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The BoJ Give the B-’Okay’ on Looser Yields

Japan is kind of like the US’s much smaller, older, and far more indebted cousin. We can’t really do much to help, but it’s okay because neither one really wants our help anyway.

But when we see signs like yesterday, that little bit of remaining hope reignites. Late Monday evening (early afternoon on Tuesday in Japan), the nation’s central bank announced plans to relax just a little bit on its notorious yield curve controls.

Background: Since Fall 2016, the Bank of Japan has allowed itself to buy unlimited (and ungodly) amounts of the nation’s debt in an effort to ease monetary policy conditions.

QE haters in the US would’ve died 10 times over if the Fed did anything remotely close to this. But for the past 6 years, this has been par for the course in the Land of the Rising Sun.

The ability to buy n amounts of bonds allows the BoJ to essentially eviscerate market demand for these instruments and thus keep yields and rates ultra-super-mega low, to use a technical term.

Those artificially low yields and rates ensure a few things. First, for a country with debt ~2.6 times its GDP, keeping the rate on your interest payments as low as scientifically possible is probably a decent idea to not bankrupt literally everyone. Second, ultra-easy monetary conditions provoke inflation, something Japan hasn’t smelled since the ‘80s.

Now, wanting inflation may sound strange in this day and age. But the reason the Fed targets 2% annual price gains is that the alternative is much worse.

Minor inflation allows for a growing economy and ensures that price-based demand today is higher than tomorrow.

When you have deflation, no one buys anything because it’ll be cheaper tomorrow, leading to a truly devastating cycle much more detrimental and harder to remedy than rising inflation.

So, to keep debt payments low and deflation at bay, Japan has enacted what inflation doves in the US can only imagine: a target of 0% on its 10-year yield.

But what happened? Why is everyone tweaking, and why did Japan’s yen rise against other currencies for the first time since the days of the Samurai?

Basically, the BoJ announced it would chill on its egregious bond purchases to allow yields to fluctuate between -0.5% and 0.5%, up from the previous -0.25% and 0.25%.

This is a sign that the BoJ is moving away from the monetary policy equivalent of Pablo Escobar burning dollar bills to heat his house and towards a policy that would make Adam Smith gag just a little less.

While it’s not a huge change, it’s the fact that there was any change that’s the true shock. No one saw this coming, hence the 10-year Japanese bond yield jumping all the way to 0.46% and the yen’s once-in-a-blue-moon rise.

Often in markets, the direction is what matters, not the level itself. Just the fact that Japan is starting to wean off the opioid of ultra-super-mega QE is a sign of changes to come. We’ll see…

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