Bank of Japan loses control as QE hits the limits
The Japanese yen has become the lightning rod of extreme stress in the global financial system, rocketing this week in violent moves that threaten to plunge Japan back into deep deflation and overwhelm the experiment of "Abenomics". The currency has appreciated by 9pc against the US dollar since the Bank of Japan (BoJ) cut interest rates below zero for the first time ever at the end of January, entirely defeating the purpose.
The yen broke through ¥111 in early trading on Thursday as safe-haven flows poured into the country and vast positions were unwound on the global derivative markets. This wiped out all the depreciation effects of the country's "weak yen" policy over the past 15 months. The Nikkei index of stocks in Tokyo has fallen 22pc since early December.
The drastic developments have been nothing less than a disaster for Governor Haruhiko Kuroda who pushed through negative rates against strong protests by half the bank's voting members. The chief motive for the move was counter deflation by weakening the currency.
"This is a reverse policy shock. We are reaching the limits of quantitative easing as we know it," said David Bloom, currency chief at HSBC. "Countries are losing their ability to drive down their currencies."
The Bank of Japan bought vast amounts of US Treasuries in 2003 in direct intervention to devalue the yen but any such action in today's neuralgic markets would trigger accusations of currency warfare. It would violate a solemn accord by G20 leaders prohibiting the use of QE for exchange rate purposes.
Mr Bloom said there is almost nothing the Bank of Japan can do to stop inflows of money in any case. "The Swiss spent €150bn over four months to hold down the franc and achieved nothing in a market that is 14 times smaller," he said.