With skepticism rising with every passing day that Japan’s monetary dead end could mean the BOJ is forced to be the first developed central bank to admit outright policy failure, resulting in suggestions for a “massive stimulus program” and “creating shock and awe at this point in the cycle“, overnight Koichi Hamada, an adviser to PM Shinzo Abe, penned on Project-Syndiate Op-Ed titled “Japan vs. the Currency Speculators“, in which he said that “what the MOF should do is intervene courageously in currency markets to stem the yen’s appreciation.” The benefit of this proposed doubling down would be that “Speculators will learn a tough lesson, and Japan’s economy could get back on track. Though Japan may become a scapegoat for the failure of the TPP, it seems unlikely that the deal would be ratified in any case, given the current political climate in the United States. An alternative would be for the BOJ to purchase foreign securities.”
In short, according to Hamada 30 years of monetary failure can be fixed if only the BOJ does, well, even more of the same.
However, the last bolded section from the op-ed was notable, because it suggests a way out for the BOJ in its predicament where it has effectively nationalized not only the stock, but soon, the JGB market as well: buying foreign bonds.
It was this point that he followed up on today, in a Reuters interview when he said that the Bank of Japan “could consider buying foreign bonds as an option to weaken the yen, if government intervention in the currency market is deemed by the United States to be exchange rate manipulation.”
“Japan’s monetary authorities should intervene in the currency market not to change the yen’s general course but to discourage speculators – who bet too much on the rise of the yen – whenever it rises excessively,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview.
“If Japan’s currency intervention is considered manipulation of exchange rates, BOJ buying of foreign bonds is an option for the same objective in a moderate form,” he said.
As exchange rate policy is the government’s preserve rather than the central bank’s, the Bank of Japan has avoided buying foreign bonds in the past.
To be sure, this is not the first time the BOJ has considered buying foreign bonds: the central bank previously debated on foreign bond purchases at MPMs in 2001. With the non-performing debt problem still ongoing, the Japanese economy was impacted by external factors, including the collapse of the dot.com bubble and 9/11 terror attacks. The Japanese government eventually acknowledged in March 2001 that the economy had entered a deflationary phase for the first time in the post-war period. In response, in March 2001 the BOJ changed the operating target for money market operations from the uncollateralized overnight call rate to the outstanding balance of current accounts, and shifted to a quantitative easing policy via the outright purchase of long-term JGBs. However, by the summer of 2001, board members have started to question the effectiveness of the policy.
According to the MPM minutes, former board member Nobuyuki Nakahara had first proposed that the BOJ purchase foreign bonds in an attempt to strengthen its funds supply capabilities and to diversify its supply means at an MPM on October 29, 2001. Nakahara viewed the purchase of foreign bonds not as an attempt to influence foreign exchange rates, but as part of the BOJ’s “normal business” in expanding the monetary base. He further emphasized the possibility of avoiding this policy being viewed as forex market intervention by establishing clear guidelines, including limiting monthly foreign bond purchases to a set amount, and holding off on purchases in cases where exchange rates fluctuate sharply.
While Mr. Nakahara’s proposal was ultimately shelved, MPM minutes suggest that there was lively debate among board members regarding the pros and cons of foreign bond purchases. Of particular interest are the views put forward by board member Miyako Suda at the MPM on November 15-16 the same year. Suda pointed out that (even if the policy was part of efforts to expand the monetary base and not for the purpose of influencing foreign exchange rates), it was crucial that the BOJ seek the understanding of overseas monetary authorities, particularly in the US, and gain the cooperation of the Japanese government (MOF).
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However, now that the proposal has been floated again, it may be tough to resist as the only other alternative is pure helicopter money in the form of cash handouts to the population. Hamada touched on that in hist op-ed last night too:
Many hedge-fund managers, along with some economists, claim that the key to saving Japan’s economy from deflation is a more direct helicopter drop, with newly printed cash delivered directly to consumers. Yet these same people are impeding effective macroeconomic policy, by betting on the yen’s appreciation. Only when the speculators are brought to heel should such a bold – and highly risky – monetary policy even be up for discussion.
Crushing of speculators aside, if and when Abe (and Kuroda) follow Hamada’s advice, watch as the yield on US 10 and 30Y tenors tumbles, potentially leading to an official (as opposed to the unofficial OIS) curve inversion, and forcing the Fed to abort any rate hiking speculation indefinitely.
Ass for the practical implications, i.e., can the BOJ monetize foreign bonds? This is what Goldman’s Naohiko Baba noted moments ago:
- Under the BOJ Act, the BOJ is prohibited from purchasing foreign bonds in an attempt to influence foreign exchange rates. However, when used for other purposes such as expanding the monetary base, the rules are much less clear-cut.
- A board member proposed purchasing foreign bonds at a Monetary Policy Meeting (MPM) in 2001, but the proposal was shelved, mainly due to opposition from the Ministry of Finance (MOF).
- Even if the BOJ were to position the purchase of foreign bonds as another means of expanding the monetary base, the international community would likely criticize the move as an attempt to influence foreign exchange rates. As such, in light of the expected opposition from overseas monetary authorities, we think the MOF’s basic stance would likely be that the BOJ should not be allowed to purchase foreign bonds .
- In April 2016, the US Treasury placed five countries including Japan on a newly established currency monitoring list. In addition, BOJ Governor Haruhiko Kuroda was working for the MOF when the BOJ was debating the proposal. These factors would suggest the hurdles for the BOJ purchasing foreign bonds are considerably high.
- At the Jackson Hole symposium in the US on August 27, Governor Kuroda emphasized the positives for its negative interest rate policy (NIRP), as expected, and suggested a willingness to take rates deeper into negative territory in the future. With other effective policy options drying up and the adoption of new policy means such as foreign bonds purchases being very difficult, we think this reflects the difficult situation the BOJ finds itself in and thus the need to be reliant on the NIRP.
In other words, as of this moment, the BOJ is prohibited from doing so by the BOJ Act, but as the ECB has shown, any law can be changed or simply ignored, and Goldman’s tone suggests to us that with other options dryingup, a push to monetize foreign debt is what may happen in Japan soon, perhaps as soon as its September meeting.