To Halt Yen’s Plunge, Japan Gets Ready to Sell Foreign Exchange Reserves Instead of Hiking Interest Rates. Won’t Work for Long. Markets Can Win this Battle

Rate hikes to keep up with the Fed would work. But the Bank of Japan still digs in its heels. Its balance sheet has shrunk for months though.

By Wolf Richter for WOLF STREET.

The Bank of Japan is now getting serious about propping up the yen with direct market intervention, after jawboning by the government and by the BoJ has failed to halt the yen’s plunge against the dollar.

On Wednesday, the BoJ conducted a foreign exchange “rate check,” asking market participants about trends in the foreign exchange market, according to sources cited by the Nikkei. “This is believed to be a move to prepare for foreign exchange intervention,” the Nikkei said.

The yen started plunging against the dollar in January 2021. At the time it took about ¥104 to buy $1. The plunge took on momentum in March 2022, when the Fed started hiking its policy rates. Yesterday evening it took ¥144.8 to buy $1, a level the yen hasn’t seen in decades. On the news of the rate check, the exchange rate briefly rose by ¥2 to ¥142.7, but has now already given up some of the gains and is trading at ¥143.2 to the USD, as markets harbor their doubts,

If the Ministry of Finance and the BoJ actually intervene, they would have to sell foreign exchange assets, such as holdings of US Treasury securities, and buy yen with those dollar-proceeds.

But the intervention is limited by the amount of foreign exchange reserves that Japan has, and it cannot be the kind of unlimited “whatever it takes forever” threat that central banks like to hang over markets.

And markets know that too. And that’s why propping up a currency by selling limited foreign exchange assets might slow the decline short-term but isn’t a long-term solution to a crashing currency.

For the US, there is also an interesting aspect to Japan’s foreign exchange sales: If those sales are large enough, they will put downward pressures on prices and upward pressure on yields.

Finance Minister Shunichi Suzuki told reporters today there would be no advance announcement of an intervention, and that authorities would usually not confirm afterwards that an intervention had even taken place, according to Reuters.  “If we were to step in, we will do so swiftly without any interruption,” Suzuki told reporters.

The plunge of the yen against the dollar is a big problem for Japan that authorities have been lamenting for months: Raw materials, fuels (nearly all of which Japan is importing), agricultural products, industrial materials and components, consumer goods, etc., are getting much more expensive to buy with the much weaker yen, which has been cutting into profit margins, has been ballooning the trade deficit, and has been fueling the wrong kind of inflation which is cutting into consumption by consumers.

The weakness of the yen, which exacerbates the surge in fuel prices for Japan, has set off a massive wave of monthly trade deficits starting in mid-2021.

The Ministry of Finance already reached out to the US Treasury Dept and asked for coordinated buying of the yen to prop up the currency but was brushed off, according to Japanese media reports in April. So a one-sided intervention now with limited foreign exchange reserves would be all Japan can do.

Everyone knows what the problem is.

The Bank of Japan hasn’t budged off its negative interest rate policy for short-term interest rates and it still maintains its rate peg of the 10-year yield at under 0.25% that it threatens to enforce with “unlimited” buying of Japanese Government Bonds (JGBs), even as inflation in Japan has risen above its target, and even as the Fed, the ECB, and other central banks have hiked their rates in large increments.

The BoJ could solve the currency problem by abandoning its rate peg on the 10-year yield and letting it go, and by hiking its short-term policy rates in big catch-up rate hikes to get somewhere near the Fed’s rates, and by ramping up quantitative tightening.

But BoJ governor Haruhiko Kuroda, a remnant of Abenomics which relied on a huge burst of money printing and interest rate repression, will stay in office until April 2023, and he has been digging in his heels on rate hikes.

He has already ended the money-printing spree that Abenomics became infamous for, and the balance sheet has been declining for four months. But rate hikes, yikes! Not Kuroda. He’s still talking tough and blowing off companies frustrated by surging costs and consumers frustrated by rising prices.

 

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  102 comments for “To Halt Yen’s Plunge, Japan Gets Ready to Sell Foreign Exchange Reserves Instead of Hiking Interest Rates. Won’t Work for Long. Markets Can Win this Battle

  1. MF says:

    Does this mean Japanese manufacturers will enjoy a pricing advantage and reignite its export engine? Or does the high price of inputs, specifically energy, preclude that?

    • Wolf Richter says:

      Lots of Japanese manufacturers sell much or most of the products that they produce in Japan to Japanese consumers and companies. This includes the automakers and truck makers.

