Tags: Central Bankers | Kabuki Theater | rate strategy | japan

Central Bankers' Drama Makes for Great Kabuki Theater

Central Bankers' Drama Makes for Great Kabuki Theater

Wednesday, 03 February 2016 06:20 AM Current | Bio | Archive

Central bankers are always mysterious, with good reason, but at what point do they cross the line to outright deception? Someone should ask Haruhiko Kuroda.

Last week Kuroda’s Bank of Japan shocked world markets by dropping its bank reserve interest rate below zero. Traders took this (correctly) to mean the BOJ and others are still in the bubble-making business. In an instant, the mood changed back to “risk on.”

I was a little surprised, but not shocked. I noticed the BOJ’s Jan. 13 move to buy negative-yield corporate bonds. In hindsight, that event now looks like a test run for last week’s shift – which was actually much smaller than most reports suggest. The symbolism was more important than the substance.

The BOJ’s governing council adopted the new policy on a 5-4 vote. Kuroda was one of the five, but it appears his influence is limited.

With that in mind, let’s look at some “metadata” surrounding the change. 

Jan. 21: Kuroda tells Japan’s parliament, the Diet, that he is “not considering negative interest rates,” according to Reuters. 

Jan 22: Kuroda flies to Davos, Switzerland to attend the star-studded World Economic Forum.

While in Davos, Kuroda met other central bankers including European Central Bank chief Mario Draghi. We know the ECB, the Swiss National Bank and others are already using negative rates.

(In an intriguing note, Reuters also reports Kuroda mingled with “leading company executives” at Davos. Which executives? From what companies? They don’t say.)

Jan. 28: Back in Tokyo, Prime Minister Shinzo Abe’s handpicked minister for economic revitalization, Akira Amari, resigns after a magazine reports a penny-ante corruption scheme.

What else was Amari up to? We don’t know. We do know he was Japan’s chief negotiator for the far-reaching Trans-Pacific Partnership trade agreement. The deal is still on, but Amari is out of it.

Jan. 29: The morning after Amari’s resignation, the BOJ announces it will do exactly what Kuroda denied even considering only a week ago.

What does the timeline tell us? Maybe nothing. Correlation isn’t always causation.

It could all be coincidence ... or maybe Kuroda knew all along that the negative rate move was coming.

Would that mean he lied to the Diet? Not necessarily. Parliament could have been cooperating in a charade intended to mislead markets and the public. The Japanese invented Kabuki theater, you know.

More intriguing: the possibility Kuroda’s earlier statements had been truthful, but someone in Davos changed his mind. He spent some time among the world’s power elite. Maybe those unnamed “executives” made an offer Kuroda couldn’t refuse.

We should also note that in the middle of all this, the Federal Reserve came out considerably more dovish in a Jan. 27 statement. That might have told the BOJ it has room to further trash the yen. Negative rates are a good way to do it. 

I could go on with more theories. Many involve China, whose economic angst is causing some of Japan’s troubles.

The broader point is that we simply don’t know what lies behind the BOJ’s latest move.

We probably never will. Kuroda could easily have outsmarted the Japanese public and the rest of us, too.

If the BOJ will deceive its own citizens, it is no stretch to think the Federal Reserve would do the same. That is a big problem in an era when trillions of dollars change hands based on central bank statements. The potential for fraud is obvious.

It doesn’t have to be this way.

If we must have central banks, they could at least make their decisions openly for all to see. They don’t — which tells us all we need to know.

Patrick Watson is an Austin-based financial writer. Follow him on Twitter @PatrickW

To read more of his insights, CLICK HERE NOW.

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If we must have central banks, they could at least make their decisions openly for all to see. They don’t - which tells us all we need to know.
Central Bankers, Kabuki Theater, rate strategy, japan
Wednesday, 03 February 2016 06:20 AM
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