UBS On The Erosion Of Central Bank Independence

Tyler Durden's picture

Via UBS Investment Research

Erosion of BoJ Independence: “Fonetary-Policy”?

The erosion of the BoJ as independence and the implications for central banking

The Japanese government’s pressure on the BOJ for more monetary stimulus is clearly intensifying as the bank’s October 30th meeting approaches.

Why is the BOJ facing heightened pressure for more easing?

Last August the Japanese government passed a bill to raise the consumption tax from the current 5% up to 8% in April 2013 and to 10% in 2015. However, the government ultimately opted to make the tax hike contingent on the prospect of the Japanese economy emerging from its deflationary rut in the fall of 2013. Accordingly, the government is now seen as increasing pressure on the BOJ to do something to combat deflation, given that the Japanese economy is likely to post negative growth over the July–September quarter amid the economic slowdown in China and other such factors.

Is the BOJ really under pressure?

As it now stands, the BOJ has set a target for the Asset Purchase Program (APP) of ¥80tr by year-end 2013 from ¥63tr currently. Media sources have reported that the government is calling on bank officials to raise that amount by a further ¥20tr (Sankei newspaper, Oct 23). However, prior APP portfolio increases have always come in increments of between ¥5tr-¥10tr, so a ¥20tr increase would be equivalent to roughly 4% of Japan's annual GDP, or 14% of the BOJ balance sheet. Although many market players obviously remain skeptical that the BOJ might actually increase the facility by such a large amount, bank officials may have become more susceptible to pressure to initiate further stimulus measures.

What about legally-mandated BOJ independence?

The BOJ Act was revised in April 1998 to ensure that Japan's central bank would maintain its independence from the government. This was done to make it easier for bank policymakers to expeditiously fight inflationary pressures. The difficulty of managing policy at the zero interest rate bound, as evidenced by the BOJ’s seeming inability to push prices onto a positive trajectory, coupled with its diminished role as a financial intermediary (due to stagnant loan markets) have put the central bank on its back foot. Downward economic pressure following the 2008 financial crisis and the aftermath of the Tohoku earthquake and tsunami has compelled the bank to invoke further monetary accommodation. Lawmakers have also implemented aggressive spending programs with the intention of spurring economic activity. With sovereign debt ratios at very elevated levels, legislators are increasingly tempted to lean on monetary officials to provide further accommodation, to little avail.

Despite the monetary and fiscal pump priming which has taken place, the bank's 2014 (FY) CPI outlook is expected to fall short of the bank's 1% inflation goal set back in February. This factor, coupled with the increased perceptions of political pressure, has raised market expectations that further measures will be forthcoming at the October 30 meeting.

Why is the BOJ seen as hesitant to provide more easing?

Until now, BOJ monetary easing measures have been linked to the prospect of increased sovereign debt investment by financial institutions (Figure 1). The monetization implemented by the central bank finds its way into the banking system and then, rather than getting re-circulated into risky assets such as loans, ends up invested in the JGB market.


Such moves have not reduced real interest rates through heightened inflationary expectations, nor have they brought about increased private-sector investment through lending. The BoJ’s unsuccessful efforts to stimulate inflation using these tools has likely heightened scepticism that further monetary easing of this same nature will be able to bring about an end to deflation. Ongoing and accelerated purchases of government bonds by the BOJ also poses the danger that such moves could be perceived as central bank financing of government spending, particularly given government lacking progress with financial reconstruction initiatives.

BoJ Independence or Interdependence?

There is a possibility that the realm of monetary policy could increasingly merge with that of fiscal policy and national debt management policy.“Fonetary-policy” – fiscal policy plus monetary policy.

The BOJ embarked on its strategy of quantitative easing from 2000 to 2006, engaged in a comprehensive monetary easing initiative commencing in 2010, and has been extending out beyond conventional T-bills to purchasing assets such as long-dated JGBs, ETFs, and J-REITs. Policy makers have been gradually exposing the bank to ever higher levels of price volatility risk.