      Much of what they sell to other parts of the world is manufactured in other parts of the world. All Japanese automakers have plants in the US, in Mexico, in China, in Europe, in other parts of the world.

      In other words, their costs are surging, but when they sell the product in Japan, they cannot get any advantage out of the weak yen, and in fact, they’re handicapped by consumers that are now getting whacked by higher prices.

      • MiTurn says:

        But aren’t demographics working against them with their shrinking, and ageing, population? Or is this overstated?

        • WA says:

          What is working against them is artificially low interest rates. Yen is no currency hedge today. It’s role has been taken by dollar.

          After Japanese trade surplus became a deficit, its last shot was to purchase its stocks and bonds to artificially value its fake financial assets. That shot has been spent and all it did was to postpone the collapse.

          Now we have a date with Karma.

        • Wolf Richter says:

          Their fertility rates are similar to those in Europe and the US. What’s different is that they control immigration, and that’s a good thing.

      • Tolkapiam says:

        Suzuki India is the biggest ( 50% market share) car manufacturer in india.also among the top 5 in scooter+ motorcycle sales in India.

    • Cytotoxic says:

      Contrary to popular belief, there is no export advantage to be had from a cheaper currency. It’s been studied. I don’t have the link handy, but weaker currency = higher costs of imported inputs = bad for business in general and exports in particular. I’d add that a weak currency punishes investment, which is the real source of prosperity, not exports.

      • QQQBall says:

        @Cytotoxic

        Nah, I doubt that’s true. Then why ship auto manufacturing from MI to Mexico? Lower costs.

        • MentalFloss says:

          Mexico has a much lower MVA cost (Manufacturing Value Add) compared to MI and no tariffs to get back into USA (unlike China which also has super low MVA but high tariff).

  2. MoreCreativeMatt says:

    You can have either low interest rates relative to the rest of the world, or a strong currency. Not both.

    I’m not sure what the debate is here.

    And the more extreme you get in one direction, i.e., ¼% and holding when the rest of the world is 2-3% and rising, the more extreme you have to get in the other.

    • Augustus Frost says:

      Switzerland has both but it’s not a major economy.

      It has both because, despite its ridiculous prior monetary policy, financial market participants have greater confidence in them than other countries.

    • Sams says:

      Well, actually it is possible. It’s name is capital control and comes in different varieties. If Japan for example switched to a Yen where also all currency on the books of banks did have to have serial number like physical notes they could control the amount of money. Keeping the inflation lower, that is printing less money, than other done with other currencies it would be possible with low interest rates and a strong currency.

      A side effect is that the central bank could take full control of the interest rates if they kept control of issuing new serial numbers for money.

  3. Cyrus says:

    Why are they doing this? Apologies if this was in a past article, but why is the Japanese central bank so intent on maintaining a clearly untenable position?

    I understand they have a very high debt to GDP ratio, but can’t they let rates rise at last a bit?

    • Augustus Frost says:

      Japan’s public debt is out of control. Allowing rates to rise a bit to solve the problem is like trying to be a little pregnant. Obviously not an exact analogy but you get the point.

      Like the US and Europe, Japan should have taken its temporary deflationary depression when the asset mania burst in the early 90’s and put the bubble economy behind it. If they would have done that, it would have bene temporarily painful as it was in the US in pre-FRB economic contractions but that’s all. Japan has a much more cohesive society than the US and at the time, also had a large trade surplus which it could have used to soften the blow.

      Now after “kicking the can” for almost three decades, it will only be a lot worse. It’s either inflate away the debt (the presumable outcome) or an even worse deflationary depression.

      There is never something for nothing.

      • Bobber says:

        If the central bank owns the government debt, is the debt really outstanding?

        • Cas127 says:

          What is the magic source of money the G used to buy the G’s debt?

          Hint…it wasn’t taxes.

          The G doesn’t have a unicorn that poops diamonds…it just behaves like it does.

          The earlier posters had it nailed…the Japanese G is checkmated because of its enormous G debt to GDP (the cancerous pdt of decades of “magic” deficit spending).

          If it lets rates rise, its interest pmts explode (ditto long debilitated fiscal balance).

        • CRV says:

          That is sort of what i wonder. The BoJ owns a big part of Japans debt?
          What if the bank crosses out half of it. Would that be a real problem to Japan itself? Or any other holder of Japanese debt? It was created out of nothing and it ends up being nothing. Only two parties involved. I must be missing something important.

        • Wolf Richter says:

          It would be a “default.” A huge one. When debt gets cancelled, it’s a default. It happens in bankruptcy court all the time.

