Lucky to Be Alive
Just when we thought we’d seen it all the impossible happened. Earlier this week the 10-year Japanese government bond yield slipped into negative territory. Obviously, it took decades of heavy handed intervention in the credit markets to pull off such a feat.
Image credit: Masaki Kobayashi
On Tuesday, when the Nikkei dropped over 5 percent, the yield on Japan’s 10-year government bond dropped to minus 0.005 percent. This marked the first time in the history of government debt that the yield on a G7 country’s 10-year bond has declined to less than zero. We are lucky to be alive to bear witness to the absurdity.
Just a few years ago these depressed credit prices would have been considered impossible. Why would anyone with advance knowledge of a negative outcome lend out their money at a loss? But sure enough, in the bright light of day, the impossible has become reality.
Make of it what you will. The ultimate impact of a 10-year government bond with a negative yield is unknown…though something seems amiss. Will this allow the government to issue, and also buy up, unlimited amounts of its own debt?
Quite frankly, aside from the notion that bond holders will pay a fee for the privilege of loaning money to the Japanese government for a decade, we really don’t know the implications. Still, we can offer some reflections.
The Beatings Will Continue
If you recall, Prime Minister Shinzo Abe, whose brainchild is Abenomics and Haruhiko Kuroda, the governor of the Bank of Japan, have pursued a reckless policy to boost exports by trashing the currency. A weak yen, it was thought, would give Japan a competitive advantage and allow it to somehow export its way to wealth.
Maybe we’re a bit dim, but for the life of us, we can’t quite seem to understand the logic. How does robbing the savings of a country’s citizens make the country wealthy? By our estimation devaluing one’s currency, like giving a Hell’s Angels biker the middle finger, is asking for all kinds of trouble.
Japan’s economic brain trust – Shinzo Abe and Haruhiko Kuroda. Money printing and deficit spending have failed to bring Japan’s economy out of its funk for 26 years running. These two have concluded that what is therefore needed is even more money printing and deficit spending.
Photo credit: Kiyoshi Ota / Bloomberg
The brief pleasure it may bring will quickly be overcome by regret when getting one’s face beat to pulp. That’s when the brief pleasure turns into long term pain. Alas, the act of angering a big bad biker – cannot easily be undone. Abe’s currency debasement actions are well past the point of no return too. The associated effects are now pummeling his country in the face.
What’s more, the BoJ has threatened that the beatings will continue until morale improves. Japan’s GDP contracted 1.1 percent in December. In addition, exports, which were supposed to be the great beneficiary of Abenomics, fell 3.2 percent.
Less than Zero
What’s going on? Wasn’t the purpose of debasing the yen to improve morale? Wouldn’t the new abundance that should have flowed to Japan provide ample compensation?
Unfortunately it hasn’t worked out that way. The variables are far too many and far too unpredictable for policy makers to account for. As it turns out, the negative yield on the 10-year government bond was compelled by the negative rate the Bank of Japan is charging for deposits.
For edification, we turn to Paul Vigna at The Wall Street Journal…
“A negative yield on Japan’s 10-year was a fait accompli after the policy moves set in motion by the Bank of Japan. The buyers of negative-yield bonds, after all, aren’t really average savers – the proverbial Mrs. Watanabe [Japanese housewife] – but rather large institutions, banks mainly, that need a place to park their money.
With the Bank of Japan setting a negative rate for deposits of 0.1 percent, the banks simply moved into the next safe haven – government bonds. It’s not like Japan’s 10-year just went from 5 percent to negative, after all. Even before the global financial crisis, its yield was under 2 percent. The policies these banks have imposed, though, designed to spur lending, are instead today spurring more fear.”
Inspiring fear with NIRP
Image credit: afrosamurai091
Who could have seen that one coming? Certainly not the Bank of Japan. The European Central Bank and the Federal Reserve would have had the same oversight. For there are unintended consequences to every clever new policy imposed. The ECB and the Bank of Japan are pioneering the way. Eventually, the Fed may follow their lead.
Regardless, it seems markets have already done so. On Thursday the yield on the 10-year Treasury dipped below 1.6 percent. Before long, it too might be less than zero. Likewise, we’ll all have to live with the consequences.
Charts by: BarCharts, TradingEconomics, StockCharts
Chart and image captions by PT
M N. Gordon is the editor and publisher of the Economic Prism.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- US Economy - Curious Pattern in ISM Readings
Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output. Pepsi factory in Baltimore, 1956 Photo via pinterest.com Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
- A Convocation of Interventionists, Part 2
Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there. Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images We should preface the following with a Mises quote, as the...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- How is Real Wealth Created?
An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Groping in the dark, Yellen-style Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- A Convocation of Interventionists – Part 1
Modern Economics - It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context. Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes). When...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- John Maynard Keynes’ General Theory Eighty Years Later
The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money. The mere fact that the book is lauded by TIME magazine on the cover should give everyone...