"Market Players No Longer Trust The BOJ": Why Kuroda Is Suddenly Facing Market Mutiny

Tyler Durden's picture

While we doubt anyone will laugh, we find it amusing that none other than arguably the "last holdout" of ZIRP and then NIRP, BOJ governor Haruhiko Kuroda, finally joined the chorus of people warning that low interest rates will "sow the seeds of the next financial crisis." Echoing concerns voiced by Deutsche Bank and virtually every other bank over the past year, Kuroda said that "a new challenge has emerged in the form of low profitability at financial institutions," adding that rapid growth in shadow banking and new financial technology were bringing big changes to the global banking environment.

"These developments suggest that a different kind of financial crisis could happen in the future," he told an international conference on deposit insurers on Thursday, without elaborating. As Reuters writes overnight, "the remarks contrast with Kuroda's previous comments emphasizing that the benefits of massive stimulus on the economy make up for potential negatives such as the hit to banks."

Hoping to spread the blame, Kuroda said the problem of low interest rates hurting bank profitability was a global one, pointing to bad loans piling up at some European banks and headwinds plaguing Japanese banks from sluggish lending driven by an aging population. "For the financial system to ensure future stability, it is becoming more and more important in the long term to think about possible responses to low profitability at financial institutions," he said.

In other words, Kuroda must have gotten an earful in his last meeting with bank execs.

And yet, we said this statement is amusing, why? Because one look at the BOJ's balance sheet explains precisely why Japan is currently grappling with trillions in negative yielding bonds.

That, and of course the BOJ's impulsive decision, taken as a result of "peer pressure" suffered during last year's Davos meeting, to unleash negative rates in Japan for the first time in history.

And now that it is no longer "fake news" to criticize central banks' failing policies, Reuters takes Kuroda to task: 

Four years of aggressive money printing by the BOJ have failed to pull Japan sustainably out of stagnation, forcing the central bank to revamp its policy framework to one better suited for a long-term battle with deflation.


But the attempts to revive Japan's anemic consumer spending through unconventional monetary policy have created new problems for the central bank in its dealings with markets and financial institutions.

It's not just Reuters who unloaded on the cartoonish central banker.

In a separate report looking at the confusion sowed by the BOJ's decision to launch "Yield Curve Control" or YCC last September, Reuters also reports that "the sometimes contradictory market operations directives are sowing confusion over the BOJ's intentions, creating tensions between the central bank and the market and underscoring the challenges of its unprecedented policy."

"What's clear is that market players don't hold trust in the BOJ," said Mari Iwashita, chief market economist at SMBC Friend Securities. "If there was trust, things wouldn't be this messy."

It sounds like a rising tide of mutinous discontent is rising against the BOJ's monetary policy by Japan's bond market, some of it even internally sourced: "It's true, controlling long-term rates is an unprecedented policy," BOJ Deputy Governor Hiroshi Nakaso told reporters last week, acknowledging that the bank was still learning how best to communicate its intentions to markets. However, he believes the BOJ has the necessary "skill and tools" to control yields.

Market players aren't convinced, complaining about the lack of clarity on how the BOJ wants to guide long-term rates. "So many things are unclear, such as at what level the BOJ will step in to curb yield rises," said a money market trader in Tokyo. A domestic bond market investor said "a lot of market players got burnt" from the volatility caused by the BOJ, which could discourage investors and dealers from trading actively.

The BOJ has put the job of controlling yields in the hands of a small group of relatively junior bureaucrats, who have no say on monetary policy but execute the board's orders through daily transactions in the interest rate markets. Their actions have resulted in some substantial intraday swings in both the Yen and JGB yields, as reported recently. Under the YCC framework, the BOJ seeks to control the yield curve by targeting short-term rates at minus 0.1 percent and the 10-year yield around zero. The task of capping long-term rates, a feat never tested by a major central bank, is entrusted to a team of around 40 staff running the BOJ's market operations.

As Reuters adds, a "handful of junior-ranking bureaucrats in the team, mostly in their 40s, decides when, how and to what degree the BOJ offers to buy bonds. Guidance from the board is vague and kept at a minimum to allow the team to respond flexibly to daily market moves."

