BOJ Holds Policy
Macro Perspectives
Yesterday’s note touched on the signal gold may be sending.
Perhaps this will be the year that the consequences of $10 trillion or more in global deficit spending in response to the pandemic are imposed. Of course, that was adding to what was already an unsustainable global sovereign debt situation.
It's a bubble.
We, the powers at be, seem to be building toward a global debt restructuring, and a new currency regime (likely coming in the form of central bank backed digital currencies). If that indeed is the ultimate destination, will it be slow moving, or will it be event driven (a shock event)?
With the above in mind, we looked at Japan as a hot-spot and potential catalyst for the onset of another crisis in global sovereign debt markets. Global interest rates have been rising. Japan, having the world's largest debt load, relative to the size of its economy, is most vulnerable to rising interest rates. That's why the Bank of Japan has held rates near zero, despite the rest of the Western world ratcheting rates 250 to 450 basis points higher.
The rapid growth in that interest rate spread promotes the flight of capital OUT of Japan, and in search of higher yield. The pain of that dynamic is only compounded by speculative capital trading the direction of those capital flows (i.e. out of Japanese assets, out of the yen).
Add to this, with inflation rising to four-decade highs in Japan, the Japanese government bond (JGB) market would be in sharp decline IF it were left to market forces.
But as we know, the Bank of Japan is in control of the government bond market. It is keeping a lid on JGB yields, through its "yield curve control" program. The question is: Are they losing control?
Will the selling pressure in JGBs become so great, in combination with the broader market forces of inflation and higher global interest rates, that the Bank of Japan is forced to back off, at some point, and let its bond market go (i.e. let market forces determine the appropriate interest rate)?
The Bank of Japan are meeting this evening (at the time of writing), and will decide on monetary policy - this may not be a graceful exit of emergency polices by the Bank of Japan.
Update: The Bank of Japan left its yield curve control policy unchanged.
