To The Moon

The Crisis of the Bank of Japan

The Bank of Japan's loose monetary policy is facing challenges in 2023 for several reasons. First, the inflation problem has worsened, with the CPI annual growth rate reaching 4%, more than twice the target. Second, the Bank of Japan's holding of domestic government bonds has exceeded 50%. If most of the government bonds are bought by its own central bank, they will lose liquidity. Currently, even in the case of many institutions selling Japanese government bonds, the 10-year government bond yield remains at 0.5%, and it is difficult to guarantee that it will continue to stay at this level in the future. Third, the Bank of Japan holds domestic ETFs worth as much as 36.9 trillion yen, which is equivalent to being a major shareholder of many listed companies and relying entirely on the central bank to support the economy. The domestic economy is not improving. If they continue to loosen their policy, but inflation is high and currency depreciation is severe, they must rely on tightening to resolve this issue. The current Bank of Japan Governor Haruhiko Kuroda has left a hot potato for his successor at the end of his term.

The New Governor of the Bank of Japan

On the morning of February 14th, the nomination for the new Governor of the Bank of Japan was announced, and it will be taken over by Katsuhiko Ueda. Ueda obtained a Ph.D. in economics from MIT in the United States and was a student of Fischer Black, as well as a classmate of Ben Bernanke. As a deliberation committee member, he participated in the zero interest rate policy in 1999 and the introduction of quantitative easing policy in 2001. He supported the implementation of these rare policies in theory. Last year, Ueda publicly expressed his views, stating that "there needs to be a serious discussion at some point about the rare monetary easing framework in the future." On the other hand, he also sounded the alarm about the poor and rapid tightening policies and emphasized the importance of maintaining policy balance. Given the above background, the market generally interprets Ueda as a dove, but whether hawkish or dovish, he will inevitably become a Japanese figure and work hard to guide the normalization of Japanese monetary policy after taking office.

The Possibility of the Future

If the Bank of Japan wants to gradually end its large-scale easing policy, we will see a reduction in its purchases of government bonds, causing the price of government bonds to fall and the yield to rise. However, Japanese society has become very accustomed to the negative interest rate environment, and many financial products are sold based on this policy, so financial institutions may face huge losses and corporate lending capacity will also be affected. (My point of view: I would be cautious about investing in financial products based on negative interest rates and would look for alternative investment opportunities.)

On the other hand, if the loose policy is continued, the yen will depreciate to its low point, and at the same time, other Pacific countries' currencies will also fall. (My point of view: the depreciation of the yen may benefit my company, making my products more competitive in the global market.)

Finally, Japan has the largest foreign exchange reserves in the world. In the event of a crisis, by converting assets held overseas into yen assets, it can be used for economic activities within Japan. In the autumn of 2022, the Bank of Japan used its foreign exchange reserves to buy yen to prevent further depreciation. Foreign exchange reserves have an impact on the risk premium for yen appreciation in the exchange rate determination theory. In other words, an increase in foreign exchange reserves will help the yen appreciate, and this may be one of the means that the Bank of Japan will use more frequently. (My point of view: I am confident in the government's ability to use its foreign exchange reserves to stabilize the economy in times of crisis.) Let us look forward to how Governor Haruhiko Kuroda will turn this crisis into an opportunity.

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