Japan’s central bank, the Bank of Japan, or BoJ, is beginning to lose control of its financial system.
The BoJ is the granddaddy of monetary madness. The US Federal Reserve (Fed) first introduced Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) in 2008.
The BoJ introduced them in 1999 and 2001, respectively.
Since then, the BoJ has NEVER been able to normalize monetary policy. The most it managed to tighten financial conditions without having to backtrack and start easing them again was 14 miserable months.
So we’re talking about 20+ years of loose monetary policy or a slow-motion nationalization of Japan’s financial system. The BoJ has bought so many assets during this time that today:
1) Owns more than half (50%) of all Japan Government Bonds outstanding.
2) It owns more Japanese shares than any other entity (country or institution) in the world.
3) It is one of the top 10 shareholders in 40% of Japan’s listed companies.
4) It has a balance sheet that is equivalent to 92% of Japan’s GDP.
After spending 17 odd years printing money and buying assets with little success in creating economic growth, in 2016 the BoJ tried a new type of policy: Yield Curve Control (YCC).
In its simplest version, the BoJ stated that whenever Japanese government bond yields rose above a certain level (0% for 10-year government bonds), the BoJ would print new money and use it to buy bonds until yields fell. to the desired range.
This was an unlimited and open form of QE. And the BoJ kept it going for six years straight until inflation finally showed up in the financial system.
And that’s when things started to break down: the yen collapsed to a 35-year low.
At this point, the BoJ had a choice: defend its currency or continue to defend its bonds.
The BoJ chose to defend the currency by RAISING the yield target on 10-year Japanese government bonds from 0% to 0.5%. This was an implicit admission that it would print less money defense bonuses. And that’s why the yen started to rise in late 2022 (see the big bounce on the chart above).
Unfortunately, that’s the end of the good news. The bond market has begun to test the BoJ’s resolve, with Japanese government bond yields repeatedly exceeding the BoJ’s target. Things have started to get out of hand to the point where the BoJ is forced to intervene on an almost daily basis to try to prevent bond yields from shooting up any further.
The BoJ is now in a corner. If you keep printing money to defend the bonds, the yen collapses and inflation worsens. and yes not printing money to defend the bonds, bond yields skyrocket, and Japan becomes insolvent (cannot make debt payments).
As I keep saying, the Great Crisis… the one for which 2008 was a warm-up, has finally arrived. In 2008, entire banks failed. In 2022, entire countries it will
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