By Richard Werner*
The Bank of Japan (BoJ) raised interest rates for the first time in 17 years on March 19, bringing an era of negative interest rates to an end. The key rate was hiked from –0.1% to a band from zero to 0.1% – a token effort to offer some tightening after decades of loose but unsuccessful monetary policy.
Despite the adjustment, Japan remains the major economy with the lowest interest rates in the world. In my opinion, the move is not designed to end Japan’s monetary policy dilemma; instead, it confirms the central bank’s role in supporting the US dollar.
Negative rates were ostensibly adopted to stimulate the economy, based on the idea that lower interest rates lead to higher growth. But the negative rates were never a stimulus to the economy.
They served as a tax on the reserves held by commercial banks at the central bank. Under negative rates, banks had to pay the central bank, squeezing their profit margins as soon as the rates were imposed (in 2016 in Japan).
Since banks in Japan never extended negative rates to deposits made by bank customers, they passed this penalty onto borrowers. This was relatively easy to do as small Japanese firms have been desperate for more bank loans for 30 years. As a result, lowering rates into negative territory actually raised borrowing rates for loan customers.
Due to the squeeze on bank profits, the years of zero and negative rates (the BoJ had already reduced interest rates to 0.001% in the 1990s) have also forced thousands of small banks in Japan (likewise in Europe) to merge with bigger banks.
Central planners love the idea of a concentrated banking system with a few big banks. But it is small firms and the middle class that get crushed. Research has found that bigger banks lend less to small firms, thus economies are most vibrant when they boast many small banks.
Bank lending provides the fuel for economic growth. So the BoJ’s low and negative interest rate policies have harmed the Japanese economy by suppressing bank credit growth for decades.
The yen remains weak
Is the small rise in interest rates a step in the right direction? Barely. Zero rates are still bad for the economy. Rates should have been raised much more and much earlier. But the BoJ is not interested in supporting the domestic economy and national interests, nor even explicit government policy. Consider the exchange rate.
It is often thought that the low rates have contributed to a weak yen, since investors could earn higher interest by investing in other currencies. But the yen has fallen in value since the rate rise was announced. Before interest rates were raised, the yen stood at ¥149 to the US dollar. One week later, it had slipped to ¥151 to the dollar. And on April 15, the yen fell past ¥154 per dollar – its weakest in 34 years.
Forecasters have predicted that the yen would bounce back given the prowess of Japanese manufacturing. They are also aware of the hawkish rhetoric of the Japanese Ministry of Finance, which is legally in charge of official currency intervention and deploys this to stop yen weakness.
However, the BoJ is independent and has a long history of sabotaging the plans of the Ministry of Finance. The BoJ usually sterilises any intervention ordered by the Finance Ministry to pursue the opposite goal. It has, for instance, aimed to prolong the recession in order to force through structural change.
The sterilisation is why the yen has weakened further since the recent policy announcement, and so far there is no change in sight.
The BoJ has been expanding credit creation faster than the US Federal Reserve. Faster money printing in Japan will weaken the value of the yen against the US dollar. These factors are more important than interest rates, which tend to simply follow the economy.
Propping up the dollar
The US dollar had been threatened by the Fed’s extraordinary monetary policy of March 2020, when it implemented the Blackrock plan. This was the plan proposed by American asset management firm Blackrock in 2019 to create inflation via a version of quantitative easing.
This plan was actually based on a proposal of “quantitative easing” that I had developed in Japan 30 years ago to help the country stage a swift recovery from its incipient banking crisis. It was a policy designed for deflationary economies with shrinking bank credit, namely for the central bank to purchase assets from the non-bank sector.
However, bank credit growth in 2020 was already more than 5% in the US when the Fed added fuel to the fire and doubled bank credit growth to 11%. That’s why I had been forecasting in 2020 that we would see significant inflation 18 months later, which is what happened in those countries that followed the Fed’s money printing.
Since then, the BoJ has been given the job of propping up the US dollar. In an era when the BRICS countries (Brazil, Russia, India, China and South Africa) are challenging the dominance of the dollar and even Saudi Arabia is selling oil against the Chinese currency, the US has enlisted its allies to support the dollar.
The BoJ continues to expand credit creation faster than the Fed, and while that happens, the yen will stay weak no matter what the Ministry of Finance says or does. As Henry Kissinger said in 1972 with reference to South Vietnam: “It is bad to be America’s enemy. It’s fatal to be its ally.”
