Bank of Japan

Gavyn Davies logo for central bank liquidity seriesLast week, in the first of a series of blogs on the use of the central bank printing press, I argued that the deliberate decision to increase the monetary base several fold in the US, the eurozone and the UK is an almost unprecedented event in the history of economic policy. Only in Japan, in the early 2000s, has anything like this been seen before.

In this blog, the second in the series, I ask whether this remarkable injection in central bank liquidity is destined to result in rising global inflation in coming years.

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In economic policy nowadays, the unthinkable suddenly becomes the inevitable, without pausing for long in the realm of the improbable. (See this piece in The Economist.) Nowhere has this been more true than in central banking, where the recent huge expansion in the size of balance sheets would have seemed inconceivable as recently as 4 years ago.

Markets have not only accepted this use of the printing press with equanimity, they have become increasingly dependent upon it. Most economists are also very relaxed about it, frequently describing it either as  inconsequential, or even as entirely irrelevant. But how can a policy intervention which has underwritten the liquidity of the entire western banking system be described as irrelevant?

I do not share the alarmist view that an explosion in central bank liabilities must inevitably lead to higher inflation. That basic monetarist link has already been shown to be invalid, at least over short periods, and at least when a liquidity trap is in operation. However, the recent use of central bank balance sheets has been so unusual and potentially so profound that the underlying economics deserves much more careful examination than it has been receiving lately. I intend to do this in a series of blogs in coming weeks. In this, the first in the series, I will ask how we reached the current predicament.

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Claire Jones

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SNB results

Friday sees the publication of the Swiss National Bank’s preliminary results for 2011. Not usually the most headline-grabbing of events granted. But given the record loss of Sfr20.8bn for 201o and the pressure that its chairman has found himself under, it is bound to make the news on this occasion.

Will the central bank report a profit? Read more

Claire Jones

Our week ahead email helps you track the most important events in central banking. To see all of our emails and alerts visit

FOMC meeting

The highlight of next week’s calendar is Tuesday’s Federal Open Market Committee meeting.

Here’s the FT’s US economics editor Robin Harding on what to expect:  Read more

Claire Jones

Last week, Sir Mervyn King added to the gloom by saying that the eurozone woes are creating a “spiral” characteristic of a systemic financial crisis.

It would appear that the Bank of Japan is similarly concerned that we could be in for a shock of Lehman-like proportions.

This from deputy governor Hirohide Yamaguchi:

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Claire Jones

Our week ahead email helps you track the most important events in central banking. To see all of our emails and alerts visit

FOMC minutes

The Federal Open Market Committee on Tuesday releases the minutes of its policy meeting held earlier this month. The minutes are out at 14.00 local time (19.00 GMT).

This from the FT’s US economics editor Robin Harding on what they’ll cover: Read more

Claire Jones

Our week ahead email helps you track the most important events in central banking. To see all of our emails and alerts visit  Read more

Claire Jones

Our week ahead email will help you to track the most important events in the central banking world. To see all of our emails and alerts visit

Draghi takes the helm

Will Mario Draghi preside over a rate cut during his first week as European Central Bank president?  Read more

Claire Jones

Our week ahead email will help you to track the most important events in the central banking world. To see all of our emails and alerts visit

Both the European Central Bank and the Bank of England will vote on monetary policy on Thursday.

The Monetary Policy Committee decision is out at noon local time (11.00 GMT). According to a Reuters poll, most expect the Bank to hold rates and maintain the stock of asset purchases at £200bn. However, a significant minority predict more QE, with most of these believing that £50bn is the amount that the MPC is most likely to plump for.

Though those expecting more QE in October are in the minority, the bulk of analysts do believe the Bank will expand its asset purchases at some point in the near future, with November considered the most likely option. The Bank also publishes the minutes of its FPC meeting on Monday at 09.30 local time (08.30 GMT), which may shed some light on the rather ambiguous statement that came out this week.   Read more

Claire Jones

Rate decisions

Next week sees a host of central banks vote on monetary policy.

The Reserve Bank of Australia’s board is expected to hold rates on Tuesday. On Wednesday Sweden’s Riksbank, the National Bank of Poland, the Bank of Japan and the Bank of Canada are all set to vote. Read more

Claire Jones

This from the FT’s Lindsay Whipp in Tokyo:

Japan intervened in the currency markets on Thursday to slow the rapid rise of the yen, in the latest response by policymakers to deal with the worsening outlook for the global economy. Read more

Claire Jones

Central bankers this week have acted on fears that the global outlook could weigh on domestic growth.

The Central Bank of Turkey’s shock decision on Thursday to cut its policy rate to an all-time low in the face of strong growth and above-target inflation shows just how pronounced those fears are.

