What Happens When a Central Bank Loses Control?

Is the Bank of Japan Finally Losing Control?

While we like to focus on the US Federal Reserve (the Fed) because it controls the global reserve currency (the US dollar) and therefore is the most important Central Bank in the world… the fact is that it is Japan’s Central Bank, the Bank of Japan (BoJ), that has been leading the current course of Central Bank insanity for the better part of two decades.

The Fed first cut rates to ZERO in 2008. The BoJ did this back in 1999. Similarly, the Fed first launched QE in 2008. The BoJ did this back in 2000.

Put simply, everything the Fed has been trying, the BoJ has got over 16 years’ experience with. As crazy as Fed monetary policy has been, the BoJ surpassed it by many multiples years ago.

To whit, the BoJ has bought so many assets via QE that today:

  • The BoJ’s balance sheet is roughly the size of Japan’s GDP.
  • The BoJ is a top-10 shareholder in 40% of Japan’s companies.
  • The BoJ buys more Japanese stocks than the rest of the world does.

Put simply, the BoJ and its policies are beyond insane. We’re talking about a Central Bank that has essentially monetized Japan’s bond market and stock markets to a degree few thought was possible.

This has lead many to ask… when does this gigantic mess finally start to blow up?

The answer is that it might be happening now.

Monetary Policy only functions as long as the market has faith in the credibility of the Central Bank employing it. By the look of things, the BoJ is now losing that credibility.

Two weeks ago, the BoJ floated the idea that it would be targeting a yield of 0.1% on 10-year Japanese Government Bonds. This represented an increase in the yield target from 0% to 0.1%.

Japanese Government Bond yields have since begun to break out above this level multiple times… forcing the BoJ to repeatedly state that it would buy “unlimited” bonds to maintain this level.

Again, just so you don’t overlook the significance of this… the bond market IGNORED the BoJ’s statements of where it wanted bond yields to the point that the BoJ had to DIRECTLY intervene to buy bonds in a bid to get the market under control.

This is the first sign that the BoJ is starting to lose control of its bond market. Again, we have a Central Bank announcing policy that the bond market is ignoring… resulting in said Central Bank being forced to DIRECTLY intervene on a daily basis.

This is the beginning of the end for Japan. What's coming will take time to unfold, but a major Central Bank is beginning to lose control.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what's coming down the pike when the Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research