Bank of Japan Governor Kuroda feeling the pain of a stronger Yen
Exactly five months ago The Spear lamented the slow murder of money in this blog. Since then, the RBA has delivered on The Spear’s portents of MOAR easy money, lowering the cash rate twice by 25bp, to an all time low of 1.50%, citing low inflation.
On the other side of the world, the most important central banker in the world, Janet Yellen, continues to sit on the sidelines, refusing to raise interest rates against the forecasts of most economists despite amenable employment figures and signs of mounting inflation. Perhaps she is still trigger-shy after the yuuuge market sell-off following the last time she rose rates in December 2015.
Now, the craziest of the crazy overlords of money, the Bank of Japan, seem to have changed their tune somewhat. The BoJ has shifted its focus away from the deepening of negative rates and fulsome quantitative easing, given the severe impact this is having on the profitability of its pension funds and banks, the mainstays of the Japanese financial system. Instead it is proposing to implement selective control of points on the yield curve, which one would assume would require ‘open market operations’, i.e the buying and selling of bonds of different maturities, similar to how central banks set overnight cash rates.
It seems the BoJ is indeed approaching what The Spear previously alluded to as the ‘end-game’ of monetary abuse, whereby there are fewer free-lunches to be had. Short-term rate reductions are exhausted. ‘Quantitative easing’ via asset purchases is not having the desired effects. Deeply negative rates threaten to destroy the viability of the financial system. The next time a crisis hits, most central banks will open their tool-boxes and find them almost bare.
For now, the governments of the world seem content to wait until that crisis, relying on central banks to conjure up some new devices by which to stimulate ailing economies. It however seems increasingly likely that fiscal stimulus will be the name of the game in the next downturn, as the central bankers are unlikely to pull a rabbit out of the hat. But don’t be surprised if that stimulus needs to be directly financed by the central bank.
In Europe, the sick man of Europe, Deutsche Bank, looms over the financial system, threatening a supernova that would put Lehman in the shade. Sure, the banks are better capitalised this time around, but the balance sheets of corporates, households and governments are soaked in debt. The banks may not require bail-outs, but investors may find themselves overly leveraged, precipitating a liquidity crisis.
Back to Australia, and the RBA’s new governor, Phil Lowe (a fitting name given interest rate levels), has kicked off his reign by telling the house of representative’s committee:
“If we need to increase spending in a downturn, the debt levels will already be high and we will not be able to borrow that much — this is what happened in Europe. So for the sake of our children, for our own sake and for the sake of having decent insurance, I think we need to be very disciplined about recurrent expenditure.”
Amen to that. But it is likely a case of talking to the hand, cause the political face ain’t listening.