Japan and Switzerland have both attempted to counter their currencies’ rapid appreciations over recent weeks, which have occurred on the back of events in the US and the eurozone.  Read more

Claire Jones

Last week Bank of Japan governor Masaaki Shirakawa claimed that Europe’s sovereign crisis and the impasse over the debt ceiling could trigger a rise in government bond yields the world over.

However, Mr Shirakawa skipped over just how events in Europe and the US – which bond markets view very differently – could lead to soaring yields elsewhere.
The New York Federal Reserve to the rescue. In a note published on Monday on its Liberty Street Economics blog, Vivian Yue and Leslie Shen argue an unexpected rise of 1 per cent in long-term US bond yields can lead to a 0.14 per cent to 0.19 per cent rise in bond yields in Germany, Japan and the UK.

How so? Read more

Claire Jones

Coverage of Bank of Japan governor Masaaki Shirakawa’s speech earlier today focused on his warning on the dangers of a strong yen.

This is odd, as currency intervention is likely to come at the behest not of the Bank of Japan but of the finance ministry. Besides, as Mr Shirakawa notes elsewhere in the speech, Japanese manufacturers are hedged against a rising yen owing to their recent spate of acquisitions of overseas firms.

Of more interest is his warning that the impasse over the US debt ceiling and the eurozone debt crisis could trigger a rise in government bond yields the world over. Read more

Claire Jones

It is oft remarked that when the US sneezes, the rest of the world catches a cold. Given the slew of poor data in recent months, then, the risk of a double dip in the world’s largest economy is of mounting concern to policymakers around the globe.

Central bankers from Sweden and Japan have both touched on the issue in recent weeks.

This from the Bank of Japan’s minutes for its mid-June policy meeting, released Friday: Read more

Claire Jones

The Bank of Japan did its bit for Sino-Japanese relations on Wednesday by publishing a paper which calls on Chinese policymakers to do what Tokyo did in the 1970s and rebalance their economy.

Accordingly to the paper, written by two BoJ economists, Chinese growth has relied too heavily on investment. This has meant that workers have failed to get their fair share of the spoils from rising profits. It has also limited job creation in urban areas and contributed to a decline in productivity growth. Plus it’s bad for the environment.

So what is to be done? There are two lessons to be learnt from Japan. Read more

Banks in the quake-affected north-east of Japan will soon be able to borrow longer term from a new scheme worth ¥1,000bn ($11.7bn), offering one-year loans at 0.1 per cent.

The scheme comes on top of ¥21,800bn ($265bn) liquidity made available immediately after the quake and a doubling of the Bank’s asset purchase programme from ¥5,000bn to ¥10,000bn ($121bn). Tokyo has also been involved in an internationally co-ordinated effort to prevent the yen appreciating too sharply. So far, though, the BoJ remains unwilling to buy government bonds, a measure adopted in several other countries since the crisis.

In addition to such measures, at today’s meeting, the Bank judged it necessary to introduce a funds-supplying operation that provides financial institutions in disaster areas with longer-term funds in order to support their initial response efforts to meet the future demand for funds for restoration and rebuilding.

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What constitutes success for the world’s one-day yen policy? To minimise “excess volatility and disorderly movements in exchange rates,” if the G7 statement is anything to go by.

But then “volatility” is all a matter of time period. For instance, it has gone up over the one-day time horizon, with the very sharp weakening of the yen since central bank intervention began this morning. “Disorder” gives a little more wiggle room because it is defined by its effects. It might include, for instance, exchange rate movements that lead to a credit crunch. (One wonders, though, whether a rapid weakening of the yen would also have been classed as “disorderly”.)

Some pundits are saying the G7 action is at least partly self-interested. Certainly their participation is likely to cost them: their domestic currencies will appreciate, and the trades themselves are very likely to lose money as the yen eventually rebounds. Perhaps the tumbling Nikkei – and stocks elsewhere following – made these costs seem smaller. Success in these terms has been achieved – for today. American, European and British equities have gained today.

Other commentators suggest the moves are about defeating the speculators. If we could Read more

The Group of Seven industrialised nations have agreed to co-ordinated currency intervention for the first time in a decade to help Japan recover from its devastating earthquake, tsunami and nuclear crisis.

Authorities in Japan, the eurozone, the UK, Canada and the US agreed on Friday to help weaken the yen in a rolling intervention that began at 9am in Tokyo, which immediately pushed the yen down from above Y79 against the US dollar to below Y81. Read more

Nobody knows how much of Mrs Watanabe’s foreign stash she intends to bring home. But the choices made by this mythical Japanese housewife – astute, and hunting for a better return than she can find at home – could help to explain the rapidly strengthening yen.

It makes sense that the average Japanese investor would want to repatriate their money at the moment. The average Japanese investor, after all, lives in Tokyo. Many have lost homes and possessions, with 430,000 estimated to be living in temporary accommodation (and it is winter). Others will be trying to move away from the Fukushima atomic power station. Still more are facing food shortages or rationing. In all these cases, cash is king. Read more