Richard Werner, Professor of Banking and Economics, University of Winchester.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
21 Comments
Brilliant stuff and much to chew through here. And big ups to interest dot co for hosting the views and explanation by Richard Werner. As the mighty Audaxes alludes to and which Werner concludes with, at the end of the day, the US is taking care of #1. To a large extent, Japan has been shafted by its mates.
The Japanese Govt regulates the market for goods and services so that aprrox 1/3 are subject to de facto price controls. What's more, the industrial structure of the market is so competitive compared to the Anglosphere that it's very difficult to raise prices. Increase prices and you lose market share - it's always been a cardinal sin in Japan to lose market share.
Yes, IT GUY - King Rat of the fiats (aka the US dollar) is the 'strong' one of the Western Fiat Four and right now the Yen is tanking at ~154, down 56.79% from its high.
I imagine Japan will try to support its currency by divesting out of US dollars. This points to a massive problem as China and Japan are by far the largest holders of US treasuries. China knows that they need to stealthily divest, all the while trying to not create panic, as the full extent of the US's financial situation is revealed to the world. Goodness only knows what Japan can do as they remain an occupied vassal state of the US empire.
And where does this leave Japan's commercial banking system when the BOJ interest rates are effectively still ZERO and only raised from - 0.1% up to a tiny 0 or +0.1%? The banks became very highly leveraged during the NIRP years. The only way they could maintain their profitability in this artificial situation was to increase leverage. These are reportedly now in the order of over 20x in terms of balance sheet assets to equity, without even marking these assets to market.
I would expect Nomura to be one of the most at risk, as they were the #1 glutton that the NY Fed bailed out during the repo crisis in the aftermath of the 2008 GFC. Nomura is the old Japanese bank (est 1925) that acquired most of Lehman's Asian operations along with its European equities and investment banking units when they went tits up and damn nearly took the rest of the Western financial system with them
Same again in the last quarter of 2019, and before any of us had even heard the word Covid, the entire Repo market imploded when cumulative rolled over Repo loans went to Nomura ($3.7 trillion) eclipsing even J P Morgan, the 2nd largest owner of NY Fed shares their loans were ($2.5 trillion). These banks have massive derivative exposure, and yet Nomura doesn't even appear on the OCC's list of institutions that pose a threat to the US financial system.
The US repo market hasn't existed ever since - it is now Reverse Repo accommodated by the Fed, because none of these big banks trust one another's collateral any longer, not even Treasury bonds they post as collateral, because half the time they don't have title to them anyway.
The same situation applies with the Euro - the behaviour of King Rat could begin to destroy these other currencies too. Meanwhile, the RoW is beginning to realise that portraits of dead presidents printed on fancy paper might not be a safe bet for very much longer either.
All of these currencies will run into trouble as gold and then silver head for the hills, with the very first organic market price discovery process since 1971 highlighting the fact that the purchasing power of these currencies is heading towards zero - where incidentally, is precisely where 100% of fiat currencies always end up anyway.
The only central bank in the world that has persisted in shorting gold into this crisis is the Fed - the other major CBs and all the BRICS+ CBs are busily gold stacking - and laughing all the way to the bank (literally) as the Fed facilitates their bullion buying.
Most of the rinse-able gold shorts are no longer there now and when the real gold break-out occurs it will reveal just how dismal the purchasing power of the dollar really is. This year the US deficit is staring down the barrel of around 12% of GDP. The markets are not facing reality either and are still pricing in rate cuts.
The US cannot ease - if anything they need to hike, but this would trash the economy anyway - so too would easing as analysts like John Williams say that the CPI is at least 7-8%, and god only knows what the true 'basket of goods' inflation figure is for Mainstreet. When the domestic US market finally flicks up that their real returns on treasuries are dismally negative, who on earth will be left to buy them - let alone the long-dated bonds amidst the most dangerous geopolitical situation in recorded history.
This is the problem, the US population will be the last to realise when gold gets to $3000 and then to god only knows what number from there (pick any figure - $5k - $10k - $100k - wheelbarrow loads, whatever) this has nothing to do with gold being worth any more, and everything to do with their currency imploding. When king rat currency implodes then so too will all of the other Western fiat currencies follow along like lemmings over a cliff. Meanwhile gold will still buy much the same goods as it would on the streets of ancient Rome.
