- it’s a super money exchangeable anywhere in the world at remarkably consistent value and with very small commissions.
      It’s just not for small transactions by Dick and Jane.

      Admittedly the US$ is a tough competitor as far as ease of exchange goes, but with almost any other currency, if you were put down at random somewhere in the world, you can exchange gold for the local currency at a better rate.
      I recall you saying you had visited Uruguay. When I was there early this year it was my first experience with cambios- the forex booths everywhere.
      Quoted where euros, US$, Argentine peso, Brazilian real. in terms of Uruguay pesos.
      The clip or commission between buy and sell on one of the two other SA currencies was 30%- they didn’t want the stuff!
      But they would do it on the spot.
      If you were carrying gold coin or bars from one of the 3 or 4 well- known smelters- it might take a few hours to find a dealer, but you could go into pesos, or US$ for a 1 or 2 % cut.

      • Petunia says:

        Should the US go cashless, I would prefer to carry a multitude of currencies. You exchanged currency in Uruguay but you probably didn’t have to. You can walk into any store and negotiate the payment in any currency you have in your pocket. They are use to doing it everywhere except America. I learned that from my dad, a sailor who traveled the world.

  10. Humpty Dumpty says:

    THE country to watch – the canary in the coal mine. Their central bank can, and just may, bring down the whole shootin match. The only topics that really make me queasy to read are about Japan’s financial manipulations. What would Mishima do?

  11. Petunia
    September 17, 2016 at 3:20 pm

    Last month’s flood in Louisiana was a real eye opener for the cashless and gold crowd. The lights went out, the ATT phones went out, the city was crippled. No place to use your debit card or cash in your gold. Katrina 2.0 and just like Katrina, Fema was impotent.
    The likelihood of a cashless America is zero.

    I agree 100% – But Even though no one had a few dollars stashed for the possibility of no power for a few days, they will all be in the same boat next time too. And the next 5 times after as well….

    I am back to all cash, including working. I just got sick of paying $200. a year to have a bank in my life. But our kid thinks differently. She is hooked on every scam the bank offers. And fees are just part of the monthly living, she don’t think about just turning it off. And they are very high, she gets hit with everything.

    Japan is pretty interesting, you would think by now they would have figured out something… Even the tsunami didn’t get them going. I’m beginning to think there are just too many people with no money.

    • Petunia says:

      I have to force my son to carry a little cash for emergencies, so I know what you mean. If your kids are attending any kind of school, they can usually get a free account through the school. If the school doesn’t have a banking relationship call the local banks and ask. Most banks give a free account to students or to any young person if they are under 24. Same thing if you are over a “certain” age. Call them and ask what’s free.

  12. Uncle Frank says:

    Except for my Mazda Miata I can’t remember anything I have purchased in recent years made in Japan. Is their economy only based on their central bank buying up all the bonds and stocks?

    • The Meat Juice From Hades says:

      Pretty much.

    • nick kelly says:

      No. When was the last time you bought something made in Germany- in most years the world’s number one exporter in $ terms ?

      Both Germany and Japan, except for cars, have moved past price -competitive consumer Walmart stuff. They sell to industry, medical labs, high end instruments, heavy machinery, and the stuff that makes stuff.
      And besides Mazda, there is the worlds largest car co- Toyota, plus Honda, Nissan and up and coming Mitsubishi.

    • Wolf Richter says:

      A friend of mine runs a company, a big corn grower, that bought a robot from Japan for packaging sweet corn into consumer packages (the kind you buy at Safeway). The robot replaced 12 seasonal workers.

      • Petunia says:


        My millennial son, who is not generally interested in business topics, can go on at length about all the technology being developed in Japan. From robots to new medical solutions. Japan seems to be a big deal among the younger generation.

        • Wolf Richter says:

          Yes. Your son knows! When I lived in Japan most recently – 2005/6 – I met several PhD students from the US and Europe, studying robotics in Japan. When I asked them, why Japan, they all told me that Japan was it, when it came to robotics.

  13. Ptb says:

    Many complex products are made up of parts from all over the world. The iPhone has German and Korean components. In today’s global economy, it’s not very obvious where a product is “made”. The country of final assembly can often be where none of the components where built.

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