Along those lines, an agreement could emerge that would put Japan on a trajectory toward a combined monetary and fiscal policy, which might look much like the regime which existed in the U.S. prior to 1951. From 1942 to 1951, the Fed agreed to support massive government borrowing to fund the war effort by purchasing sufficient amounts of Treasury debt to keep interest rates pegged at artificially low levels. The post-War economic expansion, brought about by returning veterans and a conversion of the economy from a war-time footing, ultimately kindled strong inflationary pressures and monetary policy makers were incapable of a response. After much acrimony, the 1951 Accord was agreed to, stipulating a division between fiscal policy and monetary policy in order to safeguard the economy from inflationary pressures.

Central Banks and Debt Managers: Embracing a Negative Dynamic

Globally, central banks are edging down monetary policy paths that can be viewed as increasingly backstopping budget deficits as lawmakers of respective governments continue to fail to make progress toward fiscal consolidation. A progression down this road could lead to many unsavoury outcomes, as fiscal and monetary policies entwine themselves in an increasingly negative dynamic.


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redpill's picture

Correction: The erosion of the illusion of independence.


And it's cronytary policy: the abuse of central banking power to impoverish the citizenry in order to enrich the financial oligarchy

alstry's picture

A Bank That Depends On The Milk From Its Central Bank Commenting On The Independence Of Its Mother Bank?

Now we have truly entered the

SWRichmond's picture

Any fool who believes that the solution to the central bank printing press mess is to give the power to the CONgress is similarly deluded.  Politicians and central bankers will lie and loot until they can't.

The Alarmist's picture

I'm confused ... is it the central banks that need to be wrested from the control of governments, or is it governments that need to be wrested from the control of central banks?

NotApplicable's picture

This whole article falls under the category of, "If you can get them to ask the wrong questions, the answers do not matter."


Harbanger's picture

Big business finances and Voters elect the Politicians offering the best promises, Govts then get in bed with Bankers to finance those promises because the new guy has to out-do the the last politician, who already promised more than the nation could afford.  This goes on for decades until they max out the nations credit, wreck the currency and eventually go bankrupt.

asteroids's picture

20 Trillion yen is about 125 Billion US. Doesn't seem like a big number anymore. Makes me want to puke though.

MachoMan's picture

Neither.  Central banks are merely illusions.  An additional line of defense/plausible deniability for governments.  As B9K9 said, if the central banks did not exist, the governments would have to create them.  When push comes to shove, we'll still have a government, but we may no longer have a central bank.

It also carries plenty of risk while its asset base is nothing but toxic mortgages and promises from a bankrupt empire.

swissaustrian's picture


parliamentary control over interest rates and the money supply is a socialist/communist/facist idea. It's even in the communist manifesto:

The fifth plank of The Communist Manifesto is:

Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.

NotApplicable's picture

You know, if you occasionally linked to a relevant article on your blog, you'd be within polite standards, but spamming every post with with your main page is plain rude, to all of us, as well as Tyler.

In other words, you're getting into the area of negative returns, where the only clicks you'll get are the random newbie. The rest of us meanwhile, will simply ignore you (with the exception of a down-vote).

I don't know what your intentions are here, but I doubt they are what you're achieving with your behavior.

fuu's picture

What do you expect from someone who created an account just to leave it idle for 3+ years?

takeaction's picture

Many things baffle me, but since reading zh for the past couple of years....Now I just scoff my head.  I woke up this morning at 3:30 am (Still struggling with Jet Lag) and I hopped on this machine and saw that the markets were down over 115 points before the open.  Gold and Silver were getting pummeled.  Then I checked again an hour before the open and all was back to even.  Then watched the markets dive, and now back even.....the people behind the curtain are sure putting in some over time trying to plug this "Titanic Like" hole.  PPT, The Fed. JP Morgan, etc....or all combined have to be shitting their pants knowing what is ahead.  Do you ever think that you know way too much?  Do you ever wish you could go back to being blind to it all like so many around us? 

NotApplicable's picture

With the exception of perhaps a few flunkies on the front lines, they are fully aware of the "unplugability" of this hole.

It doesn't take a Nobel Prize winning PhD economist to figure out that one does not solve the problem of too much debt by going further into debt. (Rather it takes one to invent a plausible scenario where it does.)

pods's picture

You remind me of a line from the Matrix, which I overlooked at first, but now value highly as many others.

Cipher remarked "Why oh why didn't I take the BLUE pill?"

