Is the Fed Blindly Following Failed Policies of the Bank of Japan?

Mish

Let's compare Bank of Japan actions and statements since 2016 with recent Fed actions and statements.

BOJ vs Fed Comparison Criteria

  • No Upper Limit
  • Commitment to Overshoot
  • Buy ETFs
  • Unlimited Time Frame (Until it Works)

Bank of Japan Actions

  1. January 21, 2021 Monetary Policy Statement: The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent. 
  2. October 29, 2020 Monetary Policy Statement: The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent. 
  3. April 27, 2020: Bank of Japan vows to buy government bonds 'without upper limit'
  4. July 7, 2017: Bank of Japan offers to buy unlimited amount of bonds to calm markets
  5. October 2016: The Bank Of Japan Breaks New Ground Yet Again--And It May Work This Time
  6. The BOJ has been buying ETFs for a decade as part of efforts to drag the world's third-biggest economy out of deflation. Its policy at the moment is to buy ETFs at an average annual pace of roughly 6 trillion yen, a commitment that forces it to keep buying even when stocks are booming.

The table of contents for the October 2016 article is interesting. 

Oct 2016 Table of Contents

  • Doubling Down, Not Throwing in the Towel
  • Making Sense of the New Framework
  • Quantity and Price: Is the BOJ Trying to Have Its Cake and Eat It Too?
  • An Exit Strategy Could Be in the Making
  • Commitment to Overshoot Inflation Target
  • Where the BOJ Goes, Others Tend to Follow

Exit Strategy, Making Sense, May Work?!

What a hoot. 

The rest could hardly be more prophetic especially the final bullet point.

Spotlight on Bank of Japan's Yield Curve Control

Please consider Global Bond Rout Puts BOJ's Yield Curve Control in Spotlight.

The Bank of Japan’s success in controlling the shape of the bond market’s yield curve could tempt other central banks to consider deploying similar tactics as they grapple with a rise in borrowing costs that could cripple their economies.

The Japanese central bank has kept bond yields largely pinned inside a narrow range around 0%, since it adopted its yield curve control (YCC) policy in 2016.

The merits of the policy are clear. By shifting to targeting yields, the BOJ could buy fewer bonds than under its massive bond-buying programme many analysts saw as unsustainable.

Merits? Success? 

The Bank of Japan has indeed controlled the shape of the yield curve. But where is the success?

Japan has struggled with recessions and deflation for over a decade. The BOJ's strategy is hardly a success given inflation targeting is the primary reason for its monetary madness. 

Moreover, the the final paragraph in the above article is flat out wrong. The BOJ does not buy fewer bonds, it has to buy unlimited bonds "without setting an upper limit so that 10-year JGB yields will remain at around zero percent."

Fed Doubles Down, Commits to Overshoot

The Fed is indeed following the failed footsteps of Japan. 

It is doubling down, has committed to overshoot, and has no exit strategy.

  1. March 4, 2021: Powell Confirms Easy Money Until the Cows Come Home
  2. February 24, 2021: Powell Disses Inflation and Ignores Questions From Congress About Leverage
  3. March 17, 2021: Fed Commits to "Full Range of Tools" Seeks Inflation Above 2% "For Some Time"

Key Snips From Link 3 above, Fed's Latest Meeting

  • Full Range of Tools: The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time.
  • Commitment to Overshoot: Inflation continues to run below 2 percent. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time.
  • No Time Commitment: The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. 

What About ETFs?

The only policy action missing is equity ETF buying, but the Fed is on that path too, but with junk bonds for now.

Please recall my June 15, 2020 post Fed's New Facility Will Buy Junk Bonds With 7-1 Leverage

In due time the Fed is certain to use its "Full Range of Tools" as well as invent new ones. The Fed's purchase of junk bonds (a new tool) is not even legal due to insufficient collateral. 

Full Speed Ahead

Bubbles be damned. Full speed ahead with the stimulus in search of inflation that would be visible to anyone who was not wearing groupthink blinders.

Hello Jerome Powell We Have Questions.

In addition to having no vision, Powell cannot hear questions.

Also note Inflation is Poised to Soar, 3% by June is "Almost Certain"

Meanwhile, bubbles in equities and junk bonds keep getting bigger and bigger. 

Mish

Comments (26)
No. 1-15
Eddie_T
Eddie_T

I reset the fun trade in GLD. The 1734 level, which was resistance, is now support.

Bought GLD at at 163 and setting a stop at 157-ish. I think there still might be a test of 1700 on the spot market.

Mish
Mish

Editor

Three Tweets by one person inspired this post. I linked to the Tweets but the person deleted all three of them for some reason.

