A strengthening Yen, Japanese negative ten-year yields, and a falling Nikkei

by on February 9, 2016 at 6:09 pm in Current Affairs, Economics, Uncategorized | Permalink

My market hermeneutics is this: Japan is trying to weaken its currency by confiscating resources from its financial institutions only, using negative interest charges on bank deposits held at the Bank of Japan.  The market says “we don’t believe this can work.  If you really want to weaken your currency, you have to confiscate resources from your citizens, perhaps from your median voter too.”  Abe won’t do that, not yet at least.  And so the Yen is rising.  The currency looks stronger than before, yet the overall Japanese situation looks weaker, so Japanese equities are falling sharply.

I wonder which politician will be the one to use monetary policy — not for “people’s QE” — but to confiscate resources from the median voter.  It won’t happen tomorrow, or even next year, but yes it will happen in some of the developed economies, not just Venezuela.  That will change macro debates by more than a small amount.

Here is an FT account, here are other, less gated accounts.

1 Just An Australian February 9, 2016 at 6:10 pm

Umm, isn’t it already ubiquitious?

2 derek February 9, 2016 at 6:33 pm

You ain’t seen nothing yet.

Did you think the apparat turning into organized crime syndicates in Russia after the collapse of the Soviet Union was an aberration? The only reason why central banks are busy fooling with money and credit markets is to keep a lid on how much their Treasuries have to pay for debt. They haven’t been able to inflate any of it away, they still need to borrow at the rates they did for the last couple decades.

The central bank balance sheets have expanded with the stated purpose of keeping the financial system afloat, and here less than a decade later it isn’t again. It was cash thrown in a fire to be burnt. It won’t happen again, the next strategy is to seize cash and assets. The less noticeable means is to diminish the value of debt obligations, which they are doing with negative rates. The financial system and large investors, many of the regulated pensions will go along with this stuff because they have no choice and have no sense.

If you borrow a thousand, the bank owns you. If you borrow a million, you own the bank. If you borrow $20 trillion, you have minions.

This isn’t going to end well.

3 Govco February 9, 2016 at 7:48 pm

I don’t understand the metaphor, “It was cash thrown in a fire to be burnt.”

What is the fire? And what does “burnt” mean?

4 Britonomist February 9, 2016 at 7:58 pm

He’s just your typical internet toughguy philosopher trying to sound profound, I don’t know why the lunatic fringe plague economic blogs so much.

5 derek February 9, 2016 at 11:16 pm

So you are ok with the Fed recapitalizing the banking system every decade or so, or forced to because they have lost all the money from the last time around?

In 2007-2008 people like you were so wrong that it was a wonder you could put your socks on. And here we go again. And somehow I’m the crank.

This was all precipitated by a 1/4 point change in rates by the Fed. The best and the brightest minds come up with a system that exists on a razor edge of instability. Brilliant. Just brilliant.

Is it so bad that only a highly educated economists could consider this to be anything but lunacy?

6 Nathan W February 10, 2016 at 10:22 pm

Don’t know why some mainstreamers get so worked up when someone fails to regurgitate textbook outlooks. Usually there’s something pretty interesting under the ideas, even if they obviously aren’t specialized in the field.

7 anon February 9, 2016 at 7:55 pm

It would be a pretty good trick to engineer negative interest rates while keeping inflation low – once thought impossible. How did they break the connection?

8 derek February 9, 2016 at 11:20 pm

Price fixing schemes collapse when there exists two markets, the official one and the real one. Is this the case here?

By the way, the no inflation is represented by 200-300% increases in food prices for the people I deal with. I wonder if the low unemployment rate that seems to contradict many people’s experience is a reflection of a large amount of economic activity going on underground and not reported.

9 anon February 9, 2016 at 6:23 pm

I certainly don’t know enough to know if the yen had been over-sold, but it seems a bit crazy to move funds in other currencies to the yen on the expectation that negative interest cannot last. Better to earn elsewhere and wait.

Especially given that negative interest still seems to be spreading.

10 ptuomov February 9, 2016 at 6:27 pm

Fiscal theory of price level would suggest that Japanese government bonds and currency will have very low long-term returns. There’s so much debt and so poor demographics there.

One reading of the market is that yen is just a “safe” asset and its perceived safety is self-reinforcing in some bizarre sense as the stampede to safety makes it appreciate every time the risk assets sell off, arguably without any fundamental backing for that perceived safety.

If all that’s true, one should be able to prick the bubble and get yen to depreciate significantly. Riding that tiger will be a handful for a central banker or a prime minister, though, as crash-like depreciation may be harder to stop than one would imagine.

11 David S. February 9, 2016 at 6:32 pm

This is too subtle for me. Wouldn’t the classic way to lower the value of the yen just be to have the BoJ print up a lot of yen and buy lots of USD and/or Euro denominated assets? Why would that involve confiscating resources from the median voter (except through inflation, which they seem to want)?

It seems like negative interest rates at the BoJ created a huge scarcity of Japanese Government debt which is driving the price through the roof. So if this is not desired, why couldn’t the Japanese Government just issue more debt, which is usually a popular move, at least in the short term. Couldn’t they for example issue enough new bonds to send everyone an extra old age pension check as a Lunar New Year’s bonus? I would think that would both weaken the yen and raise interest rates on their debt while buying a lot of popularity. What am I missing here?

12 Tyler Cowen February 9, 2016 at 6:56 pm

None of those strategies provide for long-term budget balance, however…thus they still face a dilemma, and arguably markets understand this…

13 Cliff February 9, 2016 at 8:43 pm

You should make a bet with Sumner.

14 Brian Donohue February 10, 2016 at 12:08 pm


15 ZZZ February 10, 2016 at 7:12 am

The BOJ can’t get ahead by printing Yen to buy Euros if the ECB is printing Euros to buy Yen.

