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When Does the Japanese Yen and/or Bond Market Totally Collapse?

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23 comments on When Does the Japanese Yen and/or Bond Market Totally Collapse?

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Yen vs US Dollar chart courtesy of stockcharts.com annotations by Mish.

I have been following this chart but have not commented on it. Jim Bianco at Bianco research posted a series of Tweets well worth a look. 

Tweet Thread

The Bank of Japan (BoJ) has been operating with yield curve control since September 2016. The current iteration is targeting the 10-year JGB yield at 0% with a 25-basis point band/range (gray shade).

The BoJ has been intervening with unlimited buying to prevent the 10-yr JGB yield from exceeding 0.25% So far it is working, but the yield is still at the top of the band.

The Japanese Yen has been collapsing (a rising line on the chart below). See the orange box. This is one of the biggest one month moves ever in the Yen. A complete surprise to most.

Yield Curve Control (YCC)

Many economists (incl Lael Brainard) matter of factly promote yield curve control as a legitimate policy tool.

The problem is it works until it blows up. This is what happened to Australia’s YCC last year, it blew up … badly

Is YCC now “blowing up” in Japan?

Note: Lael Brainard is the Fed’s vice-chair.

So, the BoJ can prevent the 10-year JGB from rising or the Yen from collapsing. BUT THEY CANNOT DO BOTH. For now, the BoJ picked preventing the 10-year JGB yield from rising. But if the Yen keeps weakening will the markets force them to abandon yield curve control?

Why the Yen Has Weakened and What Japan Is Doing About It

On March 31, Bloomberg commented Why the Yen Has Weakened and What Japan Is Doing About It. 

Central Bank Policy Mistakes Everywhere

What the BoJ has been doing about the collapse is clear. The answer is nothing as noted by Bianco.

Instead, the BoJ have been doing what every central bank does: Stick with policy long after it’s clear policy should be abandoned. 

Flashback April 23, 2018

Let’s review my April 23, 2018 post Japan Expects to Hit 2% Inflation in 5 Years, Aggressive Easing Will Continue

It may take Japan five more years to reach its 2% inflation target according to BOJ governor Haruhiko Kuroda.

I commented “It’s pretty amazing how Japan has failed to destroy its currency despite decades of trying.”

I provided guidance for Japan. Please see Mish’s Sure Fire Proposal to End Japanese Deflation. 

Mish’s Four Pronged Proposal to End Japanese Deflation

  1. Negative Sales Taxes
  2. One Percent Tax, Per Month, on Government Bonds
  3. National Tax Free Lottery
  4. Hav-a-Kid

Success?!

Hooray, Japan is now “succeeding” in destroying its currency just as the Fed finally had “success” in generating inflation. This is despite not trying my guaranteed method.  

However, despite blasting its currency, the consumer price index for Japan in February 2022 was 100.7 (2020=100). That’s a year-over-year increase of only 0.9% over the year. 

But more “success” is on the way. Japan’s CPI was up 0.5% from the previous month on a seasonally adjusted basis.

Hooray?!

Bank of Japan’s Governor Haruhiko Kuroda said a weaker yen is fine by him. The forex market is taking Kuroda at his word. 

When the Bank of Japan finally “succeeds” at producing two percent inflation, I sure hope they stop to take a bow, unlike the Fed.

Well Deserved Bows

Forget About a Soft Landing, What’s the Shape of the Hard Landing?

After having failed to take a well-deserved bow for amazing “success” it seems the Fed has a problem of a different kind. 

For discussion, please see Forget About a Soft Landing, What’s the Shape of the Hard Landing?

We are headed for a global hard landing. 

This post originated at MishTalk.Com.

