Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Funny Money Turns Serious

Interest-Rates / Quantitative Easing May 27, 2013 - 01:30 PM GMT

By: Brady_Willett


When former Asian Development Bank head, Haruhiko Kuroda, was nominated to be the next Bank of Japan Governor on February 27, 2013 he was not shy about stating his intentions: “there is "plenty of room for monetary easing”” (WSJ). And after landing the job as BOJ Chief, Kuroda immediately confirmed that he would do “whatever it takes” to end deflation.  Well, a mere two months and a massive new printing scheme later, Kuroda is already on the defensive, arguing that a recent jump in bonds yields is manageable and asset prices are not behaving irrationally.

“There is no sign at this point of excessively bullish expectations in asset markets or in the activities of financial institutions”   BOJ Governor Haruhiko Kuroda

Truth be told, the ‘excessively bullish expectations’ Kuroda is referring to may have already come and gone in the Japanese bond market.  To be sure, immediately following the BOJ’s pledge to produce 2% inflation via a massive new printing scheme the yield on the 10-year slumped to a record low of 0.315%.  Given that no sane individual is happily lending the Japanese government money for 10-years for this miniscule return, it is safe to say that the BOJ’s printing scheme – and the speculation it unleashed – precipitated this temporary rush into bonds.

As incredible as 0.315% was, 1.002% was even more remarkable.  1.002% was the intraday high that the 10-year yield hit last week - a level that immediately sparked the BOJ to act in a defensive rather than offensive manner and buy bonds.

Some have argued that the increase in long-term interest rates has occurred because money is favoring foreign bonds and the race-track that is Japanese equities.  Fund flows and a surging Nikkei seemed to confirm this (as of the May 23, 2013 the Nikkei was up a whopping 53% in 2013!).  However, the dreamy scenario of money leaving Japanese bonds and flying into equities turned into a nightmare last week when the spike in interest rates, along with a worrisome PMI report from China, sparked a 7.3% meltdown in the Nikkei (from intraday high on May 23 to intraday low on May 24 the slump was an even more fantastic -12.3%). Suddenly, the speculation that Japan, the third largest economy in the world, is on the edge of sparking a financial calamity is no longer uttered solely by the fringe.

Japan Changes The Tone

The line between success and catastrophic failure is exceptional thin in Japan.  This is the case not only because achieving an inflation rate of 2% without stoking financial bubbles/volatility is a difficult proposition, but also because of Japan’s massive debt.  As Kyle Bass (see Mauldin’s excellent recap) notes, “if JGB interest rates rise 2% in Japan, then the government must pay almost 80% of its revenues (as currently received) just to cover the interest on its debt”.  Suffice to say, given Japan’s debt albatross interest rates can not be permitted to rise all that much, which makes every Kuroda’ intervention into the bond market so intense.

Put simply, given it’s debt load and inflexible policy options, there is the real risk that Japan’s financial markets and economy become so terminally reliant on money printing that confidence in the Yen collapses. And while last week’s volatility in Japanese markets may not inspire debt default and/or the end-game exodus from Yen, it did provide a budding contradiction to the good-time QE feelings permeating the financial landscape only a few short weeks ago.


Despite the Eurozone’s ongoing sovereign issues and Bernanke’s precarious print-fest, Japan is likely to be the first real nightmare for a world increasingly fixated on printing money to try and solve problems.  Mired in a multi-decade economic funk that is riddled with failed stimulus policies Japan has been late to the current QE party, but they are now firmly in the lead.  That Kuroda and company are already openly defending their printing policies, extending their 2% inflation target from 2 to 3-years, and squabbling with each other does not inspire much confidence that more money printing will make things better (see BOJ Minutes ~ Reuters Recap).

In short, the idea that more debt and money printing somehow always transmutes into lower interest rates is a temporary phenomenon.  We are in one of those rare moments in history where fiat money can make markets do funny things (i.e. 0.315%). But as Japan nears the point when seemingly innocuous inflation targeting becomes blatant debt monetization, the tone is threatening to become more serious.

By Brady Willett was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in