Pro Perspectives 12/18/23






Please add to your safe senders list or address book to ensure delivery.

December 18, 2023

The Bank of Japan will decide on rates tonight.
There’s speculation they might end negative rates.
On that note, let’s revisit an excerpt from my April 28, 2022 note.  This was shortly after the Fed started liftoff on interest rates… 

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).

Indeed, the rest of the world spent the better part of the next year and a half executing an aggressive tightening cycle.  And in the face of the global tightening cycle, the Bank of Japan did indeed continue, pedal to the metal, with ultra-easy, emergency level, monetary policy.

Did the BOJ buy a lot of sovereign debt of the Western world, to help keep important global interest rates in check?  Yes.  Did the yen devalue?  Yes.  Did Japan finally muster some inflation, after nearly thirty years of deflationary pressures?  Yes. 

So, mission accomplished.  In coordination, the major global central banks were able to curtail record inflation, without having to raise interest rates above the rate of inflation — the historical inflation beating formula, but also a formula that would have crippled the economies of the Western world.  And the victory over inflation, was due in large part to the liquidity that continued to pump into the global economy from Japan.

With all of the above in mind, will the Bank of Japan end negative rates tonight and begin normalizing policy?  They shouldn’t.   

They held the line through the tightening cycle.  Now inflation in major economies is declining sharply, with the potential of inflation turning into deflation.  With that, the next move by major central banks will be easing.  And no central bank is more sensitive to the plight of deflation than the Bank of Japan.