The Bank of Japan prepares for negative bond yields as it expands its Quantitative Easing

The last few days have seen Japan in the news over the dispute over some of the islands that are currently Japanese territories which reside in the East China Sea. Geographers amongst you might be mulling the fact that they are in the East China Sea rather than the Sea of Japan but I expect Japan to resist vigorously any change. It does make me wonder if we are now seeing an example of “resources wars” -these islands are resources rich- to add to existing “currency wars”. However this particular move may reduce the “currency wars” issue as Sino-Japanese co-operation to reduce use of the US Dollar looks a very distant prospect right now. So fans of the US Dollar as a reserve currency can let out a small sigh of relief.

The Bank of Japan acts

This morning the Bank of Japan decided to act and increase its expansionary monetary policies and add to its asset purchases or Quantitative Easing.

The Bank decided to increase the total size of the Program by about 10 trillion yen, from about 70 trillion yen to about 80 trillion yen. The increase in the size of the Program corresponds with the size of additional purchases of treasury discount bills (T-Bills) by about 5 trillion yen and Japanese government bonds (JGBs) by about 5 trillion yen.

So far so conventional as the Bank of Japan joins the Federal Reserve of the United States in singing Elvis Costello’s “Pump It Up” this September. Those of you who look for nuance may spot something different in Japanese Quantitative Easing (QE) which is that short-dated Treasury Bills ( 3 months to one year) are purchased. The Bank of England refrains from buying even shorter-dated bonds and currently only buys maturities of around three years plus and the Federal Reserve is actively selling them so it can buy longer-dated bonds as part of Operation Twist! Ahem, intellectual consistency anyone?

The Bank of Japan is in effect announcing purchases for 2013 as it was already planning purchases for the rest of 2012 so we get a hint of what sort of economic activity it is expecting by its deeds as much as its words I think.

Also those who think of Japan as a precise technocratic nation may be mulling the regular use of the word “about” in the statement.

Negative Yields Alert

There was an development also today which the Bank of Japan has hinted at over the past few months. It feeds right into my negative yield theme. The section in normal type remains and the section in bold used to be there but has now been omitted.

A multiple-price competitive auction shall be conducted for each purchase where counterparties bid “yield spreads,” which shall not be negative and are calculated by subtracting the minimum yield of 0.1 percent per annum from the yield at which counterparties desire to sell JGBs (and now T-Bills) to the Bank.

So we see that the Bank of Japan is now willing to buy bonds down to virtually zero yield and looks as thought it is preparing the ground in case it feels it has to buy them at a negative yield.

Why does this matter?

There is a theoretical issue which is that a bond is an instrument which pays a yield and thereby gets a value. What is a central bank saying about the value of a country’s bonds and bills if it buys at a negative yield? Negative value? An interesting implication.

For Japan her government bond yields are at approximately 0.1% up to the four-year maturity so this is the area where the new rules are likely to first apply.

Why are they doing this?

I discussed the apparent slowdown in the Japanese economy back on the 27th of July and from today’s statement it appears that the Bank of Japan agrees.

Nonetheless, the pick-up in economic activity has come to a pause………..economic activity is expected to level off more or less and the year-on-year rate of change in the CPI to remain at around 0 percent for the time being

Of course it is all the gaijin’s fault! If you look at the Japanese word for foreigner you may choose to note that alien may be a better translation.

Overseas economies have moved somewhat deeper into a deceleration phase.

Mind you,to be fair, there is an element of truth in it this time although it glosses over Japan’s own economic problems.

Speaking of glossing over things

The Bank of Japan describes its actions thus.

in pursuit of powerful monetary easing…….and pursuing powerful monetary easing

An odd description you might think as something which is “powerful” might well have been expected to work at least a little bit over twenty years don’t you think? Even if one is nice to them and just considers QE alone they have been trying that for a (lost) decade now. I think we can safely add “powerful” to my financial lexicon for these times.

