As Tokyo tightens, US Treasuries wobble


(MENAFN – Asia Times) TOKYO – Did the Bank of Japan (BOJ) just shout “Uncle”? when it widened its bond trading band and signaled its curb on stock purchases? No. But BOJ Governor Haruhiko Kuroda’s mild tightening moves on Friday suggest Tokyo is realizing what it has been doing in recent years is not working. In general, the effects of Kuroda’s trick have hit markets that are geographically far from the BOJ’s Tokyo headquarters. In true “butterfly wing” fashion, the smallest wave in Tokyo was enough to surprise the fragile, nervous and frankly vulnerable USA and trigger a “risk-off” trade. US Treasury bond yields soared after hints were given Thursday of the BOJ adjustment that amounts to a slight tightening of credit conditions. US 10 Year Returns temporarily rose to 1.75% for TO READ THE FULL STORY {{sharing.sharer}} paid $ 1.00 to share this story with you.
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TOKYO – Did the Bank of Japan (BOJ) just yell “Uncle”? when it widened its bond trading band and signaled its curb on stock purchases?

No. But BOJ Governor Haruhiko Kuroda suggests Tokyo realizes what it has been doing in recent years is not working.

In general, the effects of Kuroda’s trick have hit markets that are geographically far from the BOJ’s Tokyo headquarters.

In true “butterfly wing” fashion, the smallest wave in Tokyo was enough to surprise the fragile, nervous and frankly vulnerable USA and trigger a “risk-off” trade.

US Treasury bond yields soared after hints were given Thursday of the BOJ adjustment that amounts to a slight tightening of credit conditions. US 10-year yields rose briefly to 1.75% for the first time since January 2020. Crude oil prices even fell by 7%.

Such changes don’t happen in a vacuum. Right now, the world is dominated by geopolitical nervousness as the Joe Biden administration takes early steps in its China policy, and financial nervousness that is in recognition of how much money Washington owes the world.

The BOJ’s fine-tuning was made official just hours after the spectacular duel between the US and China diplomatic corps in Alaska. The first meeting between President Joe Biden’s Secretary of State Antony Blinken and his comes as America’s debt rises to $ 30 trillion – and China holds the mortgage.

Beijing and Tokyo are by far the largest holders of US Treasuries. That fact, combined with the BOJ’s butterfly wing, resulted in a rapid spike in US interest rates.

All of this speaks to the uncertainty of the moment.


Japan uses hundreds of trillion yen as an incentive, but its economic impact is suffering from the law of falling returns. Photo: AFP
Kurodas optimizations

The BOJ’s policy review was the first since 2016. It took two steps.

On the monetary front, the BOJ is expanding its flexible trading band on either side of its 0% target for 10-year returns. On the stocks side, the BOJ could curb its annual yen 6 trillion ($ 55 billion) purchases through exchange-traded funds.

As Kuroda said in a Friday afternoon press conference, “Japan’s economy remains in dire straits due to the effects of the pandemic, but it is growing … The trend is expected to improve as the effects of the pandemic wear off.”

On the same day that traders digested the BOJ’s recalibration efforts, news came that consumer prices had fallen for a month in February.

Thanks to the disruptions from Covid-19, the Kuroda team is even away from its target price of 2%. So the moves on Friday were less of a winning streak than an admission that the BOJ does more harm than good.

For example, banks have been complaining since 2016 that the BOJ’s negative interest rate policy is destroying profit margins. Commercial and smaller regional institutions in particular claim that the BOJ’s yield curve control policy has made lending and trading exponentially more difficult.

The problem is the “flat” spread between two-year and 30-year-old Japanese, around 80 basis points.

Bankers rely on the spread to borrow at one rate in the money markets and lend at a higher rate, making the difference. Japan’s flat curve is similar to the steepening curve in most other developed markets when inflation expectations rise.

Even so, the BOJ is still anxious to stay in control, says Mitsubishi UFJ Morgan Stanley Securities economist Hiroshi Miyazaki. The BOJ, he says, “sends a message that it is able to prevent returns from rising too quickly”.

ETF optimization

As Kuroda put it, “When long-term interest rates are limited in a certain range, they can fluctuate without reducing the effects of monetary easing and help improve market functions.”

The ETF tweak can be far more important. Investors, lawmakers and former BOJ officials expressed concern over the gap between a 30-year high and a pandemic-ravaged economy.

The concern was that the BOJ’s epic ETF purchases distorted equity market independence and pumped unnecessary foam into valuations.

The EFT binge has its roots in the last major BOJ review in 2016.




A masked pedestrian walks past a stock indicator that shows the stock prices of the Tokyo Stock Exchange in Tokyo on January 4, 2021, the first day of trading of the year. Photo: AFP / Behrouz Mehri

At that time, together with the announcement of a negative interest rate policy, Kuroda & Co increased its share purchases exponentially.

Within two years, however, the BOJ was the majority of all publicly traded companies, an uncomfortable role for a top monetary authority. The BOJs surpassed the Japanese economy of $ 5 trillion, a first for a nation of the Group of Seven.

In addition to the risk of foaming, Japanese stocks have another “whale” that drives the price / earnings ratio up: the gigantic Government Pension Investment Fund.

So much public money to support corporate management teams that it may not deserve creates a moral hazard. Why innovate, restructure, or recalibrate the staff when you have two giant sugar dads with really deep pockets?

Hence Kuroda’s step back from the BOJ’s formal commitment to 6 trillion yen annually. Still, if the Nikkei or Topix index stocks wobble, the odds are that the central bank will remain a big buyer.

“The BOJ needs to be incredibly careful here and cannot be seen as a policy taper. Therefore, they realized they could buy more if needed,” says Moody’s Analytics economist Katrina Ell. “This move is part of the BOJ’s efforts to achieve more sustainable results.”

Despite all the volatility in the US markets, Tokyo appeared to be taking things easy.

“The yen is still uninspired by the BOJ,” says strategist Daniel Dubrovsky of DailyFX.com. Despite adjustments to yields and ETFs, he notes, “Japan rates are likely to remain low / negative for some time, same story.”

All of this means that the global picture is far more complicated.

If the world’s largest debt market is unsettled just a few flaps from Kuroda, 10,900 kilometers away, the financial systems are in a dangerously fragile state.


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