Japan’s currency war has just begun


Global macro UBS analyst, Syed Mansoor Mohi-uddin, has a very neat little note out this morning summarising the revolution that has just taken hold of Japanese monetary policy:

The first meeting of the Bank of Japan under Governor Kuroda has surpassed expectations. The central bank has effectively agreed to double its pace of JGB purchases to Y7.5trn a month. This will increase its bond holdings from Y90trn now under its Rinban and Asset Purchase Programmes to Y140trn by the end of 2013 and Y190trn by the end of 2014.

In addition, the BoJ will combine its APP and Rinban operations into a single quantitative easing facility. It will also abandon its ‘bank notes rule’ that restricted its JGB holdings to the size of currency in circulation, and the BoJ will now buy bonds up to a maturity of 40 years. Overall, the BoJ will now target Japan’s monetary base rather than its overnight interest rate.

This major shift – the BoJ will buy around $80bn a month of assets compared to the Federal Reserve’s $85bn a month of easing in an economy less than half the size of America’s – is reminiscent of 1995. Over the last two decades, the Bank of Japan has undertaken various episodes of quantitative easing – including targeting commercial bank reserves from 2001-2006 and starting its Asset Purchase Programme from 2010 – but investors have to go back to 1995 for the last time changes in domestic monetary policy strongly beat expectations.

In that year, the authorities were faced with the collapse of USDJPY from 100 to 79 following the Kobe earthquake. In response, the Bank of Japan – under the instruction of the Finance Ministry – massively increased its ‘Rinban’ purchases of government bonds. That pushed USDJPY back up to 100 in 1995 and thereafter the currency pair trended higher towards 150 by 1998. Clearly, by surprising investors, Japanese policymakers can cause major changes in financial markets. This suggests our end-2013 and end-2014 forecasts of 100 and 110 respectively face strong upside risks now.

Of course, the conditions that led to sustained yen weakness in the late 1990s – after the initial trigger of massive Rinban easing in 1995 – may not be repeated in the next few years. For example, the late 1990s included the ‘yen carry trade’ fuelled by Fed funds hitting 5.50%, the Asian financial crisis, Japan’s own banking crisis and Tokyo prematurely raising sales taxes in 1997. But there is one telling similarity between 1995 and 2013.

In the year of the Kobe earthquake, the BoJ still reported into the Finance Ministry. It was only from 1998 that the central bank gained its operational independence and came under the sway of conservative governors. Kuroda, as the first outsider to run the central bank since then, is returning the institution to its pre-independence era. That means investors should expect more aggressively easing in future if Japan’s inflation numbers still are far away from the BoJ’s new 2% target.


  1. dumb_non_economist

    First off, I didn’t name myself d_n_e for no reason!

    So seriously, how many years will it take for this game to play out? For the life of me, someone completely outside the financial/economics area all this (US, Japan, EU) seems to have nowhere to go other than blowing up the monetary system.

    To me it looks, feels and tastes suicidal!

    • Eventually we’ll probably blow ourselves up.

      But fiat currencies have survived much worse – world wars etc.

      The current round of printing won’t end until it finally delivers inflation, which will be no mean feat given the level of overcapacity everywhere.

      When it does come we’ll be in for another GFC.

      • ….and then savers and earners, both private and public, will be extinguished. The life-blood of capitalism, capital, will have been rendered pointless. So, yes, eventually we’ll blow ourselves up – no probably about it.

  2. No need to get excited – yet.

    At the moment we are seeing lots of frothing from the true believers in the broken interest rate debt transmission mechanism.

    So far all the BoJ is promising is to buy bonds in the market and stuff banks full of cash.

    We already know that hardly works in the countries packed full of debt junkies what hope does it have in the land of the frugal Japanese householder?


    If the Japanese want inflation and without a huge mountain of government debt that requires interest rate payments to be made to the non-government section then it has a single option.

    Buy bonds from the government that cannot be resold ( that way any interest on the bonds simply gets paid to the BoJ)then the govt uses the funds to cut taxes or hand out cash.

    Chances are that those frugal Japanese households will squirrel away a good slice of it but some will be spent and eventually the ‘purses and wallets’ might be prised open more widely.

    There is no other choice.

    There is barely a creek or river in Japan that has not received a good dose of concrete and just spending stuff on infrastructure for the fun of it is hardly going to help anyone.

    If they want some inflation and they want some spending by households then give them the money.

    I know this is essentially MMT without the all knowing genius of public servants doing the spending but that may be a good thing.

    And yes – the BoJ needs to be ready with the interest rate sledgehammer when the inevitable happens and inflation warms up and the pollies don’t have the stomach to say ‘when’.

