When you set out to take Vienna, take Vienna
I’m not a fan of bond price pegging. Nonetheless, I currently believe that the BOJ should peg the yield on 10-year JGBs at 0%. And the reason is simple; a few months ago the BOJ promised to peg the 10-year at 0%. With that in mind, this report is worrisome:
Japan’s 10-year yield surged as traders judged the central bank’s expanded bond purchases Friday to be insufficient to cap borrowing costs as global rates advance.
The yield rose as much as 4 basis points to 0.15 percent, the highest since the Bank of Japan implemented its negative rate policy last January. . . .
“It’s not enough,” said Simon Pianfetti, a senior manager in the market solutions department at SMBC Trust Bank Ltd. in Tokyo. “The market will test the BOJ further.” . . .
Kuroda on Tuesday recommitted to his yield-curve control strategy, while pledging to cap bond purchases at 80 trillion yen per year.
That makes no sense. You cannot “commit” to a 0% bond yield, while at the same time “pledging” to cap purchases to 80 trillion per year. Perhaps one of my Japanese readers can tell me if something was lost in translation.
I suspect this confusion largely explains the recent rise in the yen, which is bad news for Japan.
Tags:
3. February 2017 at 07:00
BOJ never commited “0% peg”. No one said “0% peg”
lost in translation?
http://www.boj.or.jp/announcements/release_2017/k170131a.pdf
http://www.boj.or.jp/en/announcements/release_2017/k170131a.pdf
3. February 2017 at 07:29
Totally agree with you, Scott !!! I was confused about this the moment they implemented the “yield curve control” last year. You can either target the price or the quantity, but obviously not both at the same time.
Here is what’s written in the English statement, H_WASSHOI:
“The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB
yields will remain at around zero percent.”
Clearly a peg of 10-year JGBs at zero interest rates.
3. February 2017 at 07:43
Wasshoi, Thanks, that’s helpful. But I interpret this:
The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB
yields will remain at around zero percent. ”
As a 0% peg. I suppose the only issue is what does “close” mean, which is admittedly a judgement call.
Julius. Ha! I should have read yours before replying to Wasshoi
Perhaps the term in Japanese doesn’t imply quite as close as I am assuming.
3. February 2017 at 07:46
Julius Probst-san? German?
https://de.linkedin.com/in/julius-probst-731b642b
What is “around” mean?
3. February 2017 at 08:16
German, yes. That’s not me though. This is if anybody cares. http://portal.research.lu.se/portal/en/persons/julius-probst(723efadb-bf69-4932-a9d3-3284b4bfd53d).html
According to the following statement it’s not so much of a rigid peg but a “managed float” (like an exchange rate targets within a narrow band, maybe?).
So deviations within 10 basis points or maybe even more (?) seem to be acceptable.The problem I see here is that they have not clearly defined the band. They should have, because now they’re getting tested by the markets.
http://fortune.com/2016/09/30/boj-bank-of-japan-bonds/
3. February 2017 at 09:05
Since money is neutral and BOJ has a habit of being ‘cowardly’, as is well known, this post is largely a waste of time whether or not you believe money is neutral.
OT: posted here since Econlog says: “Commenter ban in place. See your email for more information.” – GMU is libertarian? Certainly not their moderator. I’m a dangerous mind…
Dr. Sumner on BrExit opinions: “This was widely treated as the biggest shock to hit the UK since the Suez crisis, if not WWII” but aside from the Economist and the small sample they cited, who else thought this? Wikipedia implies to the contrary: https://en.wikipedia.org/wiki/Brexit#Economic_effects (“European experts from the World Pensions Council (WPC) and the University of Bath have argued that, beyond short-lived market volatility, the long term economic prospects of Britain remain high…”). Perhaps the Economist saw BrExit as a negative due to the hit on their readers in the finance sector?
Sumner: “Back in March 2011, we learned that even a devastating earthquake/tsunami, which led to the complete shutdown of the extremely important Japanese nuclear power industry, would not impact the Japanese unemployment rate” – I believe the idea that large economies don’t get impacted by natural disasters was well known before March 2011. I recall reading about this fact more than a decade ago.
3. February 2017 at 14:30
Great post title. This bit of news is a related anecdote:
http://www.sonyalpharumors.com/sony-financial-report-foreign-exchange-rates-reduces-profit/
3. February 2017 at 15:00
And so Ray seems to have missed the huge drop in the consensus GDP growth forecast. Oh well.
