As the world is now fully aware, The BOJ surprised markets in January when it set a –0.1% rate on some deposits that banks place at the central bank, effective from mid-February. Its move was designed to encourage banks to lend more, spurring higher spending and inflation. Things are not working so well…
And now, as The Wall Street Journal reports, some are already doubting the policy…
Trading has withered in Japan’s money markets, where big banks and others usually park their excess cash hoping to receive some interest—despite predictions from the Bank of Japan that its latest easing of monetary policy would spark more activity.
Traders have also pushed up the yen believing Japan’s central bank can’t do much more to ease policy.
“Every day is like being Alice in Wonderland,” said Tomohisa Fujiki, head of interest-rate strategy at BNP Paribas Securities Japan. “Interest-rates levels are having no effect on credit demand, the market function is declining. You can’t expect everything to go according to plan.”
“There’s no guarantee that lowering interest rates for retail and corporate borrowing would have the same effect [of preventing deflation] as it did in Europe,” said Nobuyuki Hirano, president of Mitsubishi UFJ Financial ??Group?Inc., Japan’s biggest bank, on Thursday, adding the negative-interest policy had caused households and businesses to rein in spending amid growing uncertainty over the future.
But it is the money markets that are becoming a major issue…
Money markets allow banks and other financial institutions to lend and borrow money for a period of less than a year, often not backed by collateral. If fewer banks invest cash in short-term markets, it is harder for other banks to get short-term loans to finance their operations.
One problem has been Japanese banks’ computer systems: The trade confirmation system used by money-market brokers wasn’t fully updated for negative interest rates until over a month after the BOJ rate cut. Money-market trading volumes dropped to their lowest level since at least 2011 at the end of March, according to Japan’s Money Brokers Association, down to nearly a tenth of January’s levels.
Japanese trust banks that manage cash on behalf of mutual and pension funds have in recent weeks been placing excess money on deposit at the Bank of Japan rather than into overnight money markets, where it might now attract a negative interest rate.
“If the money market dries up, if there is an event like the Lehman crisis, there won’t be the infrastructure for banks to raise capital,” said Naomi Muguruma, strategist at Mitsubishi UFJ Morgan Stanley Securities. “It could cause interest rates to rise sharply.”
Problems in the money markets have run counter to BOJ Governor Haruhiko Kuroda’s expectations: last month he said that as market players get used to negative rates, money-market trading should increase.
So – to sum up – NIRP has crushed liquidity (in all markets), sent foreign investors piling into JGBs to front-run chaotic BoJ buying, has actually discouraged risk-taking (breaking the back of Abe's crucial belief-based system of monetary policy), has strengthened the Yen (screwing the exporters), and finally – drum roll please – begun to drain money-market funds placing the entire Japanese financial system in a much more systemically-fragile state.
But apart from that – more of the same is just what the doctor ordered.
Given that Japan is now at QE22 with no signs of anything promised at all…
As Alhambra's Jeffrey Snider once wrote,
What none of those have amounted to is an actual and sustainable economic advance; NONE, no matter how you count them. In very simple fact, the idea that central banks “need” to keep doing them in continuous fashion is quite convincing that at the very least they don’t mean what central bankers think they mean, and perhaps worse that the more they are done and to greater extents the more harm that eventually befalls. It isn’t difficult to suggest and even directly observe that Japan’s economy has shrunk during the QE age, but that fact isn’t applicable to Japan alone (there are sure too many non-adjusted data points that uncomfortably assert the same for even the US). That would seem to at least offer a basis for a “deflationary mindset” no matter the actual economic effects.
This is not so much investing or even finance as it is a cult (calling it a religion or even ideology is unjustifiably too charitable). That is the usefulness of “deflationary mindset” not so much as a matter of actual economic pathology but as a built-in, squishy appeal to “we’ll get it right next time.” And there is always, always a next time which doesn’t seem to count for much inside the cult when, in fact, it is everything.
And so finally, as if you had not had enough of the farce they call Japan, we get this headline tonight:
- *BOJ SAID TO BE RECEPTIVE TO BUYING MORE ETFS: REUTERS
And scene. It really is the monetary equivalent of “the beatings will continue until morale improves.”
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