*Special: Japan YCC Comment
This is a towel being slowly thrown in and therefore net weakness
Two days ago, Japan hinted they may alter their YCC ceiling and permit the long bond yield to rise up to 1%.
Yesterday they did just that in a very convoluted announcement.
We’re here to try to make sense of their message
What’s YCC Again?
Why is YCC/QE Inflationary?
BOJ Announcement
What Does That Even Mean?
BOJ Implications:
Strength:
Weakness:
Bottom Line:
Market Reactions
What to Look For, Why We are Worried
What is YCC Again?
Recall: YCC is a form of QE used to keep long term rates on bonds artificially low.
All QE does this.
The desired effect is to force the extra money it prints to go into stocks and investment assets because the yield on bonds and savings accounts as a result is just too low. After a deflationary crisis ( the GFC, Covid etc) this is supposed to help spur an economy back to health.
When inflation is the fear, as it is now, the desired effect is the same. However if the market place is worried about inflation, that bond exiting money isn’t running towards investment in stock to rebuild an economy. No. it is running away from bonds to find a better hedge against inflation.
Simply put using American type levels, if inflation is 8% and your 10 year bond is only giving you 4% yield then you are falling behind by 4% every year.
Why is YCC/QE Inflationary?
So what would you do? You’d put your money into stocks that can benefit/survive “good” inflation. You’d put your money into precious metals to hedge “bad” inflation. International investors will take their money out of Japan altogether and put it in a country that gave better bond yields for inflationary risk.
Therefore the repressed long term bond yield forces a lot of money out of the country in general and into other nations’ currencies where hopefully, they can get better bond rates for their money.
This weakens your domestic currency. The result? Inflation, not permitted to manifest in longer term bond yields, finds a comfortable home via your inability to afford stuff (imports first, then domestic stuff soon after) because your money’s purchasing power is weakened globally.
That, incidentally is literally what financial repression is. Much more on the topic can be found under: Financial Repression.
Financial repression is what is coming to the USA. In fact it is already here. But that is not today’s focus. Back to Japan’s potential clusterf*ck and what it conveyed to us all.
BOJ Announcement
Today Japan announced that it would do the following. Our advice.. do not even read this part. it obfuscates intent, truth, and how they intend to execute
Bank of Japan Statement:
The Bank will continue to allow 10-year JGB yields to fluctuate in the range of around plus and minus 0.5 percentage points from the target level, while it will conduct yield curve control with greater flexibility, regarding the upper and lower bounds of the range as references, not as rigid limits, in its market operations.
The Bank will offer to purchase 10-year JGBs at 1.0 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.
In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the Bank will continue with large-scale JGB purchases and make nimble responses for each maturity by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations and the Funds-Supplying Operations against Pooled Collateral.
What Does That Even Mean?
First our Interpretation :
The BOJ would stop mandating buying JGBs when they hit a ceiling of 0.50% and move that hard ceiling up to 1.00%. They would thus permit the long term bond yield rise to 1%. But between 0.50% and 1.00% they reserve the right (without warning) to step in at any moment and stop what they feel are harsh disruptive behavioral spikes on the way to 1.00%.