Thanks Benny.
3. February 2017 at 15:19
Ray, I also enjoyed seeing you make a fool of yourself over at MR, in your comment on the Setser piece.
3. February 2017 at 16:56
I think Kuroda was saying 80 trillion yen per year is enough to get the job done.
Maybe it is.
Japan has moved to a no inflation, no unemployment economy.
I wish somebody would ask orthodox US macroeconomists to explain that result.
3. February 2017 at 17:06
Maybe the promise of the peg was foolish. I don’t know how much 10 year debt is being issued by the Japanese gov’t. But if it’s large enough, then buying a large % of it would be like QE on steroids, which would raise long term rates and force the BOJ to either (a) buy all the 10 year debt or (b) do something really contractionary so that 10 year rates got stuck at 0% because of very low or even negative NGDP expectations. I don’t like this peg idea.
3. February 2017 at 19:38
Bill—
Here is the thing: by 2020 Japanesr government will own all national government debt in Japan. The Bank of Japan and Japanese national pension systems own all the JGBs.
They still have deflation.
Western orthodox macroeconomists prefer…not to discuss Japan.
Adair Turner is on some youtubes…he makes a lot of sense on monetary policy
3. February 2017 at 22:42
Scott,
IMHO I think the BoJ just miscalculated a little. They announced a target rate and bumped up their bond purchases a little. They expected the market to push bond prices up, which it didn’t. At that point, Kuroda should have told his traders to totally burn the shorts so they won’t dis him in the future. We’ll see what he does on Monday.
Whoops – just read the paper. Looks like he already did just that on Friday afternoon pushing yields down to 0.09%
4. February 2017 at 00:40
While I agree in principle, I see no problem yet.
The BOJ committed to “around 0%”, so anything with a 0.1-handle certainly qualifies as being in line that commitment in my book – especially as stocks have surged, the yen dropped, and the economy picking up.
4. February 2017 at 09:32
@ssumner – “And so Ray seems to have missed the huge drop in the consensus GDP growth forecast. Oh well.” – yes, exactly my point, “oh well”, not a big deal. The World Pension Council did not see BrExit as a negative, only the London-based economists did in the Economist poll, and they’re talking their book. BTW which way is the economy going to go now? Please predict (and make a fool out of yourself).
As for making a fool of myself at MR, maybe so (I thought Brad Seltzer implies initially he’s taking credit for coming up with “Dark Matter” on his latest blog post, though with a bit of digging it’s more clear he’s not taking credit, it just appears initially so), but you should know that cross-posting about other posts in other forums is bad form. Except when I do it, since I’ve been banned from Econlog.
4. February 2017 at 20:27
B. Cole please tell more about this no inflation no unemployment economy in Japan. It sounds horrendous. Maybe our economists can fix it..
5. February 2017 at 05:57
Jerry Brown:
Japanese Core Inflation Declines for Tenth Straight Month
By Sam Bourgi -January 26, 2017 – 23:31 GMT
http://www.economiccalendar.com/japanese-core-inflation-declines-for-tenth-straight-month-20170126
Japan Unemployment Rate in line with forecasts (3.1%) in December
FXStreet-Jan 30, 2560 BE
Japan Unemployment Rate in line with forecasts (3.1%) in December.
Japan Job openings ratio in Dec. hits 25-year high
Clip to Evernote
inShare
12:00 am, February 01, 2017
Jiji Press
TOKYO (Jiji Press) — The ratio of job openings to job seekers in Japan in December rose 0.02 points from the previous month to 1.43 after seasonal adjustment, hitting the highest level since July 1991, the Ministry of Health, Labor and Welfare said Tuesday.
ed note:They have more job openings than unemployed in Japan.
https://www.ft.com/content/023562e2-54a6-11e6-befd-2fc0c26b3c60
Why Tokyo is the land of rising home construction but not prices
The city had more housing starts in 2014 than the whole of England. Can Japan’s capital offer lessons to other world cities?
But then Thailand has no unemployment or inflation either.
I can tell you after living in Thailand and the US, that “labor shortages” should be considered a feature, not a bug, of proper macroeconomic management.
Orthodox U.S. macroeconomists have holes in their heads. A central bank that targets keeping unemployed one out of 20 Americans who want to work is criminal.