The disconnect is easily seen when you read the nuts and bolts of reports broken down here then hear about how they are presented on the radio news on the way home.

The only reasonable conclusion is that the major media has a job to maintain the status quo.


Pactyas's picture

It should be fiscetary policy, and it's always been fiscetary policy.

kaiserhoff's picture

Central bankers losing their dictatorial, soviet central planning independence?

Does Lloyd know about this?

kaiserhoff's picture

CKGB says Lloyd sold peanuts at Yankee games in his youth.

What's that real estate thang?  Oh yes, "Highest and best use."

Dr. Richard Head's picture

What about this real estate thang?

Major Banks, Governmental Officials and Their Comrade Capitalists Targets of Spire Law Group, LLP's Racketeering and Money Laundering Lawsuit Seeking Return of $43 Trillion to the United States Treasury
The Gooch's picture

Yes please!

Watch your backs, Spire!

Stay away from hot tubs.



NotApplicable's picture

Lemme guess, you had to be rich in order to afford a vendor license?

Charley's picture

Yes, central banks are losing monetary independence. But to whom? They are not losing it to their elected governments, but to the Federal Reserve quantitative easing. The dollar is the world reserve currency, so the Fed's monetary policy determines the monetary policies of all other central banks. For these banks, providing liquidity to their respective governments will only lead to bouts of hyperinflation.

Orly's picture

Well, there are no "bouts" of hyperinflation.  It either is or it isn't, but I do see your point.

As long as the Fed pushes the USD lower and down the throats of much smaller economies, there is very little anyone can do about it.  The yen has gained massive strength over the period since the banking crisis began and there is no amount of purchases or "easing" that can be done by the Japanese central bank to keep the USD from plunging against it, short of the outright purchase of USD by the Japanese central bank, which would last all of fifteen minutes.  Their exporters are getting creamed and in an economy of exports, that is really, really bad.

The Japanese are clearly in a pickle, which is why the parliament suggested yesterday that the central bank add an extra 10T yen to their balance sheet on top of the program already in place.   Unfortunately for them, any move smaller than the now suggested 20T yen will come as a disappointment to 4X markets and the yen will rise even further.

Damned if they do, damned if they don't.  It's a real mess, this deflation thing.  They should have taken their medicine in the 80's and had it done and over with.


Marco's picture

If printing Yen to buy Dollars surpresses their currency only for 15 minutes, just repeat it every 15 minutes ... at some point the inflation expectations of foreign investors will rise enough that they will stop stockpiling Yen ... all you need to show is determination to maintain a peg.

Orly's picture

I'll defer to Mr. Hildebrandt on that topic...

Charley's picture

I completely concur with this. :)

pods's picture

Not even sure why a central bank SHOULD be independent?

And further, since it requires government force for its very survival, it can never be independent.

So basically when it is the central banks's turn to play "catcher" the bankers squirm?

Fuck em all, they have pitched long enough.  
Time for them to bend the fuck over.


El Viejo's picture

Not independent from a president in an election year???

Not independent from politicians in general???

Volcker was appointed because the previous guy was a little too close to Carter.

pods's picture

If the illusion of independence was dropped, we could actually see what the FED is.  A backstop for the banks and the government.

As it is now, the FED is some mystical organization.

It is nothing of the sort. It is the bankers bank.  The job is to backstop the banks.  Why do the banks need backstopping?  Easy, every once in a while people catch wind of how fractional reserve banking works. No FED, bank runs are a very big risk.  With the FED, not so much.

How independent can an organization be if it depends on another organization for its very survival?

I say we drop the bullshit about it being so and look at what it is.  An insurance policy for banks to be able to continually rape the populace which falls under the guise of its legal tender.


El Viejo's picture

That is the hidden job of the FED (to backstop the banks) The published job 1 is to keep inflation in check and the recently added job 2 is to reduce unemployment, but the primary job has always been to keep the US banking system healthy.

Bernanke walks a tightrope between austerity and Iceland. Maybe he could have let more banks fail Who am I to say, but in the early days it was panic they wanted to prevent and face it the damage was already done by previous history of lack of regulation. Bernanke is just batting cleanup.


pods's picture

The whole arrival of the latest incarnation of central banking in the US was due to a contrived banking panic.