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Mike Shedlock

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23 Comments
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Tony Bennett
Tony Bennett
4 years ago
A depreciating yen makes Beijing nervous. How long till yuan devalues to compete? And kick off chaos?
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KidHorn
KidHorn
4 years ago
Reply to  Tony Bennett
They’re effectively pegged to USD, so I’m not sure how that could work without first dropping the USD peg.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  KidHorn
It would be a policy move by China. Shooting $US higher …. and putting at risk offshore debt priced in $US.
Deflationary (for US).
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StukiMoi
StukiMoi
4 years ago
Reply to  Tony Bennett
“A depreciating yen makes Beijing nervous.”
Much less so than earlier.
Nowadays, Chinese companies are increasingly more constrained by commodity/resource/raw-inputs access; as well as ability to attract talent from abroad; than they are by labor cost differentials vis-a-vis competitors in previously “more developed” countries. An effective 40% reduction in Japanese oil, gas and base metals buyers’ purchasing power, versus their Chinese counterparts, these days makes up for a lot of the effect of Japanese workers now being reduced to 40% cheaper labor than before. While being able to offer Japanese talent effectively 40% more than before to take key positions, is not a bad thing either.
Judging by the commies’ continued insistence on pegging to the Dollar, the overall (il)logic of mercantilism still holds lots of sway over there. So I’m sure someone is watching the Yen’s decline. But overall, the main thrust of policy is changing; from one of being competitive based on having the cheapest labor, to one of ensuring Chinese labor and capital have maximal access to as large a share of the world’s commodities and resources as possible. Which effectively resolves to reducing the relative purchasing power of others. Including, eventually (and likely at some point “all at once”) that of those whose purchasing power derives from having license to simply print Dollars…..
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Christoball
Christoball
4 years ago
The Yen is about where it was in 2007. Before 2011 the Yen had the inverse: a 40% gain against the dollar. It was also at the current level in 2015. I detect a 7 year itch.
Young Japanese people are selling their fathers or grandfathers camera collection on EBay probably feeling like they are getting rich as their selling prices in Yen are going up even though prices in dollars are more stable.
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RonJ
RonJ
4 years ago
“The problem is it works until it blows up. This is what happened to Australia’s YCC last year, it blew up … badly”
When pegs go bad.
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RonJ
RonJ
4 years ago
“But this JGB intervention is coming with a high cost.”
For each action, there is an equal and opposite reaction.
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Anon1970
Anon1970
4 years ago
In the 1960’s, the exchange rate was 360 yen to the US$, although I could not find a chart going back that far online. In 1972, the exchange rate was about 300 yen to the US$. The Japanese yen has a long way to fall, at least when compared to past foreign exchange rates
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KidHorn
KidHorn
4 years ago
This is bad news for US debt. At a minimum Japan has no need to swap yen for USD, so no USD to buy USD denominated debt. And very likely they’ll start selling USD debt so they can buy up yen with it in Forex.
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Felix_Mish
Felix_Mish
4 years ago
Is the “inflation” rate low in Japan? If so, how so, given world-wide supply chain and petro prices zooming up?
Something seems missing in this yen discussion.
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Esclaro
Esclaro
4 years ago
The USD hit a two year high today. Like Godzilla it is completely destroying everything in its path. How long until nothing is left but rubble?
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MountainMan
MountainMan
4 years ago
Reply to  Esclaro
How long?
Does anybody have an idea?
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KidHorn
KidHorn
4 years ago
Reply to  Esclaro
It’s because investors think US yields will be going up.
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MountainMan
MountainMan
4 years ago
So, when would this global hard landing happen? Months? Years? Decades?
When will these magicians run out of magic?
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Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  MountainMan
That requires paid subscription, not for free wisdom.
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  MountainMan
Next Tuesday at 10:27 EDT.
You’re welcome.
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Scooot
Scooot
4 years ago
It’s interesting that you’d expect falling US Treasury prices to make them more attractive to buyers, but as you’ve pointed out here, that’s not necessarily the case for foreign buyers because of the rise in the dollar. This at a time when new buyers are needed to replace the Fed.
Regarding the yen and JGBs, I guess the market will keep pushing to force a change in policy one way or another.
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FooFooFed
FooFooFed
4 years ago
what does happen if it blows up? Argentina??
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StukiMoi
StukiMoi
4 years ago
Increasingly everyone is being forced to de facto target the Yuan. At the only exchange rate which ultimately matters in real terms: Labor/industrial productivity parity. JCB being just another bunch of illiterates falling for the nonsense that it is somewhat “better” to do the necessary reprising via currency manipulation, than by way of much more granular and accurate internal devaluation (aka lower nominal wages, hence lower ability to service debt, hence BKs and debt write-offs ultimately bringing costs down to where they are again competitive.)
