The BOJ Prays For Eagles


“At my signal, unleash the doves.” ~ Maximus Decimus Meridius


From an entertainment perspective, the BOJ never disappoints.

From a currency perspective, the BOJ is like a workaholic Dad that can never make it to his son’s soccer games.

The BOJ has been missed little Takagi’s soccer games for over 9 months now.

Today, the BOJ’s response was incredibly weak, choosing to talk up its current policy rather than expand its actions. At least they finally acknowledged that their inflation target was ridiculous. Somehow we are led to believe that this admission will have a positive impact on long term Japanese bond yields.

But by not expanding its current programs, the BOJ is subtly copping to market fears that the BOJ also is worried about the limits of its tools. I don’t think I really need to show the BOJ’s balance sheet again, but why not, the image is just so effective.

Instead of cutting rates, or buying more bonds, the BOJ will “fluctuate” its purchases of JGBs. Keep in mind that the BOJ buys 16% of GDP worth of JGBs while the government runs a deficit less than half of that.


When the BOJ buys more bonds than are issued, rates fall, not rise. And yet, the BOJ is determined to engineer higher long term rates through “fluctuations” in its purchases. I ask how?

Unless the Japanese word for fluctuation actually means taper, I struggle to see how the BOJ will force long term rates “higher” while soaking up an extra 10% of GDP worth of JGBs a year. And if the BOJ starts to Taper its bond buying program, then what happens to the Yen? Do they really believe that cutting asset purchases will actually weaken the Yen?

After everything the central banks have told markets, is the BOJ really going to communicate that they believe QE no longer weakens currencies?

Although Japanese banking health seemed to be the priority of THIS policy move, the main goal of the BOJ has been to weaken the Yen at all costs.

For the longest time, the BOJ’s primary concern has been the Yen. Today’s policy action seems to mark a shift if albeit temporarily in the BOJ’s priorities as they appear to be incredibly concerned with the stability of the Japanese banking sector.

The Yen has already rallied over 1% against the dollar since the announcement, we’ll see how long they stand-fast. Perhaps, like the characters in Lord Of The Rings, the BOJ has their own avian creature riding to the rescue, a sort of Deus Ex Machina to save them from their predicament.



Just maybe, a Fed rate hike is in the cards after all. Larry Summers is certainly worried.

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