However, market participants say this ambiguity causes confusion as the bureaucrats, mandated to meet the board's orders, do not focus much on the impact of their moves on the broader economy. The BOJ's task is also made difficult by the conflicting goals embedded in the new framework. While targeting rates, the BOJ maintains a loose pledge to buy bonds at a set pace to appease advocates of aggressive asset purchases in the board.

The BOJ has caught markets off-guard several times. Yields spiked when it skipped a much-anticipated auction in January, stoking fears it may soon taper asset purchases. It then offered to buy unlimited amounts of bonds on Feb. 3, when the 10-year yield spiked to 0.15 percent. 


BOJ officials say they have no plan to offer more specific guidance on their market operations, and stress their dominance in the market gives them enough power to suppress yields.


"Communication is important. But that doesn't mean the BOJ should meet each and every request from the market," said a source familiar with the central bank's thinking.

And where this whole narrative comes together is that on one hand Kuroda suddenly wants higher rates, on the other he has some 40 junior bureaucrats in charge of making sure it does not happen, thanks to YCC. Adding pressure on Kuroda is that he suddenly finds himself alone in a world in which all other central banks have launched curve steepening experiments - whose outcome remains unclear - and as a result analysts doubt whether the BOJ could keep battling market forces if global yields continue to rise, particularly with its massive bond purchases seen as unsustainable.

Brightening prospects for Japan's economy, usually good news for policymakers, could also heighten the BOJ's challenges in capping bond yields. Japan's economy expanded for four straight quarters in 2016 thanks to a rebound in global demand while analysts expect inflation to accelerate to near 1 percent later this year, which could push up Japanese yields.

Former BOJ central banker, Sayuri Shirai, who served on the BOJ's board from 2011 to 2016, said the central bank's YCC policy in its current form is confusing and causes big market distortions. "To make the framework more sustainable, it's better to raise the yield target and gradually reduce bond purchases," Shirai told Reuters in an interview on Wednesday.

That however will not happen. What however will happen is that Kuroda will be right: a financial crisis is likely headed for Japan, however not for the reason he believes; instead it will manifest itself once the market, which is already rising in mutiny against the BOJ's policies, hits a tipping point, and the selling in the country with the 250% debt/GDP, and where the central bank owns 40% of all outstanding debt, begins.

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thevekja's picture

The eternal Japanese spirit quest into oblivion has almost come to a close.  NIRP was the death knell for the ageing population; it's not hard to see why young Japanese are not having children anymore.

GUS100CORRINA's picture




silverer's picture

Fukushima is a major disaster. You have a very strong point. I can't understand why this isn't front and center on the news. Every day tons of highly dangerous radioactive water is spilled into the Pacific ocean. It doesn't just "go away". The whole ocean will be poisoned in a few years. Not newsworthy? It's insane. 250 years for that meltdown to naturally reduce to somewhat safe levels. They sure did lie. They were unicorn hopeful at best, and deceitfully dishonest to the public from day one.

phoolish's picture

Buy phaster ...

Seasmoke's picture

They can never get back all that lost time. 

GunnerySgtHartman's picture

"For the financial system to ensure future stability, it is becoming more and more important in the long term to think about possible responses to low profitability at financial institutions"

This is what the public at large calls a "WELL, NO SH*T" moment, the central bankers keeping member banks in their Lamborghinis and French Riviera getaways.


Withdrawn Sanction's picture

So, lemme see if I get this:  short nominal rates are negative, and 10 year nominals are zero, which means the real yield curve is negative from stem to stern.  Exactly how is this supposed to stimulate anything?  Yes, I see that if real rates are negative that MIGHT induce a business owner to borrow (after all, in real terms they effectively paying him/her to borrow).  And yet business owners ARE NOT borrowing by and large.  Why not? 

Or put it this way, it ought to be obvious even to central bankers like Mr Kuroda, that after more than 20 years of variations on this same theme that it's not working, and it's not working because it cannot work.  In the negative interest rate world, what was discounting math becomes compounding math.  Try it in a bond pricing problem.  Under negative rates, the bond's price will actually be higher than the non-discounted sum of the coupon and principal payments.   Who in their right mind would issue such a promise? 

Econogeek's picture

"Not on my watch" governments desperate to stay in power.

Rehab Willie's picture

No Seppuku for you, just the guillotine.

whoisjohngalt11's picture

Ok so after what 25 years Japan and the rest of the world find that endless printing doesn't work NOW??

