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Commentary

Orwell in Japan

9 May 2013 by Jim Fickett.

The April quarterly newsletter from the Ministry of Finance in Japan says, in truly Orwellian fashion, that “The Bank [of Japan] will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent”. Not an inflation target, mind you. So what exactly is 2% stability?

Anyway, the early reaction to the new policy direction was exactly as desired – yields went down:

Note that the above data are only through Q1, and the new BOJ purchases did not actually begin until April, so the above yield drops were anticipatory. If ever you needed proof that markets are essentially short-term, this is it. The central bank officially announces that they will create inflation, thereby greatly reducing the value of bonds, and the prices of those bonds go up in reaction.

Since 2009 the Bank of Japan has increased its share of the JGB market from 7% to 12%.

As long as the rest of the market remains fairly stable, increased buying by the central bank may keep prices artificially high. However the overall market is very large compared to BOJ holdings and purchases, and if other players start to sell, the BOJ will be in no position to prop up the price.

(See the Reference page Japan government debt for sources, background, and past commentary.)