    • Sorry

      “The Bank of Japan buy bonds from the government that cannot be resold…”

    • “I know this is essentially MMT without the all knowing genius of public servants doing the spending but that may be a good thing.”
      Nah! Japan is starting with a more or less balanced external account and massive international reserves and foreign ASSETS.
      So if it blows up it may not be as catastrophic as it would be here Europe or the even the US.
      However long term…?

      It all seems so insane. It’s the ‘unforseeable?’ or at least ‘unexpected’ events that might devastate.

      • Yep – the whole idea of giving people, who have money to spend, more money and trying to get them to buy things they obviously don’t want to buy now is bonkers.

        If there were some important public works that need doing and would add to the productivity of the country that might be an option but they seem to be scratching around on that front as well.

  3. Overcapacity everywhere? hmmmmmmm
    Do any business in China?

    A note from John Mauldin which encapsulates the problem with inflation and how it arrives…unexpectedly.


    “History indicates that contagions start small”
    “In a marvelous piece of research, economist Madeline Schnapp documented this history in monetary terms. When Germany went to war in 1914, an egg cost 2 pfennigs and a loaf of bread was 10 pfennigs. In 1919, after the war ended and at the birth of Weimar, the egg was 20 pfennigs and the loaf was 1 mark. By April 1922, the egg was 4 marks, by September 9 marks,
    and by November 22 marks. In February 1923, the egg cost 45 marks, by May it was 800 marks,
    in July 1923 it cost 20,000 marks, and by August it was ten times that much: 200,000 marks. At the end of 1923 one needed billions of marks to purchase an egg, and a 1 trillion marks to buy a
    loaf of bread.”

    There are 36 pages to the PDF all of it really worth reading.

    It arrives particularly unexpectedly if you’re looking for signs of it in the wrong place.
    HnH Don’t worry about replying as we’ve been over and over this and agree to disagree…for the moment. Just wanted to dig my oar in 🙂

      • My opinion has been, and still is, that you are looking backwards for your inflation.

        Please have a look at Chinese demographics! I built my own model of it about 15 years ago. It was reasonably simple and wildly inaccurate, as most models are with anything but deadly accurate input data and assumptions, however it did demonstrate the effect of the one child policy over 4 or 5 generations. In terms of dependents per working PRODUCTIVE population the one child policy becomes a total disaster. it’s a disaster that it is now too late to reverse.

        Further there is no CURRENT over-capacity anywhere I go as far as labour supply goes. All the factories are having trouble both recruiting and holding labour. There is a lot of SPACE over-capacity. How this interaction plays out I’m not sure.

        If you subscribe to this mantra about hunderds of millions of workers just waiting to step into boring sweaty production lines, for low wages, you need to go back and start over with your thinking. The total labour force is already in decline.

        Demographics and prosperity in China mean that, for the western world, the next 20 years will be nothing like the last 20 years (or 50 years for that matter). Even build in robotics etc the over-all price levels coming out of China will, at least, CONTINUE along their PRESENT path. Their re-balancing policies will exacerbate the process. The assumption that we will continue on being able to live off cheap goods from China is wrong and extremely dangerous.
        I’d be interested in ChinaBob’s opinion.
        Perhaps he can demonstrate I’m wrong.
        Note I’d be glad to be wrong. I’d like to go on living in this unrealistic fantasy world in which we now seem to exist. My business would even survive.

  4. I have been following Kyle Bass for a while now and he is obviously very bearish on JPN as a whole.

    The facts show that Japan is in a very bad place at the moment but we all know that central banks seem to have the ability to make water run up hill, cats and dogs live in harmony etc… so it may take a while to play out but at some point the house of cards will get a sudden gust of wind and a lot of retired Japanese pensioners will find themselves eating pedigree chum

  5. and doesn’t this leave australia further behind in the currency wars with imported japanese cars and electrical components becoming cheaper and australian exports to japan even less competitive.

    will other aian counties recipricate?

    i think the rba should put it to the government that the current level of the $A is not acceptable if the australian economy is to survive into the future and that a combined effort in policy formation is neccesary to bring the $A down.

  6. AUD to JPY, USD, EUR, GBP, CAD all at 1.5 Standard deviations above 20 year mean. CNY is about the mean.

    Over the 20 years, 240 month that has been a total of only about 24 months or about 10% of the time. Of that 10% part is while AUD is rising and part while AUD falling.

    Are things really going to be different this time because of some permanent realignment?

  7. seems to me that that the powers that be have a responibility to ensure that australian industries do not sink into total oblivian, which seems to be the dirction we are headed at the moment.