        • Sams says:

          Re CRV:
          “Always look on the bright side of life
          I mean, what have you got to lose?
          You know, you come from nothing
          You’re going back to nothing
          What have you lost? Nothing”
          Lyrics by Monty Phyton

          And FIAT money may not be that different.
          If BoJ own a large sum of Government of Japan debt, they could roll it over into a zero interest loan never to be repaid. What would the difference if they instead struck it of the books?🙄

      • Depth Charge says:

        That can they’ve been kicking has turned into an anvil, and soon will be an Abrams tank. The central bankers of the world pushed debt to the extreme. Now there’s hell to pay. The chickens have all come home to roost at the same time, and they’ve got nasty attitudes.

        • Harrold says:

          Japan seems to have missed the lesson that letting over-indebted “zombie” companies go bankrupt lets you reset the debt and start over. Or maybe their culture prevents them from admitting a mistake was made and losing face.

      • Old school says:

        Seems like policy makers feel comfortable running total debt (consumer, business and government) at about 3.5 X gdp. I always joke if you don’t borrow, the government will borrow on your behalf. I think Japanese consumers are savers not borrowers.

    • Cytotoxic says:

      Because Japan’s central governing culture/philosophy is mental, and entrenched in large part thanks to non-immigration. The notion that they can grow the economy with moar money is the new Shinto, and their CB is going Full Kamikaze.

    • Mark says:

      “Why are they doing this? ”

      That’s what I’m wondering. Something smells fishy.

      Couldn’t be The Bank Of Japan is “trapped” . Naw

  4. Xavier Caveat says:

    Paging Mrs. Watanabe: Please carry on.

  5. Greatvampire says:

    Japan has an interesting dilemma: an aging population.

    Although, you know, with a more compact population grouping you can concentrate on education, take your time rebuilding your cities, and enjoy the increased space to stretch your arms in a crowded country like Japan’s. It’s not all bad, I’m saying, to go from 125 million down to say 90 million, as long as it stabilizes at 90. I suspect that most countries in the world that have seen downsizing will bounce back in a generation, two at the most, leading to a slightly increased population growth. Stability is what the world needs most at the moment.

    • Wolf Richter says:

      There is no “dilemma” except for politicians.

      Japan is perfectly situated for automation, and has been on the forefront of automation for many years, and it can still automate lots of activities, and there isn’t the threat of massive numbers of unemployed people attached to this move to automation.

      Japan has lots of problems, but being a super-crowded country (OK, quit looking at the mountains, look at the urban areas), the somewhat low birth rates and low immigration rates are not one of them.

      Fertility rates are far lower in other countries, BTW. Japan is in 16th place. A lot of BS is being circulated about this.

      Here are the countries with lower fertility rates — rank, country, fertility rate (sorry for the inability to format here):

      1 Korea 0.84
      2 Hong Kong 0.87
      3 Puerto Rico 0.90
      4 Singapore 1.10
      5 Malta 1.13
      6 Ukraine 1.22
      7 Spain 1.23
      8 Italy 1.24
      9 Bosnia and Herzegovina 1.24
      10 Macao SAR, China 1.24
      11 Moldova 1.28
      12 Bermuda 1.30
      13 North Macedonia 1.30
      14 Cyprus 1.31
      15 Greece 1.34
      16 Japan 1.34

      The US is at 1.6.

      • Halibut says:

        Wow.. that’s interesting. I also read that Japan had an awful demographics problem.

        So, not as bad as many other countries. Thanks for the numbers, Wolf.

        • Wolf Richter says:

          What they don’t have a lot of is illegal immigration. They have that under control.

        • Halibut says:

          From my understanding, very few people throughout history have been able to walk on water 😂

        • Zero Sum Game says:

          Halibut, you and Wolf were discussing below how very few people can walk on water to emigrate to Japan, which made me think Elon Musk might eventually settle there.

        • Cytotoxic says:

          “They have that under control”

          And are wildly poorer for it. Japan is a disaster. They are a brutal illustration of what a lack of immigration does to a country.

      • Yort says:

        2.1 children per woman is required to maintain a stable population. Therefore, both Japan and US will need to increase immigration or have a declining population which brings about higher labor costs, decreased productivity, and an eventual end to debt based retirement schemes.

        “The children are our future” rings true on many levels…

        • Wolf Richter says:

          Japan’s urban areas are super-densely populated, and homes are small, and trains are packed like you wouldn’t believe, and sidewalks are packed, and museums are packed…. You people have NO IDEA what it’s like to live in such densely populated urban areas. The people of Japan are doing just fine. They make their decisions, and it’s working just fine. This idiocy that populations have to grow forever is just an idiocy. Japan doesn’t “need” immigration. If it “wants” immigration, fine, but it doesn’t “need” it. What Japan needs are responsible fiscal policies.

