On July 21, 2022, the Bank of Japan released this – monetary policy statement – It outlines that it will continue to use its ability to implement “yield curve control”, whereby “the bank will apply a negative interest rate of minus 0.1% to the policy rate balance in the current account held by the banking financial institution” and “will purchase the necessary amount of Japan Government Bonds (JGB) without a cap to keep the 10-year JGB yield around 0%.” In addition, the statement also stated that “except in the high probability that bids will not be submitted, the central bank will purchase 10-year Japanese government bonds at a price of 0.25% per business day through fixed-rate purchase operations.” The only opponent who voted 8 to 1 wants to ease monetary policy further! The Bank of Japan has been implementing its yield curve control since March 2021. Given global trends in central banks, the BOJ’s decision is a standout, demonstrating a deep understanding of the monetary economy and the government’s desire to improve the lives of ordinary citizens, exposing the fictions of mainstream economics that dominate policymaking elsewhere.
More recently, various hedge funds, arguing that they are smarter than the Bank of Japan, began betting on the 10-year Japanese government bond, arguing that they could force the BOJ to ease and abandon its yield-curve control policy.
Hedge funds began shorting bonds, meaning they entered into contracts to sell the bonds in the hope of buying them at a lower price in the spot market at the time of the contract and making a profit.
Their actions are based on their view that they can push yields above the central bank’s 10-year JGB target of 0.25% and restore their yield-determining power in the bond market, while the central bank through its policy denied this.
The implication is that as the so-called “yield gap” between Japanese financial assets and U.S. assets widens, the yen will plummet and the Bank of Japan will have to give up as the Fed tightens policy while the Bank of Japan maintains low interest rates.
If you read the briefings issued by various investment banks in August and September, you will find that hubris is not in short supply.
Claims such as the Bank’s “rapid turnaround” stand out.
It can be said that the Bank of Japan is holding its ground.
History repeats itself.
Many players in the financial markets — especially young traders who are opinionated and may be indoctrinated in some way by mainstream macroeconomic planning — have been shorting the JGB market and the Bank of Japan for years — to their detriment.
The short-selling strategy of Japanese government bonds has been dubbed the “widow maker” trade for good reason, as it has run out of money in an attempt to force the BOJ’s hands.
Chasing higher yields through these “widow” trades resulted in huge losses as investment banks and the like were fighting a battle with the Japanese banks, a battle they could never win.
The Modern Monetary Theory (MMT) understanding suggests that sovereign governments (central banks and treasuries) typically dictate financial markets.
It sets the rules, has the monetary ability to set yields and volumes, and has the option to stop issuing debt altogether.
Financial markets are supplicants.
As hedge funds pushed their strategies, the BOJ responded by increasing its bond purchases to record levels.
The result – the short selling pushed the yield above the 0.25% target, and then the bank showed how they could easily pull it back below the threshold.
They can choose to do so at any time.
The chart below shows the history of 10-year JGB yields since the beginning of 2021, noting that yield curve control officially kicked off in March 2021. The red line is just the 0.25% yield control target.
This week, we observed something extraordinary in Japan – news that the mainstream media mostly ignored because it was too harmful to Western perceptions of central banks.
If you follow the Japanese bond market, you will see that yesterday (Oct 12, 2022) led to the fourth consecutive trading day in the bond market where there was no trading among investors for the 10-year JGB.
The previous session was zero, but it was the longest consecutive session since the data became available.
reason?
The Bank of Japan is showing investors who is in charge.
They offer bonds at prices higher than hedge funds and other investors are willing to pay.
Therefore, no transactions will take place between private investors.
The BOJ’s stated goal is to buy as many bonds as possible to maintain yield curve control, meaning it can keep prices above what investors are willing to pay to keep yields at a desired target level.
Private bond speculators see the underlying 10-year JGB yield well above 0.25%, meaning they believe current prices are also inflated.
While the BOJ paid a price in the secondary market to maintain its yield control target, no speculators were willing to buy bonds.
And the most recent- Monetary Policy Statement – September 2022 (Published 22 September 2022) – Noted:
The bank will continue to implement quantitative and qualitative monetary easing (QQE) with yield curve control, aimed at achieving the 2% price stability target, as long as necessary to maintain the target in a stable manner. The monetary base will continue to expand until the observed year-on-year CPI (all items minus fresh food) growth exceeds 2% and remains steady above target.
If the economic situation deteriorates due to “the impact of COVID-19” and global trends, the Bank “will not hesitate to take additional easing measures as necessary”.
it says:
…also expect short- and long-term policy rates to remain at current or lower levels.
Bank President Haruhiko Kuroda reiterated the message in a speech in Washington, DC yesterday (12 October 2022).
He also told the audience that the Bank of Japan would continue to intervene in currency markets to mitigate so-called “unilateral” yen depreciation, although he said:
The depreciation of the yen may have a good effect on the overall macro economy, but there are also some industries affected. If the currency moves so quickly and in a (one-way) direction, possibly due to speculation, it will be bad for the economy as it will make business planning more difficult.
He also reiterated the central bank’s policy stance on wages and inflation:
Wages are definitely going up right now, but not enough to guarantee 2% inflation in a sustainable and stable way… you can’t simply conclude that we’re going to be able to achieve 2% inflation in two years or a year, So we can change the current monetary policy. This is not correct.
in conclusion
Thus, the lack of trading in the 10-year JGB suggests that gamblers in investment banking have given up on the power game with the Bank of Japan.
They finally got word – for now – that the bank was going to continue the show, and trying to bet against it was just a losing activity.
Now private bond traders are chattering about how banks are hurting “price discovery.”
what does that mean?
This means that private markets are not sure about the price at which bonds would trade without a central bank.
They don’t have to worry.
Bank of Japan won’t be handing control to gamblers anytime soon – if at all.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