And we expect Americans to vote for free enterprise?
So, yes we will zone property to create housing shortages, then run trade deficits to that foreign capital pours into housing, then leave a border on a Third World Nation unpoliced so that 11 million to 20 million work-seekers enter the labor force.
And if unemployment ever noses around 5%, or if inflation even looks like it might rise above 2%, then our central bank will suffocate the economy. Home ownership rates are declining, wages a dud since 1972. According to Tyler Cowen, 50% of Americans now enjoy lower living standards than their parents.
I can see why someone would vote for Bernie Sanders, and I even understand some elements of the Trump voter.
Percentage of Young Americans Living With Parents Rises to 75-Year …
https://www.wsj.com/…/percentage-of-young-americans-living-with-parents-rises-to-75-…
Dec 21, 2016 –
5. February 2017 at 11:10
Ben, You said:
“I wish somebody would ask orthodox US macroeconomists to explain that result.”
Natural rate hypothesis?
dtoh, That’s good to hear.
Ben, The Fed doesn’t target unemployment at 5%.
You said:
“According to Tyler Cowen, 50% of Americans now enjoy lower living standards than their parents.”
He’s wrong. That 50% would be horrified to have their parents standard of living. Want to pay $5 a minute for long distance calls? No internet? Crappy black and white TVs? Cars that rust out and don’t start in cold weather? Meat and potato restaurants? Crappy healthcare? Go right ahead, I’m staying in the 21st century.
5. February 2017 at 15:24
@Benjamin
You asked,
“Why Tokyo is the land of rising home construction but not prices
The city had more housing starts in 2014 than the whole of England.”
For various reasons, elasticity of demand for rental housing in Japan is close to zero. (Kind of… rents for older buildings in less desirable locations continue to fall gradually.)
5. February 2017 at 16:09
Scott Sumner: yes and no, on living standards.
Ordinary people used to raise “large” families, often on daddy-only working, in Los Angeles. In my area, the Catholic families were noted for innumerable offspring….
Per capita incomes have risen since the 1960s. Tastes change, people do not want as big families.
Still the idea a middle-class family can be large while daddy-only works…is economically antique as those 1959 Cadillacs with shark fins and double tail lights…
Is that a higher living standard?
6. February 2017 at 03:48
Benjamin Cole and others, “I think Kuroda was saying 80 trillion yen per year is enough to get the job done”. Central bankers should never put limits on programs such as these, because the market may well go and test then. They gain close to nothing and give up degrees of freedom.
6. February 2017 at 12:50
dtoh, You said:
“For various reasons, elasticity of demand for rental housing in Japan is close to zero. (Kind of… rents for older buildings in less desirable locations continue to fall gradually.)”
I not sure you know what elasticity of demand means. That implies if real estate became 40 times as expensive, quantity demanded would be almost unchanged. Actually, at that price almost no one in Japan could afford an apartment. Not quite sure what you are trying to say . . .
Ben, Yes. And you are wrong, families can still be supported by “daddy only”, it’s just that we’ve gotten greedier for more stuff.
Jose. Exactly.
7. February 2017 at 03:48
“The Japanese bond market has been very interesting in the last week proving yet again that private bond markets cannot set yields on government bonds if the government does want then too. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The financial media referred to the Bank of Japan as putting a whipsaw to the bond markets, which in context means that the BoJ is forcing the ‘markets’ into confusion (Source). The bond markets have misinterpreted recent Bank of Japan conduct in the JGB markets (less purchases than expected, and even missing a scheduled buy up) as a sign that the Bank was weakening on its QQE commitment from last September that it would hold the 10-year JGB yield to zero and thereby allow the longer investment rates to fall. Why they doubted that commitment is another matter but within a few days over the last week the Bank demonstrated that: (a) it remains committed to that target; and (b) it has all the financial clout it needs to enforce it; and (c) the bond market investors do not call the shots….”
http://bilbo.economicoutlook.net/blog/?p=35303#more-35303
7. February 2017 at 18:26
Postkey, I have several posts on MMT. I’d encourage you not to waste a lot of time on crackpot theories.
8. February 2017 at 06:16
“Postkey, I have several posts on MMT. I’d encourage you not to waste a lot of time on crackpot theories.”
You may have several posts on ‘crackpot’ MMT.
However, does the comment above:
“Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions.” not substantiate the underlying insights contained within MMT?