          In my lifetime, the global population grew from 2.5 billion to 7.5 billion, which is totally nuts. Pure idiocy. Time to back off a little and be responsible global citizens – it’s good for the quality of life and for future generations. And people in lots of countries, including in the US, Japan, most European countries, China, Russia, etc. – have figured this out. But politicians haven’t. Corporations haven’t. And some academics haven’t.

        • Augustus Frost says:

          Debt based retirement is ultimately unsustainable. It isn’t the obligation of any subsequent generation to lower their living standards or quality of life to pay for it.

          Even if it does mean somewhat lower living standards, better for the local population than destroying the culture through Balkanization which is where the US and Europe are headed.

        • phleep says:

          Every ecosystem on earth is under severe stress. It is time to modify the model of “growth” at any cost. Unregulated growth has another name: cancer.

          I look at he photos of Asian populations and feel for them, but shudder. I could not live in that density.

        • james wordsworth says:

          I’ll agree with Wolf here. Japan does not need immigration. It will do well to have a lower population.

          We need to understand that one of the ways to reducing the carbon footprint (and the environmental impact) of humanity is to have fewer people.

          As for workers they have a very untapped pool of women who could join the work force, but typically have stayed home to look after kids.

          The real problems are Nigeria, Ethiopia, Congo etc, with birth rates of about 5.0 – 6.0 per woman. And women have children earlier, so this speeds up the population growth even more. These places are really scary from a demographic perspective. Nigeria with 200 million now will be 400 million by 2050 – that’s like adding almost 2 Japans. Currently 1/2 of the population is under 18. Yikes.

      • Not Sure says:

        OK, so Japan is 16th on a list of of countries and city states which are all facing demographic crisis. Doesn’t mean they’re fine. Japan is also consistently at or near #1 on the list for oldest average age of their population and a dismal percentage of their population is under 20 years old… Smallest percentage of young folks in the world next to Hong Kong, so their fertility rate isn’t going to be getting any better. Low immigration rates aren’t going to help that. Automation isn’t going to save them either. Only so much can be automated (a lot already is automated in Japan), and it’s expensive to automate the care of older people who can no longer contribute to pay for that expense. Their ratio of productive young folks to resource-draining elderly folks is going sharply in the wrong direction.

        Now add massive inflation against a central bank that refuses to fight inflation, which isn’t exactly the type of thing that incentivizes family formation, but it does cause public pension costs to skyrocket. They have a dilemma, a big one, just like most of the other countries on that list. 16th on a list of the world’s worst demographic dumpster fires still isn’t a great place to be.

        • gametv says:

          Time for Japan to enact Logan’s Run.

        • Auld Kodjer says:

          Not all are “resource draining elderly folk”.

          Eligible age for retirement and pension has steadily increased from 60 to 65 to 70.

          The relative health of older Japanese is due to a number of factors including cultural habits and a universal health care system.

      • Isaac S. says:

        I wonder how factoring in immigration rates (i.e., an immigration adjusted fertility rates ) would change the rankings. I’d expect Japan’s ranking would plunge and US’s would soar.

        Also, I wonder if Korea having the lowest fertility rate has any causal connection to them being recently put high on the world debt financial crisis country risk list.

      • Cas127 says:

        But replacement birth rate is 2.2.

        (You aren’t incorporating death rates).

        Japan can afford to shrink for a while at a reasonable rate.

        But it isn’t a hard argument to make that deeply economically stressed populations don’t reproduce. There are many examples on your list (Italy, Spain, Greece, US, Japan, etc).

        When people are afraid of the future (because of their recent past and present)…they don’t have kids.

        • Wolf Richter says:

          “that deeply economically stressed populations don’t reproduce.”

          That’s idiotic BS. Look at the fertility rates of the poorest most economically stressed countries. It’s the wealthy countries that have low fertility rates. EVERYONE but you seems to know this.

        • Hardigatti says:

          In the ’60s there were some very interesting mammal population experiments, see “Mouse Utopia”. Mice and rats were provided with unlimited food/water and nice, but limited accommodations/space.
          After initial explosive growth, severe social disorders became apparent as density increased. Mothers would kill their young, endless fighting, birth abnormalities, lack of interest in sex, etc. The populations did not stabilize but started to collapse and eventually die out despite unlimited food/water. There is a message in this somewhere given we are all mammals.

