Recent speculation that the Bank of Japan (BOJ) might pull back on its program of monetary easing led to a spike in Japanese bond yields. Yields soared from 0.03% to 0.09%. Yes, you read that right, near zero is still soaring. In response, the BOJ offered to buy an unlimited number of bonds on Monday at 0.11%, but found no one willing to sell. It’s an indication that the BOJ is still dead set on pursuing a course of monetary easing and is prepared to pull out all the stops to ensure that that easing does not end anytime soon.
The BOJ, like many other central banks, has set an inflation target of 2 percent. That means that it is intent on seeing prices rise by 2 percent every year, or more than quintupling over the lifetime of the average Japanese. But despite massive monetary inflation over the past several decades, prices in Japan are rising less than the BOJ’s target. That’s not a bad thing for consumers, since inflation steals from them surreptitiously. Yet the BOJ continues to try to pursue its loose monetary policy, with no end in sight.
In the past the BOJ hasn’t been content just to buy bonds, it has purchased stocks as well, to the tune of over $50 billion per year. Because of the increasing interconnectedness of the world financial system, it doesn’t matter as much anymore whether the Fed decides to tighten its policy because continued loose policy in Japan and Europe can affect markets just as much. With a finite supply of stocks and bonds in existence, continued purchases by foreign central banks will continue to affect stock and bond markets even in the face of Fed tightening. That’s something not only for the Fed to think about as it continues its course of action, but also for investors to think about when making their investment decisions.