Saturday, July 29, 2023

"Bank of Japan tiptoes toward financial bedlam"

Because Japan has the potential to really, really (really) change market perceptions and realities (for they are far from being the same) this is the most dangerous of the known macro risks.*

From Asia Times via MENAFN July 21:

Has Bank of Japan (BOJ) Governor Kazuo Ueda, 103 days into the job, already blown it?

Inquiring minds in trading pits everywhere can't help but wonder as inflation and gross domestic product (GDP) diverge in dangerous ways. And markets are getting exactly the last thing you'd want from Ueda's BOJ: crickets.

Data released on Friday (July 21) showed that core inflation, which excludes fresh food, rose 3.3% in June year on year, faster than in the US. Japan's inflation surge shows how quickly price dynamics can shift - and perhaps get away from a central bank.

This adds an economic exclamation point to next week's BOJ policy meeting. The two-day event ending July 28 is shaping up to be the BOJ's last chance to salvage its reputation in world markets.

The odds the BOJ will do just that aren't great.“Although we don't rule out some yield-curve-control-related change at the BoJ's upcoming policy meeting, our base case is for the central bank to stick to its guns,” says Stefan Angrick, senior economist at Moody's Analytics.

Norman Villamin, group chief strategist at Union Bancaire Privée, adds that“the Bank of Japan may once again be forced to defend the policy via liquidity injections moving through the summer.”

Given Ueda's recent comments, Mitsuhiro Furusawa, a former vice minister of finance for international affairs, told Bloomberg:“It's unlikely that the bank will modify the instrument at the upcoming meeting. In the past, I thought July is possible, but the way he's speaking, if he moves next week, it'll be a major surprise.”

This crisis of confidence confronting the BOJ has many fathers, of course. Blame must be shared by Prime Minister Fumio Kishida's ruling Liberal Democratic Party (LDP) for squandering the last decade. The same goes for a succession of BOJ leaders who forget about what William McChesney Martin said about punch bowls 70 years ago.

It was in 1951 when Martin, then chairman of the US Federal Reserve, famously quipped that a central banker's job is to remove the punchbowl just as the party gets going. Far from internalizing this mindset as, say the Bundesbank of old did, the BOJ has been refilling and refilling the punchbowl for decades.

First, with the quantitative easing that the BOJ pioneered in 2000 and 2001, just after cutting rates to zero in 1999. The unsurprising result is a level of financial intoxication that no Group of Seven (G7) economy had ever known.

Easy money: Japan has a long history of quantitative easing Photo: Agencies

Twenty-plus years ago, when then-BOJ leader Masaru Hayami served up quantitative easing (QE), it was meant to be a special monetary cocktail available for a limited time only. Over time, though, the Tokyo political establishment got hooked on loose monetary policy.

One government after another prodded the BOJ leader at the moment to keep the liquidity flowing - and to up the dosage. This cycle got supersized in 2013, when the LDP hired Ueda's predecessor, Haruhiko Kuroda.

At the time, then-prime minister Shinzo Abe said he was mixing up his own cocktail of badly needed structural reforms to end deflation. Abe promised a mix of Ronald Reagan and Margaret Thatcher with Japanese characteristics. Mostly, though, Abe just prodded Kuroda to add more punch bowls.

It backfired. As Kuroda fired his monetary“bazooka,” the yen plunged and exports soared. That generated a corporate earnings boom, one that propelled the Nikkei Stock Average up 57% in 2013 alone.

But those gains never made it to the average Japanese as wages flatlined. That's because Abe's party failed to implement the supply-side revolution it promised.

Moves fell by the wayside to cut red tape, liberalize labor markets, increase innovation and productivity, empower women and restore Tokyo's place as Asia's financial hub. Instead, Abe bet it all on ultraloose central bank policies, the likes of which modern economics had never seen before.

In short order, the Kuroda-led BOJ drove the yen down 30%, hoarded more than half of all outstanding Japanese government bonds and morphed the BOJ into a giant hedge fund by gorging on stocks. By 2018, the BOJ's balance sheet topped the size of Japan's US$5 trillion economy, a first for G7 members.

None of it generated real inflation, though. That took Vladimir Putin's invasion of Ukraine. The massive boost to oil prices had Japan importing too much inflation too fast via an undervalued exchange rate. The Putin factor collided with Covid-19 era supply chain price pressures.

Japan suddenly had the inflation it sought for a decade. It was the“bad” kind, though, generated more by supply shocks than rising consumer demand. It also came too quickly, catching BOJ officials flat-footed....

*ZeroHedge was so concerned that in the 18 hours after the Friday BoJ meeting they had seven stories either addressing or referencing the Bank, an approach they usually reserve for high-traffic U.S. political stories: