"Ze Price Stabeeleetee": The Market Impact Of The BOJ's Interventions

Because when your primary stated goal is achieving “price stability” through unprecedented intervention, and instead you break the markets (both bonds and stocks) it may be time to reevaluate.

As a reminder: “The Bank of Japan, as the central bank of Japan, decides and implements monetary policy with the aim of maintaining price stability. The Bank of Japan Act states that the Bank’s monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy.”

Instead, you get this…

Some more from the Bank of Japan on the topic of stable prices:

Price stability is important because it provides the foundation for the nation’s economic activity. In a market economy, individuals and firms make decisions on whether to consume or invest, based on the prices of goods and services. When prices fluctuate, individuals and firms find it hard to make appropriate consumption and investment decisions, and this can hinder the efficient allocation of resources in the economy. Unstable prices can also distort income distribution. For example, in times of high inflation, people holding only financial assets whose value is fixed in nominal terms, such as bank deposits, will suffer a decline in the value of these assets in real terms.

Instead, we get this. From the BIS:

The shift in Japan’s monetary policy dominated financial markets during this period. On 4 April, the BOJ announced a new operational framework designed to lift inflation to 2% over about two years (see Box 1). Immediately after the announcement, equity prices rose and the yen depreciated. Meanwhile, the price of JGBs turned extremely volatile, as investors needed to digest the implications of the unexpected scale of future JGB purchases across different portions of the yield curve. On 5 April, the yield on the 10-year benchmark bond dropped to a low of 32 basis points, before rebounding to twice this level in a single trading day. The  sharp increase in the volatility of JGBs reflected considerable uncertainty about the future market impact of the policy shift, exacerbated by a drop in market  liquidity. In response, the BOJ undertook one-year funding operations to provide a stable funding source for market participants’ risk-taking, enhanced  communication with market participants and revised its way of conducting JGB purchase operations. This helped ease volatility in the JGB market, at least temporarily.

We assume the last sentence excludes the 20 or so Japanese bond trading halts in the past two months, as well as the intraday 10% price swing in the Nikkei two weeks ago.

But hey, at least the BOJ is fully intent on preserving “ze price stabeeleetee”


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