The BoJ , The Yen & Central Banking Chess
The BoJ , The Yen & Central Banking Chess
Part 2
This is the second part of Macro D’s excursion into the BoJ and what it means for central banks globally.
You can find the first part here.
“A person's soul is hidden in their gaze, so we fear being looked in the eyes.”
- Jim Morrison
And the soul of a currency exchange?
Is there a commercial exchange that is afraid of its observers? Or is there perhaps an observer afraid of looking a currency exchange in the face?
There's no point in hiding it from ourselves. The inscrutable features of the USD/JPY exchange rate are before our eyes. What do we want to do?
Do we abandon ourselves to Heraclitus's resigned and unbreakable wisdom, or do we align ourselves with the curiosity of the young Thomas of Skymars Bank? (I introduced him in Part 1).
I vote for the boy with high hopes. After all, the young man on the desk has Bruce Kovner's biography in plain sight. The boy is looking for a vision.
Here, it is not a question of putting a strategy based on winged messages on paper. Still, at the same time, it is not even a question of showing off a plan based on numbers, equations and diagrams, which, although they do not fly and keep their feet firmly anchored to the ground, fail to offer that temporal/spatial precision that is the dream of any global macro trader, regardless of whether he manages 10 million euros or 1 billion euros.
I confess it; as for Japan, I am immersed in a night in which the moon and the stars struggle to find a meeting point that is the precursor of a universal principle.
That of the Rising Sun is a fascinating and honourable story. Therefore, the undersigned will certainly not be the one who will be able to unravel the meanders in which the original crumbs of oriental wisdom are wedged.
I return to the numbers, to the history of Japan, to the soul of the Japanese, to the prerogatives of their economy, to the drafts of their control rooms.
Socrates never tired of asking questions about truth and goodness, and despite not being able to offer specific answers, he managed to provoke doubt and spur research. It was precisely in doubt and research that (according to him) lurked the essential act of human life and experience.
I, who am not worth a hair's breadth of the good Socrates, now confidently follow his teaching and immediately ask myself.
"But what does Japan's economic history of the last thirty years consist of?".
Answer:
"Low growth, low inflation, low interest rates."
Let's proceed in small steps.
The recent decision by the Bank of Japan to end its yield curve control policies, ETF and Japanese listed real estate fund (J-REIT) purchase program, together with the rise in interest rates, has sent a clear signal to the market: a gradual process of normalization from these ultra-expansive measures is starting. Contrary to all expectations, this announcement did not bolster the yen but instead sparked a surprising wave of selling, leading to a further 1.5% depreciation against the US dollar.
It must be acknowledged: the rate increase was announced in a low voice, like a message in a bottle flowing across the ocean, without being accompanied by fanfare.
The bond purchase program remained unchanged, with no indications of future rate increases.
On the other hand, the Bank of Japan is confronted with the potential of higher interest rate costs on its bank reserves, substantial losses on its bond portfolios, and a potential moderation in inflation. However, these factors are being tactfully managed by the astute Ueda, who always seems to be one step ahead, even as the environment perceives him to be ten meters behind. This is the strategic plan of those who prefer to operate away from the limelight.
My full-blown ignorance urges me to return to the early 1990s to frame the big picture. It's not a bad trip for me, who loved the young Marty McFly. Fasten your seatbelts; this is a necessary trip.
Since those days, Japan's economy has been growing slowly. For this reason, we talk about the so-called "Japanese syndrome", a centuries-old stagnation capable of causing cold sweats in those covered by his shawl. Therefore, since approximately 1997, for a good quarter of a century, the Land of the Rising Sun has suffered from latent deflation and consumer prices, instead of growing a little from year to year, often decrease. To sharpen their claws against this enemy, who under his battle helmet hides the right half of his head in stagnation and the other left half in deflation, the Government and the BoJ have coordinated their moves. Ueda and Kishida don't meet at all; they meet at the beginning of the year to exchange greetings.
It is no mystery to anyone that there is a very close relationship between Ueda and the Diet. The players who play in the financial markets always tend to evaluate the meetings between the governors of the central banks and the governments of reference as a signal that the blood is starting to boil and the concerns and disturbances are becoming more and more pressing. Instead, My point of view tends to see in these meetings between central bankers and governments the proof that the anxieties and disturbances are easing, particularly when Ueda and the Japanese Prime Minister meet. Why?
Let’s explore.