China persisting in targeting the USD nominally, despite its own productivity growing severalfold faster than the US’, is forcing the hand of everyone who competes with them: Down vs the Yuan, hence down vs the Dollar. Those competitively exposed, have no choice but to bring costs down. And since all of them, just like the JCB, insist on protecting their rentier classes from liquidation; and hence refuse to let nominal incomes with which to service debt drop; printing money, hence bringing about devaluation, is all they are ultimately left with.
America don’t even try to compete with China anymore, and for the time being get to live high off of Dollar demand momentum from back when someone needed dollars in order to buy something which Americans could still competitively make. But productivity parity wise, it’s an absolute abyss down to where the Dollar would reprise American companies down to parity with Chinese ones. When China finally decides, or is forced, to gives up their Dollar targeting, the Dollar will reverse gains currently made against the rest. With the main lasting change being: The Yuan being much more realistically priced. Hence Chinese people being paid closer to their competitive worth. Allowing them to consume more.
This also will afford them much improved ability to bid for a greater share of the world’s commodities and resources. If anyone thinks oil/gas/energy is expensive now: Wait until a billion Chinese (rather suddenly most likely, when the de facto peg falls…) makes a lot more than current new-pickup-buyers in the US….
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William Janes
William Janes
4 years ago
Reply to  StukiMoi
So lower wages are the key to prosperity. I suggest that you read Michael Pettis’s Twitter comments. Chinese domestic consumption is per capita is one of the lowest in the developed world. Also China has a monstrous hidden debt debacle waiting in the wings. I can raise many other issues with your analysis. But I leave at this. China has as many if not more problems than any other developed economy in the world.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  William Janes
The key to prosperity has not changed from the factors of production: land, labor, and capital, plus INNOVATION.
So not lower wages, but highly productive and cost-effective labor ** implies a lot about education, worker motivation, government regulation etc **
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  Captain Ahab
How about highly productive and cost-effective allocation of capital?
For example, just how productive is the FoolsBook?
Fun, yes, but productive?
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StukiMoi
StukiMoi
4 years ago
Reply to  William Janes
“So lower wages are the key to prosperity”
Not lower as in some absolute sense lower. Making nothing at all, hardly makes you prosperous.
Like the key to all else of value, the key to prosperity, is economically CORRECT wages: Pay corresponding to value added. Not higher, not lower. Mispricing, of anything, is NEVER systemically good. Not when $50K shacks are mispriced to sell for $1million. Not when a group of Chinese dudes are outproducing American and Japanese colleagues, yet are paid half. Not when ambulance chasers and rent seeking leeches, who not only don’t contribute to building housing for which there is clear demand, but instead straight up engage in preventing others from doing so as well, get paid anything at all, other than a few pieces of fast moving lead.
“Chinese domestic consumption is per capita is one of the lowest in the developed world.”
It won’t be, once the Yuan/Dollar peg is vacated, and the exchange rate doubles. Very few people won’t consume more, after they get a 100% raise. Corollarily, few Americans won’t consume less after a 50% drop in their pay, measured in the currency everything they buy is priced in. Or even a 40% drop in the currency 30% of what they buy is priced in, as is the case for the Japanese.
Forex markets are, at least per the deplorable standards of our post-free world and “markets”, fairly efficient. The one big exception being the Dollar. Where the so called “downward stickiness” Keynesians insists of excusing all manners of folly with wrt labor prices, remains huge: Continuing to cling to the outdated notion that the world still needs dollars and America, despite fundamentals having long since left both in their wake, continues to prop the dollar’s real purchasing power up greatly.
With the result that the closer your economic life exists to the dollar, the more you can effectively consume versus what you produce. Americans, and to a slightly lesser degree other Westerners who are also largely living in the Dollar bubble, don’t have to compete with Chinese people. As long as someone prints dollars for them, they can just spend those, instead of being dependent on actually making money by doing something of value at a competitive price.
But those only a little bit further away, like the Japanese, can’t do that. They instead have to compete head on. And with Chinese productivity growing the way it is compared to more settled economies, that means the others have to adjust their costs, measured in Yuan. Making sure costs aren’t too far out of line compared to those of ever more efficient Chinese competitors.
This then, specifically because China insists on NOMINALLY, NOT productivity corrected, targeting the Dollar; means those places’ currencies have no choice but to fall in relation to Dollars as well. There is no way around that, until China’s de facto Dollar peg start softening, or cracking entirely. Which it eventually will. Then, having already corrected, the Yen and the rest will remain stable(ish) wrt the Yuan, while the Dollar catches up with their current declines.
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