And many argue that the first great depression was in fact also contrived to do away with exchange of banknotes for specie.

They have miserably failed at their published number one job.  So much so that it is clear that that is in fact NOT their job.

You have every right to demand that this cancer be removed if your life (labor) is priced in what the central bank peddles, namely FRNs.

Even the whole bank failure is a scam. I remember in 08 looking at the FDIC's list of bank failures.  The overstretched little banks.  Actual bankers that live near us, whose kids play little league with your own.  Those are the ones who failed.  Then the good debt is bought in a (discounted) deal by connected banks brokered by the FDIC while the bad debt is made good by your tax or your kids tax money.

And the problems were not due to regulation, or lack of. It is due to fractional reserve banking needing exponential expansion to work.

They are vipers and thieves, all of them.  The sooner we stop pretending they are warm fuzzy bunnies the better our posterity will be.


El Viejo's picture

I disagree with "contrived". It is very real.  Man made perhaps. (Made by irresponsible people in power who just wanted to turn the knobs a little further for the sake of political gain or more profit)

Its a fast paced world and things are already done before the lag time allows the results to manifest.

Maybe the fraction should be greater, but I disagree with Friedman and his 100% reserve.

I agree with the fuzzy bunny thing sortof. Its time that the law enforcement and justice system in this country realize that not just private citizens such as Martha Stewart commit crimes. The FBI and Justice dept needs to get its act together and arrest those that cause the most damage. The American voter needs to study and vote intelligently (or not at all)

The whole funny bunny thing was brought to light with computers. (too complicated to blame the software sellers when things don't quite work out right.) That has existed in banking for some time. They are not geniuses for sure, but the politicians and Greenspan were to blame.

Let em hear you in Washington. Throw out all encumbents.

pods's picture

Sorry, if you have a system based upon lending at interest at anything other than 100% reserves you end up in the same place.

It just takes longer to get there at first. That is why you tend to see these systems starting out with high reserve requirements and over time they are lowered.  

It is an exponential function.  They lend out P, they require payback of P+I.  

The money supply has to expand at a rate greated than I for it to work out.

Go to the St Louis FED and look at any of their FRED data on credit, debt, etc.  You will see they are all exponential functions.

It is the system. 


El Viejo's picture

It is the system. (fortunately sometimes and right now unfortunately)

Some have likened it to a hydraulic system. (You tweak a knob here and something happens over there a little while later)

Hard barriers like the gold standard or 100% reserves have similar negative effects under different circumstances. I will be mightily junked by gold holders if I suggest that we do not  go back to the gold standard and yet if we do the govt will take all their gold. (govt does not like competition) and unless trade is balanced Fort Knox will disappear. Leaving the country with no gold. (Including private owners)

Have you ever seen an undiciplined person suddenly find discipline. It has to be beaten into them. Especially politicians.

pods's picture

As much as I like gold, we do not have to have a gold standard. 

All we need is a system where money is whatever the market says it is, and bankers cannot lend against fractional reserves.

Of course, then banks would actually go back to being banks, instead of little mini-HP laser jets.

And your talk of trade is especially spot on, as our nation could not go on any kind of standard due to the trade deficit.

As well as Gresham's law.  One nation cannot specify a specie standard in a world of debt money.  

So a freely arrived market money is what I hope for. As long as my labor cannot be devalued by a printer, computer, or pen I will be happy.  I get tired of living withing my means only to see how much money is made off the backs of workers by the money changers.


Harbanger's picture

Many countries have state-owned Central Banks and they aren't doing any better, in fact those countries, independent from external pressures don't have a gold standard, and most are worst off.  How do explain?  Where does managing a nations expenditures and budget play a role.

Dr. Engali's picture

Lincoln knew we didn't need a central bank when the bankers wanted to rape the republic to fund the war:



"We have given the People of this Republic the greatest blessing they have
ever had-their own currency to pay their own debts." (No privately owned
Federal Reserve or other central bank)

El Viejo's picture

So how do you compensate for population growth??? Or more specifically what is happening right now: An aging population that will be retiring soon Or back in the 70's when the boomers were buying anything not nailed down??? How do you compensate when there is only so much currency and the demand for goods explodes like it did in the 70s. I once (blogged)suggested that the taxes should have been raised on individuals and tax breaks given to industry to automate and modernize and produce more. (eventually the breaks to corps were given and now weve gone to the other extreme)

You do understand that different parts of the country have different demand for currency at different times. Our banking system is flexible in that regard. Forcing too much control at the top is like the system in the old Soviet Union. Where the guys at the top pulled all the levers and pushed all the buttons.

