Bank of Ja­pan loses con­trol as QE hits the lim­its

The Pak Banker - - FRONT PAGE -

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.

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