        • rojogrande says:

          In addition to what Wolf said, I would add that Japan’s birth rate has been below replacement since around 1974. Japan boomed for the next 15 years with no real improvement in its birth rate. I’m sure no one at the time blamed economic stress. The fact nearly all rich countries now have birth rates below replacement level suggests other factors, such as personal lifestyle choices, may be in play.

      • Alex says:

        Yes, however Japan entered below replacement fertility in the early 1960s unlike South Korea which I believe got into sub replacement fertility in the 1990s.
        So Japan is aging faster, the way math works. However this is a huge problem in Europe too not just East Asia. The U.S. is somewhat better. Note, the actual Japanese GDP per capita has slowly increased.

        • rojogrande says:

          Although it dipped below the replacement rate in the early 1960s, according to Bloomberg Japan’s birthrate was above the replacement rate from 1967 through 1973.

    • 2banana says:

      And because of very strong immigration laws very strictly enforced…

      Japan will be still be Japanese even with a low fertility rates for 50 years.

      And, one day, having babies will be cool again in Japan

      • Motorcycle Guy says:

        2banana,

        “And, one day, having babies will be cool again in Japan.”

        Only if the Japanese men learn how to treat their women better.

      • Augustus Frost says:

        Agree, but not to the consensus which measures “success” by the unrepresentative statistical data point known as GDP.

        Must have “growth” at all costs.

        • HowNow says:

          Until “conspicuous consumption” is “uncool” and getting laid is given mature, responsible thought (which will never happen), we’re going to be toast.

    • Flea says:

      So does the USA,and china

  6. Bobber says:

    So can we expect the price of Japanese manufactured automobiles to decrease? Japanese cameras? Other Japanese manufactured goods?

    I doubt it. Middlemen will likely capture the benefit of import price decreases.

  7. Zero Sum Game says:

    I’m a little confused at how Japan’s balance sheet has been declining for the past four months when it is offering an open-ended bond purchase regime to keep interest rates below 0.25%?

    I’m sure I’m missing something here that explains the divergence; can anyone please tell me what that is?

    • Wolf Richter says:

      Much of the BoJ’s Pandemic era QE was through handing out free loans, not bond purchases. It is now unwinding those loans. During the pandemic QE, it bought relatively small amounts of bonds (since it was doing most of the heavy lifting through loans). At the end of 2020, it stopped adding to its bond holdings. In early 2021, its bond portfolio started declining (QT). But over the past few months, the bond holdings started ticking up again. This phrase, “unlimited” purchases, is just being thrown around out there, but in effect, it’s mostly jawboning. The BoJ has bought only modest amounts. Its current bond holdings (¥547 trillion) are just 1.3% above the prior peak of Feb 2021 (¥540 trillion).

      I cover the BoJ’s balance sheet about once every three months in detail. Including charts of its various assets. So stay tuned.

  8. Minutes says:

    Will I be able to get Sake cheaper? All that matters

  9. historicus says:

    Japan started all this ZIRP stuff 22 yrs ago as I remember
    I also recall Paul Krugman was advising them
    Now for them to hold ten yrs at .25% can only end one way….I think they call it “breaking the syndicate bid” in other circles.
    The losses could be catastrophic as the BOJ not only holds govt paper but large equity positions.

    • Wisoot says:

      not only holds govt paper but large equity positions…. is that a Sept 2008 black swan event whiff I detect you intimating? Catastrophe – an interesting word to turn heads. Japan’s Samurai sword will cut through the illusions set out by seekers of calamity. The last 22 years Japan gave us Just in Time Kaizen. Allow them the grace to nazel gaze and tell us whats next.

  10. Yort says:

    With 1.236 Trillion of US treasury holdings as of June 2022, Japan is the largest holder currently. China is below $1 trillion, after having dumped over $300 billion the last few years.

    As of 2022 it is widely known that US reserves are financial weapons, thus the US Fed will have to step in and reverse QT at some point as there is a limit to how high interest rates can rise for both private and public entities across the entire globe.

    There are also limits to how high the USD can rise before the global economy falls apart even faster. The limits are somewhat mathematical but the “event horizon” is more animal spirits in nature and not easy to predict.

    That said, I’m guessing “the limits” will become apparent after watching what happens with Japan over the next 5-10 years…

    Per article below, Japan “Abenomics” endures to avoid “unsettling markets”. At some point in the near future, “unsettling humans” will matter more…

    Per Bloomberg:

    Legacy of Abenomics to Live Beyond Its Tragically Shot Architect (July 8, 2022)

    The passing of Kuroda’s key political champion could even raise the odds of a shift in the BOJ’s super-stimulative monetary stance before 2023, in the initial speculation of some market analysts. But Kishida’s fiscal plans rely on holding down borrowing costs — all the more vital given Japan’s bloated debt burden — so any dramatic BOJ policy change is far-fetched, observers said.

