Bank of Japan In Wonderland

by bitznbitez

According to financial news today the Bank of Japan has announced a couple key things.  First it wants to set a 10 yr bond target of zero percent.  Second it wants to hit its inflation target of 2% or perhaps slightly higher.   This is surrealism brought to finance.  Its not limited to Japan.

The ten year bond return of 0% would still be higher than the current bond yield in Japan which is slightly less than zero.   So zero is in fact an improvement.   Setting a 10 year bond target and controlling it is a stunning objective in and of itself.   The Bank of Japan, along with a lot of other central banks, have failed to achieve other targets.   All would prefer a return to normal economic growth and yields.  In the absence of the ability to control that they are now setting insanely absurd targets as a goal, like zero percent on a ten year bond.

Meanwhile markets have reacted to this news with gains for the day.   When the markets view this news as positive it gives us some sense of just how distorted things have become.

The thing to consider is why.   Stimulating growth is the goal of virtually all industrialized nations central banks.   The operating premise is to much cash is on hand, negative rates might force the cash to be invested.  Investing is how you produce growth because companies produce growth.   But its whistling past the graveyard.  The problem is not a lack of money to be invested, nor a lack of desire to invest it.   The problem is a lack of reasons to invest.  For growth to happen their must be an increase in demand on the part of the consumers.   This has not happened.   Japan is leading the way in that.  The reason is there are fewer and fewer consumers.  The way to increase demand is to increase the number of consumers.   Negative interest rates do not increase the number of consumers.

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