In Weimar Germany, the domestic population realised far too late that their currency was already in the process of hyperinflating out of existence. The other confusion can be that an economy can have inflation and deflation at the same time - IOW massive inflation in the items you need to survive, and concurrent deflation in everything else. This effect can help to hide true inflation until the currency is already broken.
The value of the US dollar has everything to do with faith in it as a viable currency, and now the US budget is looking like it is going to be in deficit by $3-$3.5 Trillion or even more with public debt sky-rocketing over $40 trillion and increasing with it being more difficult to roll it over - paying any down is an impossibilty. This is another tragic case where the faith from foreign investors will go first, and eventually the domestic confidence, by then it is far too late to save a currency.
There were some other forces revealed in the last week or so too that might explain some of what is happening. In March of 2024, China reported $3.25T of US dollar assets, but there are also around $3T in shadow banking reserves that are being quietly converted into bullion and around half of these reserves are scattered amongst state and commercial lenders. Monetary gold reserves are also FX reserves and so goodness knows how much of this is being converted into bullion.
We will know a lot more about the potential lifespan of King Rat after the fast-approaching BRICS+ Kazan Summit which will focus on Glazyev' new currency basket models that will be backed by some 20 commodities, including gold, and most likely silver too. These will be formally tabled at the meeting and might give some indication of when a gold revaluation trigger point is likely to happen.
BRICS+10, going on BRICS+45, already controls the lion's share of the global energy supply which means it would be extremely foolish for any of us to underestimate the effects of the rapidly accelerating de-dollarisation process. This will only increase the dollar price of energy and feed more inflation into the Western bloc.
As the US persists in weaponising the dollar and SWIFT payment systems, this too will hasten the introduction of the new trade-only currency instrument. Some very astute analysts expect gold re-valuations as soon as the end of the 2nd quarter of 2024. None of this has yet been factored into the paper-driven price of gold as yet, and so this is completely uncharted territory.
Given that silver is historically valued at 1/8th to 1/16th of the value per oz of gold, and currently languishes at around 1/80th, the break out of silver could be even more spectacular. Hold onto your hats, 2024 is set up to be an extremely wild ride.
Warm regards
Colin Maxwell
Awesome to see Werner being aired here on interest.co.nz - he is one of my four main global financial heroes - I listen up big time whenever he writes or is interviewed.
My own analysis shows that Japan's economy is in the deep do-do's, especially if you look at the dismal Total Debt:% of GDP - CEIC figures which include unfunded liabilities in total debt.
The only mitigating factor I can see, is that a substantial amount of their debt is owned by their domestic population - nevertheless debt at this ridiculous level, however you slice and dice it, is not conducive to a vibrant economy going forward.
In fact, all of the main Western fiat currency economies are technically insolvent, with the possible exception of Australia at 259%.
Japan sits at a mind-numbing 1,291% and Canada, the EU, France, Germany, Italy, the UK, and the US are all worse than Greece which sits at 559%. These are 2023 figures.
I can't locate NZ's 2023 figures, but in 2021 the ratio stood at a jaw-dropping 621%. This was only slightly below our all-time high of 679% which we reached in 2010 in the aftermath of the Lehman/GFC debacle.
The problem is though that the underlying fundamentals in the Western financial sector are now far worse than what led into the 1929 stock market crash, and the 2008 debacle.
Clearly, NZ's position can only have deteriorated since 2021, but of course, these numbers are never spoken of. The reality is that our economy, like almost all Western fiat-based systems, is in a serious debt death spiral.
Our Govt, commentators and analysts, all love to dwell on our relatively moderate 37.4% public debt to nominal GDP (Sept 2023), all the while conveniently ignoring the giant gorilla that is ensconced on the kitchen table gobbling up our lunch. These parrots and snake oil salesmen live in a false reality, specialising in obfuscation and smoke and mirrors, not in finding workable solutions.
My work revolves around solution-based commentary - endlessly describing a problem is not constructive. However, before we can set to work to fix anything, we have to be honest about the monumental extent of the problem - otherwise, we are only tinkering with the breakfast menu, when the Titanic has already hit the iceberg.
https://globalsouth.co/2024/02/09/solutions-to-the-western-train-wreck/
Warm regards to all
Colin Maxwell
Yes, Psyguy, my visionary contemporary high-profile heroes, apart from Werner, are Ellen Brown, Michael Hudson, and Sergei Glazyev.