    “With more fiscal spending expected, it would be hard to imagine the BOJ tightening policy by increasing borrowing costs,” said Takahiro Sekido, chief Japan strategist at MUFG Bank and a former BOJ official. “That would be very unsettling for markets.”

  11. The Real Tony says:

    Thirty straight years of monetary policy errors have completely destroyed Japan. Europe learned nothing but managed to destroy their own banking system with negative interest rates and America tried zero interest rate policies and mostly everyone got a lot poorer.

    • Observer says:

      I’ve been to Japan several times in the last 5 years. It is not “destroyed” or otherwise hyperbolically bad. Indeed, it is clean and functioning and there is ample construction and “newness”, and old things work quite well (like the quaint old subway ticketing system).

      On the ground, it looks like Japan decided to be Japanese and continue to have a nation: a culture, a border, and a language. A Japan that their parents would recognize as overall harmonious and productive.

      Yes, there are some weird things and problems! But, it still is a fine place to live.

    • Wisoot says:

      Real Tony – by writing your comment again but from the perspective of those who gained during the same period, so everyone who got a lot richer, would words such as errors destroy negative be replaced by . . .

  12. Everett Hubble says:

    Where is my Wolf Street Report YouTube video? I’ve been waiting for weeks! I’m forgetting the accent to use when I read these articles to myself.

  13. gametv says:

    Government is now the root of all evil or incompetence.

    • phleep says:

      No, I vote for absurdly broad generalizing. The world is just not that simple. If it was, it would be gamed and cease being so.

    • Wisoot says:

      Power grabs break decent people of weak constitution and focus to step into the shadows and wait. Result dishes up the intended void of regulation to commit whatever whenever at no challenge. Corporation AI attempt to debt enslave sovereign Earthlings revelation is stronger than force or fiction. Laws of physics which dont require fact checkers because they just are.

  14. Norths says:

    So Japan’s currency has fallen say 25% and many of their industrial inputs are imported, so how is it that Japanese domestic inflation (measured in Yen) stays in the 2% range?
    Something doesn’t seem right with that.

    • Wolf Richter says:

      Wholesale inflation is double digits. That’s what enters into costs for companies.

      The government controls healthcare, and healthcare insurance, and so it controls healthcare price increases. It also subsidized wholesalers of fuels so that they would NOT increase their prices, which kept fuel prices lower. It has a bunch of similar tricks up its sleeve.

      Despite that, inflation jumped from about 0% in October last year, to 2.6% in July. This is on the move.

  15. Concerned guy says:

    Wolf – What is your guess for Fed rate increase, by .50%? .75% or 1:00% bases point?

    • Wolf Richter says:

      I’ll wait till I see it :-]

      I would not be surprise by 75. I would be surprised by 50. Maybe 100 might raise my left eyebrow a little, like, OK I got it.

      • Mark says:

        “Maybe 100 might raise my left eyebrow a little”

        My eyebrow says we need about 1300 basis points from the Fed to begin to extinguish the fire they lit over decades.

        I don’t trust the arsonists that set this fire, or anything they say
        in defense of themselves. Nor do I trust their words spoken into microphones. That’s just their lips moving again.

  16. Cytotoxic says:

    “If those sales are large enough, they will put downward pressures on prices and upward pressure on yields.”

    …and that’s before China gets started. We’ve been here before: China had to sell a bunch of UST from its stockpile circa 2015 after that debacle, and the effects did filter down into rates IIRC. What a time…

    The only weakness of this article is talk of a ‘trade deficit’. There is no such thing.

  17. phleep says:

    If the US dollar is strong, it makes sense for Japan to rebalance its vast holdings (sell) and strengthen its currency, no? Or is every holder of US treasuries just sort of trapped?

  18. Tony says:

    Hello,

    There’s a global dollar shortage and demand for dollars is high? Can you do an analysis on the global dollar shortage theory? The demand for dollars and it’s strength right now seems to be the anomaly in the market place, but no one can explain it? I’ve heard the theory that the world needs $20 trillion of USD to meet demand for the shortage.

    • Wolf Richter says:

      The “dollar shortage” meme is TOTAL BS. What is happening is that borrowing in dollars is getting more expensive, because rates are going up DUH. And it’s getting a lot more expensive for junk rated foreign governments that have ruined their own currency with inflation and now cannot borrow in their own currency because no one wants to lend to them in that trash currency, and so they borrowed in dollars, and now interest is rising, and the cheap debt has to be refinanced with more expensive debt, and they’re whining about it. It’s the same thing every time. Why do these morons ruin their own currency and then borrow in dollars that they cannot control? Why do any morons LEND to them in dollars? We need 10% Treasury yields and let this whole pile of foreign sovereign debt denominated in dollars blow up. Why does anyone ever lend any dollar-debt to Argentina, Turkey, Mozambique, any of them. Those moron-investors should lose everything.

