An announcement made by the Bank of Japan to modify its so-called Yield Curve Control framework came at one of the most illiquid times of the day. It also occurred during one of the most illiquid weeks of the year. This "tweak" immediately created havoc in the currency markets. Where this becomes insanity plus is that this is a bogus market, a glorified illusion. When all is said and done, the BOJ will be the buyer of this debt. 

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New data shows that the share of Japanese government bonds held by the Bank of Japan has grown to where it now tops 50% on a market value basis. Into this mix, we should factor in the notion that with a wider/higher band for the 10Y yield, in theory, the BOJ will have to buy fewer bonds to keep the spread within their limit. Many of us are struggling to interpret the logic behind the latest move that allows long rates to rise from 25bps (the prior YCC limit) to 50bps. The point is, it doesn't matter all that much.  

You could argue the BOJ is both tightening and loosening at the same time. One explanation is that while causing speculation and chaos in the markets it is, or will prove to be, a big nothing burger. It is difficult to embrace the idea this will help the struggling Japanese economy which has already been hit because of its ties to China, where growth has slowed, and the high cost of energy.

Despite saying the BOJ would increase bond purchases to Y9 Trillion from Y7.3 Trillion per month (which indicates an easing of monetary constraints) the Japanese yen strengthened against the dollar. We must remember that this is a double-edged sword. An upward move in interest rates by the BOJ increases the cost of servicing Japan's enormous national debt. 

Japan's debt has become so large it can never be repaid by a yen that has real value. The only way it can be repaid is by massively demonetizing the yen which would take it down the road traveled by many fiat currencies. In short, it would become worthless. Adding to the problems faced by Japan is the fact any rise in the yen will put pressure on exports, yes, Japan is in a pickle.

Here the reference to being "in a pickle"  has to do with the difficult situation the BOJ currently finds itself in. A problem with no easy answer or an obvious way out. The 'in trouble' meaning of 'in a pickle' is an allusion to being disoriented and mixed up in a bunch of stewed vegetables used to make pickles. This is almost a literal reference to fanciful stories from old stories related to hapless people who found themselves on the menu, but that is enough about pickles.

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As mentioned earlier in this article, this announcement from the BOJ came with no warning and caught currency markets off guard during a time of very light trading. It also came at a time when the rest of the world's central banks are still moving in the opposite direction. 

The BOJ has acknowledged, “the functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and future markets... If these market conditions persists, this could have a negative impact on financial conditions.” 

This could reflect the BOJ has lowered its view on the economy and is getting worried. The bank even stressed it expects short-term and long-term policy rates to remain at their present or lower levels. In short, traders should not see this so much as a pivot in policy as much as an effort to put a net under the sliding yen. After the yen rose in value stopping out those with short positions and forcing out many traders due to margin calls it has now edged slightly lower. Many of us see the yen as being in a precarious situation and would not be surprised to see it resume its slide downward in the new year.

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