Dr. Engali's picture

Are you kidding me? The system we have in place now is more like the old soviet union. We have asset prices being determined by a committee, instead of being determined by the market. As far population growth that is easily solved through the growth of currency as long as that currency growth is restrained by asset backing. There is nothing that prevents the flexability and need for money. The banks can continue to lend, they just won't have the luxury of being backed up by the U.S tax payer. Nor should they be. The system we have now is too unstable thanks to the "too big to fail policy"

El Viejo's picture

Remove any mechanism such as the FED and you end up with a less flexible system. It's like going back to a carbeurator after computer controlled fuel injection.

The current system is a demand based system. If Chicago is having a boom all the banks in Chicago can get the currency it needs for the boom without it being injected vertically by the treasury somehow??(not sure what you meant) A lot of the forced actions right now are a result of the crisis. It wasn't part of the system before hand.

For more info on the FED I highly recommend the book "Secrets of the Temple", William Greider

Se a paraphrased exerpt here:

It's been great but I gotta commute. Have a great weekend!



q99x2's picture

Get rid of the central banks and throw the heathen banksters into prison for treason. Arrest them.

El Viejo's picture

The central bankers are battling the hull damage. The bankers that created exotic financial instruments and the local banksters that committed fraud in mortgage sales and the lawmakers that allowed them both to do the hull damage should be thrown in jail. (And possibly Clinton who repealed Glass Steagall)

But unfortunately in this country we allow good looking or politically motivated embecils to drive.

Maybe if a law has been in effect for more that 50 years it should require a larger majority to repeal it.

Misean's picture

"There is a possibility that the realm of monetary policy could increasingly merge with that of fiscal policy and national debt management policy."

Really!?!?! Could it also be possible that water will one day be wet, the sun might start to rise in the east, and bears, growing weary of porta-potties, might start shitting directly in the woods?

Such wonderment...

nasdaq99's picture

independence hell,  they should all be in handcuffs

WhiteChrist's picture

The Lord is backstopping today's cheapings through His midbanks, which are every one, and steering them through the great men of His fellowship on the Street, in the Borough and throughout the world. They are His chosen ones, and they are where they are in that they are more worthy than we. 'Tis naught for us to do but buy every dip, and to go long forever. These are the up-times, and His Kingdom is nigh. Be glad, for the Lord letteth us buy. There is no Christ but White Christ, and man is His foe. I am not He, nor is any man, but His thane will I be, and His will do. And so shouldst thou. Indeed, we have naught to say in this. May we have no self or freedom, and may we never think.

PUD's picture

US President Obama says first priority in 2nd term is solving debt and deficit;


swissaustrian's picture

There was never any CB independence. In the old days the term "cb independence" was a euphemism for "secrecy" in taking care of the major private banks through frequent leaks on interest rate decisions and other inside information plus emergency lending in liquidity crises. Now that private banks hold so much government paper that any severe decline in bond prices could collapse them, central banks "have" to respond by intervening in sovereign paper. The politicians aren't in charge over central banks due to that, though. They're still doing what the bankers tell them. The relationship between politicians and bankers has just gotten much more incestuous since the sovereign debt crisis started. Central banks were, are and will always be wealth transfer machines for the financial elites.

Jugdish's picture

Excellent summary Swissaustrian. The word "incestuous" hit the nail right on the head. At the same time I always think of the Euro royals, particularly Prince Charles as a perfect example of the consequences of incest. You know one thing about Amerika that is positive is at least in Amerika inbreds live off in the mountains in Appalachia or out isolated in the deserts out west but in Europe they live in castles and palaces. Fuckin euros. I understand why my ancestors left.