      • JeffD says:

        “Why do these morons ruin their own currency and then borrow in dollars that they cannot control? ”

        1MDB as a case study sums up the moving parts ?

      • perpetual perp says:

        My understanding is that it is a basic ‘no no’ to borrow in a foreign currency. Economist Michael Hudson has been warning that the dollar might be sold out as nations eliminate debt denominated in dollars. He has been warning about this for years. But nothing of the kind has actually occurred. If you can unravel this, I’d sure appreciate it. And Japan can wipe off the books it’s domestic debt that sits on the government ledger. I don’t know why it doesn’t do that.

        • Wolf Richter says:

          “Japan can wipe off the books it’s domestic debt that sits on the government ledger”

          That’s a DEFAULT. At a minimum a “selective default.” Happens all the time in bankruptcy court. But countries cannot file for bankruptcy protection, not yet. But I understand that MMT trolls don’t get this.

  19. Isaac S. says:

    Did you hear about the Fed study just published that concluded that QE and QT has almost no effect on the economy? According to the financial site I got this from, the Fed’s conclusion was that $2T of Fed QT has the same effect as them raising interest rates by only .25% over 3 years; hence, practically no effect. So, Fed QT is all hype however you cut it, just like their QE was.

    I can’t post the link b/c Wolf does not allow that here. just Google “Fed says, ‘Quantitative Tightening does Nothing (QE too)'”

    • Tony says:

      I heard about it. Pretty interesting. It’s also interesting that the general public is so focused on doom and gloom and causation correlation…but frankly….no one has any clue and it’s just hearsay.

    • Wolf Richter says:

      Isaac S.

      Wait a minute… you’re conflating two things.

      1. not much impact on the “economy,” yes. I have been saying that for years. And that’s what the study said.

      2. But QE and QT have HUGE impact on the markets. QE inflates assets prices, QT deflates asset prices. And the Fed can do lots of QT just fine, and the economy will feel little impact, while asset markets are spiraling down for years.

      Remember: the economy is not the markets.

      • Old school says:

        Wolf,
        I pondered the statement “Remember the economy is not the markets”. It is very profound.

        How do you have an economy without price? How do you have price without markets? Does every real economic asset not have a debt or equity financial asset? Did zirp policies cause the market tail to wag the economic dog?

      • perpetual perp says:

        BINGO! Market is not the economy. In theory the markets provide the ‘price discovery’ mechanism. But not a market that is a casino. Not a market that is bloated by tax breaks for the rich which just end up causing asset inflation. “When the capital development of a country becomes a by-product of a casino, the job is likely to be ill-done,” JM Keynes ‘The General Theory of Employment, Interest, and Money.’

  20. Rosarito Dave says:

    Hey Wolf, (O/T) I wanted to commend you for your reporting yesterday…
    ——————-
    of the Zoom meeting with Yellen, Powel and the PPT at 4;30PM during which they lamented that the Plunge Protection Team (PPT) had absconded from their posts as soon as the CPI number came out.

    You mentioned, “…..By 3:30 PM, with stocks totally losing it, the PPT was still in the bar, and some tried to throw a several hundred billion dollars at the stock market, but were too drunk to even log into their trading software.

    Powell and Yellen concluded the Zoom meeting with the decision that they would personally block the exit of the PPT office tomorrow to force the traders to stay inside and to do their job and throw several hundred billion at the market to halt this mess.
    ———————————–
    It seems they got the message and sobered up for the last 20 minutes of trading today. I appreciate your sources! :-)

  21. Depth Charge says:

    What has become abundantly clear is that central bankers are the scourge of humanity – a blight upon the world’s landscape that needs to be cleaned up.

  22. curiouscat says:

    Cytotoxic

    If all countries need immigration, where with the immigrants come from? Some countries must have emigres if others are to have immigrants.

  23. Juicifer says:

    My question for the writer of this very helpful article is two-fold:

    What is the “good” inflation that Kuroda and the BOJ are looking for? And what’s the public rationale behind continuing the near-ZIRP, even after their declared inflation targets for “good” inflation have been over-fulfilled? The only thing I’ve ever heard Kuroda say is that Japanese will soon have “learned to tolerate” generally higher prices (something he had to walk back the very next day in the face of an irate public!)

