On the one hand, the Japan Band says it wants long-term interest rates to be dictated by market forces. But on the other hand, the The BoJ spent 6 trillion yen every month it buys bonds to support its currency. In other words, it is doing everything it can to control short-term interest rates with bond-buying programs and yen interventions, free markets be damned.
BoJ Governor Kazuo Ueda is expected to discuss further tapering of his bond-buying program at his next meeting. Reuters:
“Our fundamental position is to allow long-term interest rates to be determined by market forces.”
Yet in another appearance at a meeting in Tokyo, BoJ Deputy Governor Ryozo Himino said:
“On the other hand, the BoJ has been deeply involved in the bond market until very recently and our presence remains very important. We must avoid causing discontinuity or unintended movements in the market.
It is obvious to anyone paying attention that the BoJ has no interest in allowing anything remotely resembling a free market to take over. Indeed, the shock would be enormous after decades of negative interest rate policy, but it is ridiculous for a modern central bank to claim to adhere to “market forces”.
The whole purpose of a central bank is to attempt to circumvent market forces by bond purchase programs and other marvels of monetary policy – a true embrace of free markets would mean that central banks would no longer need to exist. Japan hasn't let markets manage themselves for a very long time.
At the time of writing these lines, the yen is up slightly against the dollar as the world waits for clues on what news could come from next week's BoJ meeting. Will it continue like this, or will it reduce its bond buying program to encourage a tightening of economic conditions after many years of maintaining negative interest rates?
Yen versus USD, 1 month
Without significant foreign exchange reserves other than U.S. Treasuries, the BoJ could be forced to sell to prevent the yen from collapsing. This will cause US Treasury yields to rise and the prices of those bonds to fall, which will only further weaken the yen, leaving the BOJ stuck in a vicious spiral.
Inflation excluding fresh produce in Tokyo jumped to 1.9% in May, supporting an upcoming rate hike from the Bank of Japan.
This increase is due to rising utility costs.
Inflation in Tokyo is a leading indicator of Japan's national trends. pic.twitter.com/zCO5jF9PO7
– Global Markets Investor (@GlobalMktObserv) May 31, 2024
When bond yields get too high, inflation often follows, leaving the Fed trapped in a trap where it must lower interest rates to save the real estate and banking sectors. However, these rate cuts will further contribute to inflationary pressure that is already spiraling out of control.
In the meantime, central bank guessing games there will always be insiders and outsiders in the banking sector Keynesian academics playing God with the economy – and the lives of citizens. Like all central banks, the BoJ is a house of contradictions and pseudoscience, with almost dictatorial power over the levers of finance. Ultimately, it is not the financial class that pays the price, but the people forced to use, save and spend in devalued currencies that are micromanaged and slip into fiat oblivion.
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