Japan Makes Surprise Move Loosening Monetary Policy
The Bank of Japan (BOJ) surprised markets Tuesday, easing its bond control policy. The new policy will allow Japanese 10-year bonds to rise as high as 0.50%, compared to the previous policy of allowing the 10-year up to 0.25%. The BOJ said the policy breathed life into the Japanese bond market.
The BOJ move was utterly unpredictable and a shock to markets. However, the media used incredulous language, connecting the destruction of Christmas to the BOJ’s statement. The Wall Street Journal said, “The Bank of Japan Steals Christmas," CNN’s headline reads, “Japan just delivered a lump of coal to investors across the globe. Bloomberg’s headline says, “BOJ Blindsides Traders to Echo Christmas Day Shock of 1989.
With all due respect (or disrespect) to the media, Japan’s announcement is not why people are struggling this Christmas. Inflation is at 40-year highs. 63% of Americans live paycheck to paycheck. A National Retail Federation survey in September found 43% of Americans can’t afford Christmas this year. Rising interest rates have brought double-digit losses to stocks and bonds. Japan’s announcement five days before Christmas is not why Americans are feeling the pinch this year.
What Is Happening?
Japan has a severe debt problem requiring yield curve control. Yield curve control is an extremely loose monetary policy. Japan’s yield curve control (YCC) is a looser policy than the Federal Reserve’s quantitative easing. The Fed uses quantitative easing to buy a certain amount of bonds. For example, the Fed may say it will buy $120 billion monthly.
Quantitative easing is a check with the amount written in, and yield curve control is a blank check policy. The BOJ buys as many bonds as necessary at whatever price to keep interest rates within a range. Previously, the BOJ would buy the necessary bonds to keep rates between -0.25%-0.25% with a goal of zero percent on the 10-year bond. The BOJ relaxed the range to extend to -0.50-0.50%. The BOJ has utilized the 0.25 YCC policy since 2013. The BOJ movement is not an interest rate hike but a policy tightening. Japan is the only top-ten economy that has not raised interest rates this year.
A Japanese housing crisis is building and stressing some of the largest banks in the world. The BOJ policy has been a constant in the market. Since Japan has such low-interest rates, it is a very attractive place to get loans. A significant risk is that 73% of Japanese mortgages are adjustable rates. The International Monetary Fund estimates that Japan has $9.96 trillion in assets overseas with $5.7 trillion of that number in debt instruments. The IMF suspects a rise in Japanese rates would expose Japan to the real risk of about $7.3 trillion in cash repatriating to Japan.
How Did the Markets Respond?
The Yen jumped 4% against the Dollar, the most significant single-day movement since 1995. The U.S. 10-year bond rose ten basis points. Asian markets lost 2.5%. European markets lost 1%. Selloffs in bond markets happened around the world. The Japanese ten-year bond climbed to 0.43%, the highest level since 2015. The markets felt the BOJ shift. Now the speculation about the BOJ's next move is being hotly debated. Goldman Sachs believes the new policy is the first step away from negative interest rates.
In contrast, Japanese bank, Nomura does not expect the BOJ to raise rates. I am undecided if the BOJ will raise rates. However, now that the BOJ has opened the faucet, they will likely increase the water pressure. I agree more with Goldman Sachs that the BOJ will continue to take action to soften its liquidity crisis. I started writing about Japan's issues in April. In October, I wrote about why Japan can’t raise interest rates, even though it needs to. Instead of rate hikes, they will probably continue to tweak their YCC policy like yesterday. The BOJ will allow the 10-year bond to tick upward without having to take direct responsibility for bankrupting Japan.
What Does It All Mean?
YCC is an emergency monetary policy Japan has used since 2013. The BOJ announcement relaxing a nine-year emergency policy made markets negative, and the media thought it ruined Christmas. Remember this event because the coming weeks will be crucial for markets. Change is the most predictable market condition. Investors should diversify their portfolios with time-proven strategies to weather any storm. Precious metals have a 5,000-year track record and are essential in a well-diversified, balanced portfolio.
Japan is the third largest economy and represents 8.6% of global GDP. The fragile globalized economy suffers supply chain disruptions, energy shortages, war, pandemics, and governmental defaults. There are many crises to go around. However, problems in Japan equal guaranteed problems for the entire global economy. Markets are very concerned about the blowback from Japan's shift. The lesson is to be flexible and willing to change. As the BOJ showed, things can change instantly.
Change is coming. Isn’t it better to be prepared?
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