It is time again to look East to Nihon to examine the news from the Bank of Japan.Plus an update on its hedge fund The Tokyo Whale. Let us start with what for us at least is the easy bit.
The Bank will encourage the uncollateralized overnight call rate to remain at around 0.5 percent.
What I mean by that is more than a few have fallen for the Bank of Japan promises about higher official interest-rates. Let me take you back to the 6th of February and the words of Board Member Tamura-san.
My sense is that the neutral interest rate would be at
least around 1 percent. Therefore, I think it is necessary for the Bank to raise the short-term interest rate to at least that level by the second half of fiscal 2025…
Yet some time later it is still 0.5% and as I scan the online version of the front page of the Japanese owned Financial Times I see no mention of the Bank of Japan at all. Perhaps they wish to avoid a topic where any sensible analysis would suggest an interest-rate rise.
Japan’s core inflation accelerated to 3.5% in April, government data showed Friday, bolstered in part by surging rice prices, as the central bank considers pausing its rate hike posture to assess the impact of U.S. tariffs. ( CNBC)
I have quoted the core rate because that is what the Bank of Japan claims to look at. As it happens the headline rate is similar.
Headline inflation climbed 3.6% from a year ago, steady from the prior month and staying above the Bank of Japan’s 2% target for more than three years. ( CNBC)
Along the way we see that CNBC has fallen for all the open mouth operations.
Bank of Japan Governor Kazuo Ueda has signaled his stance on intending to raise rates given price trends, while also citing the need to monitor closely the effects of U.S. tariffs.
Rice Rice Baby
This is a slightly curious issue but let me start with a reminder.
Rice prices in Japan have doubled over the year. The average price in 1,000 supermarkets across the country reportedly continued to hit record highs, with prices for a 5-kilogram bag of rice hiking by 54 yen from the previous week to 4,268 yen ($29.63) as of May 11. ( CNBC)
The reason I say curious is that other countries seem to have plenty so why doesn’t Japan increase imports? But as we stand Japan has quite a food driven cost of living crisis. This from The Asahi Shimburn shows how deep the crisis is.
“In response to soaring rice prices, the government is promoting sales of rice reserves through direct contracts with retailers,” the notice said. “Despite this situation, rice balls, bento meals and other cooked rice products have been wasted. This is socially unacceptable.”
Whilst I agree that one should try to avoid food waste governments always look for scapegoats when they are in a mess. Oh and they also look to fiddle the numbers.
The government will abolish publication of its annual rice crop index that has been used for decades to assess the yield of Japan’s rice harvests, farm minister Shinjiro Koizumi said June 16. ( The Asahi Shimburn)
Or maybe the UK Office for National Statistics has been involved.
The continued increase in the rice prices has added to concerns, with producers and wholesalers pointing to the lack of accuracy in official statistics.
The Japanese Government Bond Market
This is a rather different story because if we look back to the Covid pandemic period we see that the thirty-year yield was around 0.5% as The Tokyo Whale surged into the Japanese Government Bond market to impose Yield Curve Control. But the thirty-year yield has been above 3% this year and is 2.95% now. That means if you have 580,895,517,863,000 Yen of Japanese Government Bonds you are sitting on enormous capital losses on a mark to market basis.
The Yield Curve Control was expressed usually in terms of the ten-year yield. We can get a rough look via the futures market where the price was 152 or so back in the Covid days and is now 139. That is a large loss when you own that many bonds.That is why as I pointed out on the 2nd of November 2023 that the official position is denial.
For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses unrealized gains/losses as reference information. As of March 31, 2023, the FRB held substantial unrealized losses on its bond holdings, amounting to 0.9 trillion dollars.However, this does not directly affect its actual profits/losses, as in the case of the Bank of Japan. ( Governor Ueda-san)
It is their version of this from Shaggy.
But she caught me on the counter (It wasn’t me)
Saw me bangin’ on the sofa (It wasn’t me)
I even had her in the shower (It wasn’t me)
She even caught me on camera (It wasn’t me)
She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the screams gettin’ louder (It wasn’t me)
Bringing things really up to date they are now losing money on many of their purchases on an interest or carry basis as well. The official interest-rate may only be 0.5% but when you buy like the Bank of Japan did you lose money this way as well. This as I have pointed out quite a few times is a big reason why for all its open mouth operations the Bank of Japan wants to raise interest-rates as little as possible. They create losses even it cannot hide.
QE is back on the menu
The previous plan to gradually phase out QE bond buying has been replaced and the emphasis is mine.
Regarding the reduction of its purchase amount of Japanese government bonds (JGBs), the Bank decided, by an 8-1 majority vote, on a plan to reduce the amount of its monthly outright purchases of JGBs so that it will be about 2 trillion yen in January-March 2027. The amount will be cut down, in principle, by about 400 billion yen each calendar quarter until JanuaryMarch 2026, and by about 200 billion yen each calendar quarter from April-June 2026.
In fact if you do not behave yourselves in the bond markets “I’ll be back” ( h/t The Terminator)
In the case of a rapid rise in long-term interest rates, it will make nimble responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations of JGBs
The idea of the Bank of Japan being “nimble” is the funniest thing I have seen this week.Although there is some competition here.
while allowing enough flexibility to support stability in the JGB markets
Regular readers will know that I have long argued that a realistic or what central bankers might otherwise call “normal” level for the Japanese ten-year is around 1.5% to 2%.So we are pretty much there ( 1.48%) and our control freaks cannot let go.
Comment
As I have argued many times the real driving force for Japanese monetary policy is a combination of both the size of position and accumulated losses of The Tokyo Whale. Next up is the position of the Japanese government which has got used to The Tokyo Whale enforcing financial repression on interest-rates and bond yields meaning it has low debt costs. They are now rising fast.
TOKYO, Jan 30 (Reuters) – Japan’s annual interest payments on government debt could surge more than 50% over the next few years, government estimates showed on Thursday, highlighting the country’s struggle to fix its tattered public finances amid rising interest rates.
Next up is one of the causes of the higher debt and it may also be picking up speed.
The number of babies born in Japan in 2024 fell to a record low of 686,061, marking the first time the figure has dipped below 700,000 since statistic keeping began in 1899, the health ministry announced on June 4.
A ministry official described the situation as “critical,” saying, “Multiple complex factors are preventing individuals from fulfilling their hopes of marriage and starting families.” ( The Asahi Shimburn)
The numbers are also very Japanese and would probably not be allowed in the UK.
The figures exclude foreign nationals born in Japan and Japanese nationals born outside the country.