Pro Perspectives 6/17/22

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June 17, 2022

We ended the week with yet another big central bank meeting.  It was the Bank of Japan.
Remember, while most of the world is raising rates and ending quantitative easing, the Bank of Japan has been entrenched in multi-decade fight against deflation, and consequently a very long period of ultra-easy policies.
But inflation is running hot around the world, even Japan.  Japan's most recent inflation print was 2.5% annualized.  Their goal for monetary policy is to get sustained inflation of 2%.  
So, given the trajectory of global rates and Japan's recent inflation, there was question as to whether or not they would stick to their guns at today's meeting. 
Those questions were manifested in selling … selling of Japanese bonds.  That speculative selling in the Japanese government bond market put pressure on one of the BOJ's core policies:  Yield Curve Control. 
As we discussed earlier this week, under their "yield curve control" program, they are managing the yield curve, and doing so by manipulating the 10-year yield. They are targeting 0%, allowing 25 basis points on either side. 
Remember, this top limit was breached this week, creating speculation that the BOJ, too, might start the process of exiting emergency policies — in this case, through raising the top limit on their yield curve control program to 50 basis points.
It didn't happen.  In fact, the BOJ doubled down today.
They will continue QE.  That includes buying unlimited JGBs to defend the top of their limit on the 10-year yield.  The more pressure, the more JGBs they buy. 
Again, this is a stated plan of unlimited QE, as it has been.  The difference now, is that the upward pressure on rates will put this program into overdrive.  
What does it all mean? 
It means that there is still a very big and powerful central bank in the world that is still pumping liquidity into global markets.  It's the shock absorber, in a world where policy change can induce big shock waves. 
This is good news, to end a tough week.  We shouldn't underestimate the importance of this. 
Let's again revisit this related excerpt from the April 28 note …
"This looks increasingly like the Bank of Japan is taking the baton from the Fed and other central banks that are being forced into an inflation fighting role. 
How do you prevent a global economic shock that may (likely) come from reversing the mass liquidity deluge of the past two years (if not 14 years, post Global Financial Crisis)? 
You keep the liquidity pumping from a part of the world that has a long-term structural deflation problem, and that has the biggest government debt load in the world (exception, only Venezuela).
The Bank of Japan, in this position, can be buyers of foreign government debt (namely the U.S.) to keep our market rates in check (keeps the world relatively stable), which gives the Fed breathing room on the rate hiking path.  
And Japan's benefit?  The world gives Japan the greenlight to devalue the yen, inflate away debt and increase export competitiveness (through a weaker currency).  They hit the reset button on an unsustainable, debt-laden economy."