As a result of the ongoing bond rout, an interesting dynamic has emerged post the recent sell-off. With 10 year Japanese yields edging back above zero intra-day yesterday and again this morning (currently 0.027%) for the first time since September 21st the market is now watching the BOJ’s every move, and specifically whether the Japanese central bank will defend the zero level, as it declared it would at its especially if the global yield sell-off gathers pace over the coming weeks and months.
Asa reminder, on September 21, the BOJ surprised the world when it announced its latest monetary policy iteration dubbed “QQE with Yield Curve Control”, according to which the BOJ would buy JGBs such that 10-year yield remain at the current level of around zero percent. Ironically, at the time – when yields were far lower – the BOJ was implicitly threatening it would taper purchases to prevent yields from going too low. It is now, however, facing the opposite problem as suddenly global yields are soaring following the Trump presidency.
Why the keen focus on what Kuroda will do next? Because as DB’s Jim Reid explains, “it would be a strange decision to abandon the new policy so soon after announcing it so assuming global yields remain elevated they may be forced to buy more JGBs than they thought when the new scheme was announced.”
But where the BOJ’s reaction gets more interesting is what it means internationally: if the BoJ sticks to defending zero in a world where the US is likely to increase fiscal spending then you could make an argument that there is full blown helicopter money except that the BoJ is flying the copter over the US and may be about to become the new US government’s best friend.
Alternatively, one can make the argument that Trump is Japan’s best friend, with his election sending the Yen plunging by 8% in only one week.
Reid concludes that without the BOJ and without the ECB, it might be that Trump would be less able to spend freely on the fiscal side as yields would be less supported globally.
Unless, of course, Kuroda flip-flops and announces in the next BOJ meeting that QQEWYCC was a failed experiment at controlling the yield curve, one whose time has passed, and the result will be a spike in long yields across the globe, as the anti-Trump bond vigilantes, who were frozen for years under the Fed’s financial repression, wake up and make up for their long absence by slamming the global bond complex, in the process making any Trump fiscal easing contingent on Yellen launching QE4, as we speculated yesterday may very well end up happening.
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