AurorusBorealus's picture

The banks may control the supply of currency, but the governments control the guns (at least for now).  The banks may not care who makes the laws, but they will care who has the guns.  The governments of the world have taken more and more and more in the name of public safety, public health, public whatever... but the chorus is the same among the world's middle class... the governments are parasites sucking the blood from the entire world.  As the situation deteriorates in Europe and the U.S. the banks and the government will need the police the police, the army, and the printing press joined together to fight enemies foreign and domestic.

kevinearick's picture

Empire Self-Fulfilling History & Quantum Mobility

“ ‘He is a good man,’ Judge Jed S Rakoff said of Mr. Gupta on Wednesday. ‘But the history of this country and of the world is full of examples of good men doing bad things.’”  (Brilliant/sarc)

Bernanke is playing with peanuts to keep this thing going another day, relative to what has already been exhausted, whatever figure you care to place on middle class liquidation, or more directly, capsizing the American Enterprise System, for a globalization scheme that does not work. Go figure.

As a laborer, the most important lessons in the Bible are remain unknown, create multiplier effects locally, and travel to create multiples of multiples. Capital is bred to hunt you down, employing the middle class to do so, building its potential in the process. When you want to release that potential, let it find you. Act wisely, because you have to go through Lazarus to re-initiate.

When they delay you, they increase pressure on themselves, because delay is the beginning, middle and end of what they do. You will not take robot stupidity personally if you keep your pipeline sufficiently loaded to render their behavior irrelevant.


Moreover, the example of the ancients prescribed that such histories ought to be written from a purely political point of view. In order to become histories, chronicles and memoirs had to be purged of all extraneous non-political material. The exclusive emphasis on politics had the effect of narrowing the lessons of history from broad prescriptions of moral philosophy to rules of political conduct. History became the handmaiden of politics.


Everyone understands well enough how praiseworthy it is in a prince to keep his word (reference to Cicero), to live with integrity and not by guile. Nevertheless, the experience of our times teaches us that those princes have achieved great things who have looked the keeping of one’s word as a matter of little moment and have understood how, by their guile, to twist men’s minds; and in the end have surpassed those who have rested their power upon faithfulness.

You ought to understand therefore that there are two ways of fighting, the one by the laws, the other by force. The first is proper to men, the second to beasts; but since in many instances the first is not enough, it is necessary to have a recourse to the second. A prince, consequently, must understand how to use the manner proper to the beast as well as that proper to men…

Since, then, a prince must of necessity know how to use the beastial nature, he should take as his models from among beasts the fox and the lion; for the lion does not defend himself from traps, and the fox does not defend himself from wolves. One must therefore be a fox to scent out the traps and a lion to ward off the wolves.


Much of what we now classify as medieval political theory…They could no more see the forest for the trees than the theorists could see the trees for the forest. Therefore they did not feel impelled to analyze the means or the resources necessary to achieve those [political] goals, which they simply prescribed as categorically imperative.

Scarcely less well known is More’s brilliant feat of tracing the failure of criminal justice in England to a legally maintained set of social and economic arrangements which by locking men into their poverty drove the poor to steal out of despair, and then, by establishing the death penalty for theft, made it only prudent for the thief to murder his victim.

Surely this combination of lessons of antiquity with the quick and accurate reading of the economic and demographic facts of life as they affected the aristocracy, this perception of the church as a useful by-route for a social mobility which was itself a means of releasing and diffusing social pressures, surely all this in the face of the contemporary habit of thought which almost automatically triggered a spasm of horror at the mere notion of such mobility, entitles Seyssel to join More and Machiavelli…It was this habit of confrontation shared by all three that enabled them to see through and beyond the stale hortatory moralism…

The consequence of this sharp deflation of expectations was to render Seyssel’s enterprise possible.


…for the mood of disillusionment and self-criticism, of analysis and introspection, which becomes evident when man looks into himself is at the root of Donne’s poetry just as it informs the whole of Montaigne’s writings and reappears in Shakespeare’s dark comedies and his tragedies. [T]he ‘Spirit of the Ages’ tends to express itself in the mood and tenor of its poetry…can we believe in anything like the rapid change from an optimistic outlook in 1590 to a pessimistic one in 1600?

“But how can a mathematically perfect pendulum driven by an exactly repeating oscillatory force produce motion that is best described as noisy?”