A short follow-up of our previous post ‘Bank of Japan: backward guidance’.
As a reminder, in this process of ‘forward guidance in reverse’, we believe that the BoJ is running behind the curve instead of controlling it.
Please consider ‘BOJ Fires Warning at Bond Market With Unlimited Buying Plan’ :
“The Bank of Japan fired a warning shot at the government bond market Thursday, announcing its first offer to buy an unlimited amount of securities to maintain its yield-curve target.…“It’s a surprise that the BOJ took action today,” said Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. in Tokyo, a unit of Japan’s second-biggest lender. “Markets won’t test levels above these fixed rates as these will be seen as reflecting the BOJ’s upper limit.…“The aim is to send a warning to markets about a significant surge in rates,” said Keiko Onogi, a fixed-income strategist at Daiwa Securities Co. in Tokyo. At the same time, “there are questions as to why the BOJ conducted this operation now, when the market had already stabilized after the surge in yields to yesterday,” she said.…Kuroda said in parliament following the announcement that the central bank won’t automatically allow Japanese rates to rise if rates rise in the U.S. He reiterated the BOJ is aiming for a 10-year yield of “about” zero percent, and that it can’t achieve a yield target of exactly one level.“It’s the strength of that stance rather than the actual levels at which the BOJ offered to buy the debt that’s pulling down yields.”
“The strength of that stance”, really ?
We suggest :
– Q: what happens when the forward guidance bubble finally bursts ?
– A: a massive repricing of (sovereign) credit risk.
– Q: is there a chance to escape the current repricing ? What about Japan ?
– A: nope. The BoJ may pretend, reassess and adapt however.
– Q: what are the effects of an interest rate shock on the economy ?
– A: once the election dust settles we may soon find out: tougher financial, public and real conditions. This is part of a larger normalization process.
– Q: isn’t growth going to rebound as a result of fiscal policies ?
– A: at which cost ?
Back to the first answer …