Summarized with a slightly modified quote from the video: “It remains to be seen if this crazy sh*t will work.”
Here are some summary bullets from Deutsche Bank:
- 1) Raising the opportunity cost of holding currency (cash) through negative nominal and real interest rates, and bringing future spending forward to the present through the inter-temporal substitution of consumption and investment.
- 2) Rising actual and expected inflation bring forward future household consumption.
- 3) Local currency depreciation, due to large-scale QE (though the monetary base is not the instrument anymore), leads to the recovery in export volumes, which has a positive impact on the real economy, while rising import prices lead to higher domestic inflation.
And here’s a bit more color:
Remember, the BoJ’s yield curve control amounts to a blank check. That is, the bank can basically buy as many bonds as they need to buy in order to keep 10s anchored at 0%. As SocGen’s Albert Edwards noted:
Under its new framework, the BOJ will buy long-term government bonds as necessary to keep 10y bond yields at current levels of around zero percent. Many commentators saw this as a monetary tightening, especially as 10y JGB yields were trading well below 0% at the time and both yields and the yen jumped higher. On reflection though, many commentators thought this interpretation of events was incorrect as the BoJ had effectively written the government a blank cheque for any fiscal expansion it wants, with the promise that yields would remain around zero. That might require Y80tr pa, or Y180tr, or indeed infinity!
This is made all the more interesting by the yield repricing that’s taking place in the US post-election.
Essentially, US yields are driving core rates higher and Japan will need to decide how much leeway there is around the 0% target for 10s. “With market consensus calling for higher yields and steeper curves across core markets as higher oil prices and expectations of fiscal stimulus boost the reflationary impulse, the pressure on the JGB curve to reprice higher will remain elevated,” Goldman wrote, earlier this month. “Market participants will continue to question if the BoJ will shift the yield curve target higher or allow for a wider band around the current target of 0% as global yields rise,” the bank added.
We’ve seen some curve steepening of late…
… but the problem is that the BoJ seems to want to have its cake and eat it too. That is, they want to keep 10s anchored at 0% but they also want a steeper curve, and while the rate repricing in the US can help with the latter, it might jeopardize the former. Here’s the latest out this morning (via Bloomberg):
- Japan’s sovereign curve marginally steepens, with 20-year yield rising 0.5bp to 0.580%, as BOJ reverses an earlier move to increase purchases of super-long term debt.
- BOJ offers to buy 190b yen of govt bonds due in 10 to 25 years, and 110b yen for maturities of more than 25 years
- The move reverses a 10b yen increase in purchases on Dec. 14 for each category – to 200b yen for 10 to 25 years and 120b yen for more than 25 years
In the end, the yield gap between US 10s and Japanese 10s is likely to widen further if the BoJ keeps its promise of keeping the things anchored at 0%. As Albert Edwards concludes, that means “spreads are going to widen very sharply indeed and the yen’s decline will accelerate until it revisits the 30y support level of around Y125/US$.”