Remember when Japan was going to rule the world? And no I’m not talking about WWII, I’m talking about the late 80s. The Japanese were buying up everything. The world was turning Japanese. Ahem.
That was a long time ago now. Indeed many of our readers don’t remember the 80s Japanese surge because they weren’t even born. Since those heady days Japan has stagnated. It may be looking at significantly worse than stagnation soon. The Land of the Rising Sun, the third largest economy in the world, has some deep deep systematic problems.
If and when the BOJ does withdraw from the market, it will therefore face a double whammy of risks: the threat of soaring bond yields and a just as soaring Yen, in a global risk off move. At least initially: once the BOJ loses all credibility, the Yen will disintegrate as has been the long-running thesis of Kyle Bass and Dylan Grice, as Japan finally unleashes hyperinflation to deal with its massive debt overhang.
It’s a different matter entirely if the BOJ will ever actually follow up with “ending monetary easing policy.” If the past 8 years have demonstrated something very vividly, it is that central banks simply can not escape the vortex of QE, ZIRP and now NIRP. If anything, more easing will have to be added in the coming years as global rates turn ever more negative.