The Bank of Japan's Absurd Monetary Manipulations Are Distorting World Markets

When Will Central Bank's Vast Manipulations of Their Nation's Money End? Ever?

Japan is a huge mess. Like most nations, they are seeing higher inflation rates after years (decades?) of deflation. But they have less inflation than most at “only” 4%.

Here’s the thing: They are desperately trying to hold down their short term interest rate at 0.5% (up from 0.25%) whereas the rest of the world’s shortest rates have risen sharply. Europe had negative rates for many years. Now they have a 2.2% overnite rate in Germany and a 3.4% in the UK. The US has shortest term rates are about 4.67%. But these rates are still too low as inflation is 10 or 11% in the UK and Germany, and 7 or 8% inflation in the US.

Most of world countries are trying to REDUCE their central bank assets to cool inflation. But the BOJ is so rapidly increasing it’s central bank assets to buy back it’s bonds, that now, on average, world central banks are INCREASING their money supply (net). Take a look at this tweet and chart.

The mechanics of this “money printing” QE are the same everywhere: the central bank creates money ex nihilo (out of nothing) to buy their own government’s bonds on the open market from their primary dealers (banks). (This drives the bond price up and yields down.) The banks deliver the purchased bonds to the central banks and these bnaks record a deposit from the central bank—also ex nihilo. This increases money supply, ie., the money on deposit in the banking system.

Because of bank deposits rising and money expanding, we’re seeing a renewed surge in the world’s stock markets. We’re seeing rampant speculation re-appear in various markets and asset classes. Bitcoin is suddenly surging. Tesla stock is surging this morning.

All of this is happening as the outlook for the world economy is collapsing and the outlook for recession is rising. Leading indicators are strongly pointing to recession. Japanese inflation will rise not fall.

What’s Happening?

The biggest industry in the world now must be financial gamesmanship, ie., “money changing” and trading, ie., finance. It’s really out of control now due to excess money and liquidity. There are no guardrails now that Glass Steagall regulations are gone. Central banks have also gone insane. (You can win a Nobel prize now for your insanity.)

Untold institutional and bank trading desks, around the world, are likely borrowing Japanese Yen at the 0.5% rate and then buying government bonds in the US at 4.6%, pocketing a very, very hefty profit. This is called a “carry trade.”

Remember, “they” are doing this on a vast scale because it’s so profitable and so many players in various institutions are likely doing this. Thanks Japan! The demand for Japanese Yen for this “carry trade” is causing the Japanese currency to appreciate against the US dollar, whereas one would expect the relatively low interest rates in Japan would cause the Yen to decline. But it’s rising. The USD is falling.

This carry trade is also helping to manipulate the price of US bonds higher and interest rates are falling—outside of the shortest rates.

Only ONE central bank’s excess liquidity is, on balance, once again “goosing” markets —thank you Japan. All the other central banks are trying to reduce money and speculation. But a lower USD, lowered rates and more money for buying assets are all “good” for risk assets. And Japan alone is doing it—for now.

This is also likely why risk assets are once again taking off —for now. See this headline: Asia-Pacific stocks rise as Tokyo’s inflation nears 42-year high. That’s what happens when you’re reckless with your money.