I don’t begrudge Bank of Japan Governor Kuroda for not warning the markets about last night’s historic move to negative rates.
Of course he is going to lie about it. He will lie right up until the moment he does it.
Imagine if instead of giggling like a school girl during last week’s Davos interview while ducking all the questions, Kuroda said the Bank of Japan was seriously considering moving to negative rates.
The markets would have instantly spiked and forced him to follow through with the action. During the interview, Kuroda lied, but he had to lie. All Central Bankers are expert liars - to think otherwise is just naive. Don’t ever forget Juncker’s famous quote - “when it becomes serious, you have to lie.”
Right now the markets are celebrating Japan’s move following Draghi and the rest of Europe into the uncharted waters of negative rates. The Nikkei was up 2.7% last night, and both European and US stocks are pushing higher by more than 2%. Yields across the world have also spiked lower, with many 2 year government rates hitting all time lows. The Japanese bond market has slipped below 0% all the way out to nine year maturities!
Although it might seem like all is well, I wonder if market participants have fully thought through the ramifications of this development.
Given the crazy amount of quantitative easing the BoJ is currently engaged in, it would have been difficult to justify even more. Yet the truth of the matter is that few Central Banks are hitting their inflation targets, and Japan is no exception. With the severe lack of options, the BoJ broke the taboo of negative rates, and ventured into an area long been viewed as unimaginable. There can be no denying this is yet another attempt at competitive devaluation. Yes it is couched in economic justifications of not meeting an inflation target, but it is simply a way to cut to the front of the line with an excuse.
The US dollar has soared on the news, and why not? They have a Central Bank insisting on higher rates, not negative ones.
But let’s not forget the biggest problem two weeks ago. Or have we all forgotten China?
The Chinese Yuan is tied to the US dollar, or at least it used to be. The recent move by the PBoC to benchmark their currency to a new basket of currencies has not been tested.
My suspicion is that we are about to learn China will not sit idly by while the rest of the world competitively devalues. It would not be at all surprising if Monday sees renewed Yuan weakness. I am shorting more Yuan today.
I know the PBoC says they will not allow their currency to fall. Yeah, yeah, I know… Just like Kuroda will not adopt negative rates…
Thanks for reading - have a great week-end,