The Bank of Japan is winning the bond war but not the economic one

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by Shaun Richards

Last week brought a couple of developments that will have raised a wry smile in the land of the rising sun or Nihon. The first has been the fall in bond yields we have been seeing which picked up pace. In itself that poses a question for central banks that have raised interest-rates and the obvious example is the US Federal Reserve. Over the last 2 policy meetings it has raised its official interest-rate by 1.5% but the benchmark US ten-year yield has fallen by around 0.75%, and is 2.68% as I type this. This poses a question for the US Federal Reserve but also remember that the Bank of Japan is doing this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero

When we last looked at this the Bank of Japan was singing along with Queen and David Bowie.

Pressure pushin’ down on me
Pressin’ down on you, no man ask for
Under pressure that brings a building down
Splits a family in two, puts people on streets

Which meant that there has been some flexibility applied.

In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

In practical terms the Bank of Japan was holding the line at a yield of 0.25% rather than 0%.

But this morning the picture looks different to when we were noting an array of hedge funds surrounding the Bank of Japan looking to break the Yield Curve Control threshold. Here is Bloomberg on the state of play from last week.

BlueBay Asset Management is committed to its bet against Japanese bonds despite a global debt rally that has led to a sharp retreat in yields…….“As at this morning 10-year yields are at 0.21%,” he said Tuesday. “We entered the position at 0.23% so truthfully speaking nothing has really happened.”

This morning it is at 0.18% and is more significant than they are letting on. This trade has been called the “Widowmaker” for good reason although the loss so far is as much as in capital tied up rather than large losses.

The Yen

The Bank of Japan will be pleased about this although there is a nuance.

LONDON, Aug 1 (Reuters) – The U.S. dollar sank to its lowest in more than six weeks versus the Japanese yen on Monday……….The dollar sank to its lowest level versus the yen since mid-June at 132.07 , down more than 5% from a late 1998 peak of nearly 140 yen hit last month.

It will not have liked the way that the fall became a rout at times but of course under Abenomics a lower value for the Yen was effectively an “arrow” of policy. The irony was that after the initial falls not much happened and at times we saw Yen strength such as the “flash crash” to around 103.

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Reuters got rather excited about the latest numbers.

Japan’s core consumer inflation remained above the central bank’s 2% target for a third straight month in June, as the economy faced pressure from high global raw material prices that have pushed up the cost of the country’s imports.

But it was a number other central banks can only dream of presently.

The nationwide core consumer price index (CPI), which excludes volatile fresh food costs but includes those of energy, rose 2.2% in June from a year earlier, government data showed.

The headline at 2.4% was as you can see very little different and even dipped slightly on last month. So the Bank of Japan is after many years actually pretty much on target. But it took a surge in energy costs and a currency fall to get there.

With the producer price index having been over 9% for all of 2022 so far I think it is reasonable to question the numbers? But the official series has not moved much.

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Real Wages

The wages series suggests a typical monthly wage of around 277,000 Yen but we get a reminder of one of the major players in the “lost decade” period as we note it is only up by 1% on a year ago. The highest paid group is the information and communication sector at 448,000 Yen and the lowest the hospitality sector at 127,346.

The real wages series tells us that they were some 1.8% lower in May than a year before. This is a regular drumbeat for Japan and I will return to it.

The Economy

Bank of Japan Deputy Governor Iwate-san told us this on Thursday.

In terms of the medians of the Policy Board members’ forecasts, Japan’s real GDP growth rate is expected to be at 2.4 percent for fiscal 2022, 2.0 percent for fiscal 2023, and 1.3 percent for fiscal 2024.

Not stellar levels but well above its potential.

As Japan’s recent potential growth rate is estimated to be
in the range of 0.0-0.5 percent, the forecasts show that the economy is projected to continue
growing at a pace above its potential growth rate for four consecutive years when including
fiscal 2021.

Also Japan has lagged its peers.

The level of GDP is expected to recover to the pre-pandemic level (the 2019
average) around the second half of this fiscal year. However, the pace of recovery has been
slower than in Europe and the United States

The issue I have is the supposed logic for the recovery now. Japan’s producers will be affected by the rises in costs especially energy ones.

Japan is battling its worst energy crisis in recent history that has exposed its energy security vulnerability, as scorching weather and surging oil and gas prices have led to spiking electricity rates, prompting calls from the Japanese government for residents to conserve power. Japan is extremely dependent on imported energy, with more than 90% of domestic consumption reliant on foreign oil and gas……..and Moscow’s shock nationalisation of the Sakhalin 2 LNG and oil project in the Russian Far East. ( Natural Gas News)

Could there be rationing? One response has been the re-opening of some nuclear plants.

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Also the rise on employee income is not coming from real wages as we have already seen.

Meanwhile, employee income has improved moderately, reflecting rises in the number of
employees and wages associated with a recovery in economic activity. Such improvement
in employee income is projected to continue; supported by this, private consumption is
expected to keep increasing steadily from fiscal 2023 onward, although the pace of
materialization of pent-up demand is likely to slow.


There is so much here that is typically Japanese. They have stuck to their guns on monetary policy and whilst official interest-rates have left then increasingly lonely in the icy cold world of NIRP with a rate of -0.1%, bond yields have gone their way. With its large equity holdings the Bank of Japan in its alter ego of The Tokyo Whale will be pleased to see the Nikkei-225 just below 28,000. I am not sure they know what their Yen policy is now? But they will not have liked the fast falls so that has improved too.

The problem comes with the real economy and let me return to the subject of real wages and this analysis from The Japan Times from February.

On top of deflation, many economists claim that Japan’s sluggish wage growth is linked to a soaring number of part-time and contract workers over the last few decades.

Companies use such workers to save costs. Full-time employees are heavily protected by law, so employers hired more and more part-timers and contract employees as they are easier to lay off when times are tough.

In the early 1990s, part-time and contract workers comprised about 20% of the total employed workforce, a figure that shot up to 36.7% in 2021.

There is a huge wage gap between employees with full-time contracts and those without, so the increase of part-time and contract workers drags down the growth of Japan’s average salaries overall.

However you spin it there is an issue here which undercuts a Japanese success story which is the low unemployment rate.


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