The Value of the Yen: More Currency Wars?

This may have been a factor in the Bank of Japan’s action. The exchange rate of the Yen versus the US Dollar has remained in the same region for quite a while. Whilst the focus of the mainstream media has left this issue it is the same level which we were told would make life very difficult for Japanese exporters. The dip into the low 77s versus the US dollar may have put pressure on the Bank of Japan even though the move had then reversed.

So to the extent that the beginning of QE3 in the US led to fears of US Dollar weakness this may well be a response to that. This will raise fears of the competitive devaluations of the 1920s and 30s although that is somewhat unfair on Japan who has suffered from a currency appreciation in recent times.

If we look at past history then some actual foreign exchange intervention by Japan has now got more likely.

More,More More

So we have seen this month increases in QE from the United States and now Japan. The Bank of England is still busy actually fulfilling its last planned increase in it and the European Central Bank has made all sorts of QE like promises for its peripheral nations although less so for the Euro area overall. However the Bank of Japan did of course kick-off such policies and so as well as the song above perhaps it might like to add the song below to the next central banking conference.

That’s why I’m turning Japanese

I think I’m turning Japanese

I really think so

Turning Japanese

I think I’m turning Japanese

I really think so

Shame there is no real evidence anywhere of QE actually doing any good! Still never mind perhaps they could hand out some toy Buzz Lightyear’s too.

Too infinity….and beyond

Gold bugs will be happy anyway as their favourite metal has seen its price rise to US $1778 per troy ounce today.

Another ratings anomaly

Those who feel that financial markets slavishly follow the views of credit ratings agencies have a difficulty with Japan. Her bond yields are very low with her ten-year yield being a measly 0.82%. However she has been downgraded on a reasonably regular basis and rather than being an AAA as such a yield implies she is now an A+ with Fitch for example.

For once I am on the side of the ratings agencies and I hope that they continue this habit of trying to get ahead of events rather than chasing them.


This entry was posted in General Economics, Inflation, Interest rates, Japan's Economic Situation, Quantitative Easing and Extraordinary Monetary Measures, Yield. Bookmark the permalink.
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  • MickC

    It seems the planet’s entire financial community has turned Japanese.
    Given the alleged subject matter of the song, it is doubly appropriate, as it will produce short term relief but no actual long term product. Possibly, they’ve all gone blind.

  • Anonymous

    On and on all this seems to go. Can they keep it up forever or will reality catch up with them? Who will be first?

  • Forbin

    Hello Shaun,

    yes more QE for Japan , I guess they have to buy more oil and gas as they’ve shutdown their Nukes . a costly replacement I guess ( ?) in monetary terms atleast.

    And they are used to paying for it as well , as the UK is not ! Look here

    “LONDON (Reuters) – Britain’s natural gas imports from outside the North
    Sea will surpass domestic production by 2015 and add more than $11
    billion to import costs as domestic supplies dwindle and Norway
    increasingly struggles to fill the gap, Reuters research shows.

    From a economic view – how do we pay for this gas – against worthy competitors like China ? More QE ? you know the rest of the world will cotton on that our paper is worthless…..

    Oh then add in the cost of oil we’d have to import as well ……

    Not good, not good at all ….


    armageddon : better with popcorn .

  • Anonymous

    Hi MickC
    There was a hit “Too Blind to see it” from a decade or so ago. But as to whether they genuinely do not see the consequences of their actions or they choose not to remains uncertain…
    I think that their attitude is that the future can look after itself.

  • Patrick, london

    If only we could use the bodies of our disenfranchised poor as batteries to power our iphone 5 chargers in some Swiftian vision of the Matrix….

    If you could use ketosis to generate electrical energy efficiently, we’d be on to a winner. ;-)

  • Anonymous

    Hi Josephine
    As far as we can tell the QE machine is looking set for quite a run yet.

  • Anonymous

    Hi Patrick
    Please do not give the powers that be such ideas! I fear for what they might try to do with them…

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