Eddie_T
Eddie_T

No doubt the Fed is following BOJ. I expect them to print to infinity to keep interest rates low.

It is a bad policy, but it’s one we can benefit from as long as we remain vigilant and don’t get over-leveraged. You play the hand you’re dealt.

shamrock
shamrock

I'll point out that the cost to the Treasury of any bonds bought by the Fed is essentially zero no matter what the interest rate. Interest paid on the bonds to the Fed are immediately returned to the Treasury as "excess profits". Net expense: $0.

Casual_Observer
Casual_Observer

The Fed is betting that asset values are more important than liabilities. The holders of dollars have no choice. If the dollar collapses every other currency will too. The power of the dollar is our consumptive capacity to keep global economies afloat. The US is still the best bet in a below average neighborhood of currencies.

Tedwardspharmd
Tedwardspharmd

Mish. What is the risk of going 100% into the market index? Doesn’t the Fed have unlimited buying power?

BobSmith
BobSmith

How likely is that the Fed will start buying munis?

Anda
Anda

"... a rise in borrowing costs that could cripple their economies."

Just about says it all - if someone cannot borrow / "borrow indefinitely" then their economy is crippled. How someone bases the success of their own economy on borrowing from others defeats my understanding , and more so when the choice of the lender to lend is overwritten by national policy.

You could say everything is borrowed, an employer borrows a workers time and redeems that with a good which is hypothetically borrowed because the worker is expected to use or dispense of it at some point. However ownership of a workers time remains his own always because he has every choice to stop working in a voluntary contract, as does the good pertain to him fully when it is given because no other has claim to it under normal understanding of what property represents. So to overrule those understandings is both slavery and theft, which governments are quite adept at, including disguising the deception as a matter of public good. In fact it would be easy to take the initial quote as a menace

"...we are now able to cripple you by allowing rates to rise."

And so the strange crippled waltz continues, because those that cannot stand without the support of their partner tend to dance in a rather peculiar way. Just look at EU, they even had to bolt the exits to keep everyone on their feet.

Intelligentyetdiot
Intelligentyetdiot

If all money is to be true money, no one can be permitted to create or destroy money except the government. Each citizen who thinks he owns a dollar of real money should own 100 cents of claim on the government and not 15 or 20 cents. The government, when it wishes to expand or contract money, should simply add or subtract that many dollars and not have to add or subtract only a fraction as many as reserves, waiting for banks and people to do the rest. Above all, no one should enjoy the incidental benefits of money creation but the government, using these benefits for its public purposes.

bradw2k
bradw2k

If/when there is another crisis, Fed+Congress will bend or change the rules to keep the game going for the 0.1%. Does anyone doubt that all the kleptos in DC will rush to give the Fed more power to fund new programmes during a big crisis? ... From Powell's point of view, he's just doing whatever is necessary--he has "the courage to act" as Bernanke put it. ... From our outsider point of view, it's going to look more and more like nationalization of the entire economy by elites.

Felix_Mish
Felix_Mish

Speaking of the BOJ, have they bought a significant share in Nikkei companies by now? And, if the BOJ "owns" a large percentage of the Nikkei, what does that even mean?

Too, if the Fed is following the BOJ playbook, one can wonder how long it will be before the Fed can and does buy public stocks indirectly or directly. Given the Fed's thick checkbook, that is an interesting thought to noodle on.

Mish
Mish

Editor

Tied up with company this weekend will post and answer questions with a bit of delay

oee
oee

You are incorrect. Japan created the equivalent of 3 million jobs in the US during a year in 2010's. the approach did work. Also, Japan only has 7333 deaths resulting from Covid 19; it is a country that has 38 % of the US population and is super dense in terms of population density. I wish the US would an equally failed country like Japan.
P.S. the US has logged 530000 Deaths. one of the worst death rates in the planet.

bluestone
bluestone

I think Japan is different from the US in that it is a net saver, and the problem for the Japanese is that they want to produce more than they consume. Perhaps recycling the savings into infrastructure has become a bit embedded in the political psyche but its stable as long as they keep saving.

Eventually they will have a negative savings rate and I imagine they would inflate the debt away slowly.

The US on the other hand, doesn't save and always wants to consume more than produce so any fragilities of the Fed response could (leaving the prediction aside) show up more dramatically.

I live in Japan and I can say for certain there is zero wage inflation and there is zero pressure on companies to improve their offer. For Japanese its unseemly to be money orientated and renumeration is not even always discussed at the interview. Anyway so i doubt the Fed will be able to follow the BoJ.

markos123
markos123

Hey Mish, what would you have done if u were fed chair. What is your solution ? Thanks


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