16 Brian Donohue February 10, 2016 at 11:53 am

Is that true? Competitive QE might be what the world economy needs.

17 msgkings February 10, 2016 at 5:56 pm

Honestly curious: what do monetarists/Sumnerites/QE mavens think about the old Helicopter Ben idea of printing up cash and mailing it to actual citizens? How is that worse or even different than buying bank assets, or negative interest rates, in terms of the goal? And doesn’t that sound like a more popular way to do it (generate inflation and NGDP growth)? Even if a lot of it gets saved, is that any worse than it sitting as bank reserves? What am I missing?

18 david February 12, 2016 at 6:45 am

pretty sure this is the actual helicopter drop quote from bernanke, it doesn’t seem to be anything like mailing money to citizens, more like cutting their taxes while having the Fed buy up financial assets (aka QE):

“A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.18″


2009-2010 saw a payroll tax cut and QE, aka the helicopter drop happened.

19 gab February 10, 2016 at 11:46 am

It strikes me as profoundly odd that the Japanese don’t issue an infinite amount of debt at negative interest rates, or at least as much debt as it takes to get rates back to zero.

If people are paying Japan to lend it money, the arbitrage would be to borrow money at negative rates and refund ( current positive rate debt. Kill two birds with one stone.

20 Justin Kelly February 9, 2016 at 7:22 pm

An internal sovereign default. “This time it’s different”.

21 David K February 9, 2016 at 7:45 pm

Tyler, if you’re looking at the yen in isolation right now you’re really missing the forest for the trees. The market is going risk off right now simultaneously in all risk premia– credit, equities, Fama-French equity style premia, euro periphery vs core bonds, vol trading, and, in this case, FX carry. The yen is rising primarily because it is the main carry funding currency due to its negative interest rates, so everyone who was long carry is now rapidly covering their yen shorts.

22 BC February 10, 2016 at 1:59 am

This makes sense to me. One of the explanations for why the carry trade “works” — why one could historically earn a premium by going long high-yielding currencies and short low-yielding currencies, contradicting uncovered interest rate parity — is that the low-yielding currencies like the yen, USD, and Swiss franc tend to be safe havens while the high-yielding currencies tend to do poorly during crises. Year-to-date, the low-yielding yen, Swiss franc, and Euro are all up 3-5% (against USD) while the higher yielding Aussie dollar, New Zealand dollar, and Mexican peso are all down 3-8%. The yen, USD, and Swiss franc all tend to appreciate during “risk off” periods.

23 BC February 10, 2016 at 2:43 am

In market monetarist terms, negative interest on reserves is supposed to be expansionary by decreasing demand for base money. Indeed, *immediately at the time of the surprise announcement*, the yen depreciated and equities rallied. However, the on-going global volatility shock (“risk off”) is increasing demand for safe haven currencies, including the yen. This demand increase is more than offsetting the decrease from negative IOR. The net effect is monetary tightening, consistent with falling long-term yields, appreciating yen, and falling equities.

24 Brian Donohue February 10, 2016 at 12:07 pm

This sounds right. So, without the negative IOR, conditions would be tighter still.

Central banks need to keep leaning in.

25 Cliff February 9, 2016 at 8:43 pm

I haven’t really been following this, but are you talking about a 1 day or 1 week phenomenon? Are you perhaps reading too much into it?

26 ChrisA February 9, 2016 at 11:52 pm

Isn”t Tyler’s post just a long winded way of saying that the market doesn’t believe that the negative inflation rates are stimulatory enough? And why all the rhetoric about confiscation? Do the Japanese banks not have other places to put their excess reserves? Why should tax payers subsidize the desire of Japanese banks by giving them a positive return on their savings?

27 Qurio February 10, 2016 at 12:42 am

Isn’t any central bank interest rate which is below the inflation rate confiscatory in this sense?

28 Todd K February 10, 2016 at 1:09 am

FT: “A weak currency is one of the major hallmarks of Prime Minister Shinzo Abe’s economic revival plan, dubbed Abenomics.”

When was this?

29 Dan Hanson February 10, 2016 at 12:22 pm

Isn’t the Japan experience the nail in the coffin for fiscal stimulus as a cure for recession? Has any other country tried a fiscal stimulus anywhere near as large as Japan’s? And what results do they have to show for it?

Here’s a country with a declining population that could easily already have been facing the problem of having more infrastructure than they need, and their ‘solution’ to the problem was to invest 2 trillion dollars in infrastructure building with borrowed money. Because ‘stimulus’.

Bastiat wept.

30 Nathan W February 10, 2016 at 10:04 pm

How much would Japanese GDP have declined had they done nothing?

31 Nathan W February 10, 2016 at 10:01 pm

Currency names are always lower case 🙂

32 Jeff February 11, 2016 at 4:39 pm

Tyler is wrong. If the Bank of Japan wants to depreciate the yen, it is trivially easy to do so. You just announce that effective immediately, the BoJ will exchange yen for dollars at 120 yen per dollar in unlimited amounts. The exchange rate will fall to 120 yen per dollar immediately.

And it is easy to keep it from appreciating. You just keep printing up yen and exchanging them for dollars. Nothing to it. There is no long-run budget constraint. The worse that could happen is that all those holders of yen change their minds and want their dollars back. You just pull the dollars out of the vault and exchange them back at the same 120 yen per dollar price. You won’t run out of dollars because you’re not paying more for the repatriated yen than you sold them for.

The fact that the Bank of Japan is not doing this indicates one thing, and one thing only: they don’t actually want to depreciate the yen. It appears their highest priority is to use an interest rate as their policy instrument whether it’s effective or not. Apparently that’s the only respectable way to do monetary policy these days. If you think this makes no sense, you are not alone.

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