SomethingSomethingDarkSide's picture

Wealth Gap was on purpose?


combatsnoopy's picture

The wannabe Mrs Wasabi Wantinobe Obi Wan Kenobi decided she didn't need to suck anyone off today and some body isn't happy.

Soul Glow's picture

Fuck this guy.  

SomethingSomethingDarkSide's picture

End of the line, Candy Cane.  People want to be paid for their loans to nowhere now!

shizzledizzle's picture

Sad news is they got no where to turn... where they gonna go? To Yellen?! God help em.

Batman11's picture

Putting a technocrat elite in charge of the economy was an idea with some merit.

Since 2008, the Central Bank technocrats have been stuck in an infinite loop of lower interest rates and QE. They just consult their Central Banker’s handbook and this is what it tells them to do, they don’t even bother to use some imagination.

They have maintained asset prices for the 10% that own nearly all the assets, but have left the global economy in a state of secular stagnation.

Looking after 10% of the population doesn’t work democratically and the populists are rising.

In hindsight it can be seen that the Central Banker needed to be properly motivated with the carrot and the stick.

They earn a lot and have a lot of prestige; there are plenty of carrots there.

What they needed was the stick of penalty clauses.

You have your inflation target and we expect you to meet it, miss it for a whole year and you are out. We will get someone else in that can do the job.

The carrot and the stick are necessary to get the Central Banker to perform his roll properly.

Mario would have got his finger out and got the Euro-zone economy working or been replaced with someone who knew how to do the job.

Mario put your bazooka away, tidy up your desk and meet your successor, someone who can think in a creative way and has new solutions.

Kuroda needs a rocket up his arse.

small axe's picture

In other words, "market participants" will no longer put up with the BOJ's arrogant posturing and economic destruction.

Way back when (1990s), there was a well-publiciized theory that a turf war between the Ministry of Finance and BOJ was a fundamental cause of Japan not being able to recover after the bubble burst. BOJ was said to basically want to usurp the MOF as top dog in the economic hierarchy.

Kuroda is just the latest iteration of this arrogance. He is pure evil.

Bam_Man's picture

What "market" are these "players" playing?

The one that prices 30-year Japanese Government (the most highly indebted government on the planet) bonds at a Yield-to-Maturity of ZERO%?


World citizen's picture

Trusting the BOJ and Kuroda? Who? When? 

Never heard about such a thing...LOL

That guy is an idiot, copying the FED inane approach by the letter, and adding some original nonsense to it with some fancy wording.

When I read about Yeld Curve Control for the first time, I was thinking either:

a. He is on drugs

b. He is joking

Then I realised he was serious and I got a bit worried.

Now, dear Mr. Kuroda, after you gave all this money to the banks at negative interest rates, which account to literally stealing Japanese tax money, please explain to me how are you going to raise interest rates... because you see, the banks are supposed to give that money back, plus interests this time... with the little problem that the money is GONE, evaporated into oblivion...

He is not going to get friends, that's for sure...

In.Sip.ient's picture

The real ominous part of the Japan situation,

is that the BoJ pretty much invented every

fool stunt in the modern day central bank

play book.


The problem, is that Japan Inc. is sputtering

in a major way.  Which means the BoJ and

( by extention ) other C.B.s have a huge

problem in front of them and probably on

their books.


Pay attention to outfits like Toshiba, that seems

to be trying to spin off every valuable division

in its tech inventory...  wonder what THAT is



silverer's picture

Japan should trade Paul Krugman for Dennis Gartman. That will help them make a comeback.

Econogeek's picture

Great article, ZH, thank you.

I think capping interest rates is a hypothetical problem.  This is the face of deflation.  It's weird-looking.

Let it Go's picture

Japan is on borrowed time. The myth promoted by the central banks that a major currency cannot fail is accepted as fact by many people however, the rapid demise of either the yen or the euro is all that will be needed to reveal the truth. When a major currency fails it will remind people everywhere that our system of fiat money is held together only by faith in the system and a prayer.

Japan's public debt, which stands at around 250% of its GDP is the highest in the industrialized world. In the future Japan's debt can only be addressed by printing more money and debasing the yen. The article below explores how when Japan crumbles it will be felt across the world.