    Second: would it be possible for the BOJ to simply “cancel” say a couple trillion in debt owed “to itself”, and what would happen to Japan if it did?

    Thank you, Richter-san! I’ve been waiting with anticipation for just such a Japan-related article.

    • Wolf Richter says:

      “good inflation” as in the kind of inflation that the BoJ and the government wanted: higher wages pushing up prices, roughly in parallel, which would make the government’s debt-load easier to deal with. But that’s not what they’re getting. They’re getting stagnant wages, and prices and corporate costs being pushed up by yen weakness, which makes all imports more expensive, on top of the price surges in global commodities.

      Japan got away with its crazy monetary policies for a very long time, and it taught the world all the wrong lessons about QE and interest rate repression. But ultimately, it all ends up in the currency, either inflation or exchange rate, or now both. So there are now some tough decisions to be made, and there are no easy exits.

  24. JeffD says:

    Jean Caude Trichet, former ECB president, just spoke on Bloomberg saying that all Central Banks on both sides of the Atlantic and in Japan have unanimously agreed on a 2% inflation target, period., snd have done so since the Lehman collapse to enforce stability. His words, not mine. I’b betting the interview will make its way to youtube tomorrow.

    My comment: The only way to acihieve that is QT, since inflation is a monetary phenomenon, period. BUT, if you look at the bottom ljne cause of the Great Depression, it was extremely loose credit and money printing, pre-1929, followed by allowing the money supply to shrink by 1/3 from 1929 to 1933.

    History doesn’t repeat, but it sure does rhyme.

    • Old school says:

      Heard a pretty convincing discussion that Milton Friedman’s statement is no longer true. Supposedly there are three channels for money. I can’t remember what they are, but one is banks lending money into existence. Bottom line from discussion was Fed policy is a blunt tool and they can not determine exactly which channel money goes to so controlling inflation is not easy.

      Heard also that QE and QT is more correlated to asset prices than interest rate policy. If so, the fun is ready to begin with full run off beginning.

  25. Marty Milner says:

    This sentence is the ied in the article” Finance Minister Shunichi Suzuki told reporters today there would be no advance announcement of an intervention, and that authorities would usually not confirm afterwards that an intervention had even taken place, according to Reuters.”
    International dominoes can start to fall if just two central bankers decide to pull the rip cord over a weekend. Remember the yuan devaluation in 2015. Just a blip now but the DJII lost 1,000 points in about 2 hours.

  26. Mark Stoneweapon says:

    US bond yields are already rising to some degree from Japan’s currency intervention and the contagion from US bond yields flows through the periphery. It’s a giant inflationary feedback loop.

  27. Isaac S. says:

    Did you hear about the Fed study just published that concluded that QE and QT has almost no effect on the economy? According to the financial site I got this from, the Fed’s conclusion was that $2T of Fed QT has the same effect as them raising interest rates by only .25% over 3 years; hence, practically no effect. So, Fed QT is all hype however you cut it, just like their QE was. The Fed QE/QT has near zero effect on the real economy.

    I can’t post the link b/c Wolf does not allow that here.

    • Wolf Richter says:

      Isaac S.

      This is the SECOND time you posted this comment in this thread. Do you have an agenda?

      So I’m having to shoot it down again:

      You’re conflating two things but the study didn’t conflate them.

      1. not much impact on the “economy,” yes. I have been saying that for years. And that’s what the study said.

      2. But QE and QT have HUGE impact on the markets. QE inflates assets prices, QT deflates asset prices. And the Fed can do lots of QT just fine, and the economy will feel little impact, while asset markets are spiraling down for years.

      Remember: the economy is not the markets.

    • Mark Stoneweapon says:

      QE has almost no effect on the economy? So for example, if the Fed didn’t buy and mortgage back securities and just allowed the market to default and liquidate under natural market forces, where do you think the price of real estate would be today and how do you think this would affect the money supply that drives the economy?

      • Wolf Richter says:

        Price of real estate is an asset price, same as price of stocks or bonds. That’s what I was talking about. QE inflates asset prices, including RE.

        The economy is employment, wages, consumption, fixed investments, etc. And inflating asset prices have relatively little impact on employment, wages, consumption, fixed investments, etc.

        • Auld Kodjer says:

          Home equity as an ATM?

          [The “theory” that rising RE prices leads to rising Consumption]

  28. Beardawg says:

    If Japan has been kicking the can for over 30 years and the USA for only about 12, sounds like Japan has gotten pretty good at it, and they have a dedicated workforce. Seems they will have a little pain with continued ZIRP, but will come out fine.

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