Yes, it's a pitifully short list I know - especially when I have been on this journey for decades.
It used to include an Ausy Steve Keen too, but I comprehensively crossed him off when I realised how hopelessly sucked in he was by the disastrous woke green agendas.
Note that Brown never trained in academia as an economist - she has a legal background. This is what is so intriguing to me - some of the most amazing financial visionaries who have come up with viable money creation and banking solutions, were never formally trained as economists.
So too, C H Douglas, the father of the Social Credit theory (the good one that is) - he was an engineer - trained as a problem solver.
Same too, with Fabio Vighi, a Professor of Critical Theory from Cardiff University - goodness only knows what their funding model is, as Vighi has called out the putrid present system on many different occasions - clearly his narratives are not bought and paid for by the corporates.
And herein lies the entire point for me - in order to keep their jobs, 99% of neo-classical trained economists never intend to even try to solve these problems.
They operate in a comfortably numb state, swamped in a mythical realm of false maxims. They are not the slightest bit interested in solving what you and I see as the monumental and socially destructive problem of the obscene wealth gap and its associated hamster wheel debt traps.
On the contrary, their mode revolves around obfuscating the fundamental causes and perpetuating an inherently broken status quo.
Warm regards
Col
My own analysis shows that Japan's economy is in the deep do-do's, especially if you look at the dismal Total Debt:% of GDP - CEIC figures which include unfunded liabilities in total debt.
Japan is a net creditor nation by the way. in 2022, Japan’s net external assets reached a record high of 411 trillion yen ($3.24 trillion), retaining its position as the top creditor nation for 31 years in a row. The weak yen and an increase in direct investment overseas have contributed to this growth. Japan’s net external assets were 1.3 times those held by Germany, the world’s No. 2 creditor, followed by Hong Kong and China.
Point taken JC - this is why I also look at the CEIC figures too, which include all debt and unfunded liabilities and allow for demographic factors as well - numbers that can be much more revealing than other measures of debt which can hide some major pitfalls.
A huge part of Japan's post-war remarkable recovery was due to the Japan Post Bank, a public utility banking model. It was very similar to President Roosevelt's use of the RFC in funding the government without taxing the people.
Quoted/paraphrased from Ellen Brown...
"The result was a massive accumulation of publically held household savings, which were channeled by the government to wherever the money was needed. The depositor's funds remained available to the depositors on short notice without penalty.
The lending was guided by a system called FILP (Fiscal Investment and Loan Plan) and by 2001 had accumulated ¥400 trillion, a sum equal to 82% of Japan's GDP. Nearly half of the govt spending was funded by borrowing from the savings accounts of Japanese people themselves.
With the JPG though this public utility was, unlike the RFC, actually a bank. It didn't need to sell bonds with the entire operation operating in-house and using deposited funds of the domestic population."
... end quote...
Sadly since 2005, they have been trying to privatise it with government ownership in 2019 down to 57%.
Talk about doing their level best to kill the goose that laid the golden egg. It is the fact that Japan's truly enormous public debt being largely held by its own citizens that there is not the same immediate risk of foreign investors losing confidence in the impending fiat currency crisis.
The political pressure to privatise JPG is like a death wish, as as soon as enough of it is sold off, interest rates could rise and Japan could then find itself in a debilitating debt trap. One that ironically the JPG public utility model allowed it to avoid and at one stage become the 2nd largest economy on the planet.
Much of these shenanigans were described by Prof Werner in his seminal book and film 'Princes of Yen: Japan's Central Bankers and the Transition of the Economy' (2003).
Cheers
Col
The lending was guided by a system called FILP (Fiscal Investment and Loan Plan) and by 2001 had accumulated ¥400 trillion, a sum equal to 82% of Japan's GDP. Nearly half of the govt spending was funded by borrowing from the savings accounts of Japanese people themselves.
This is so mind boggling. Could our nation even contemplate this?
The $64 billion dollar question J C!
I believe that every nation on earth should not only "contemplate" this, but move heaven and earth to accomplish it. It is achievable for any country to escape the status quo IF they have true sovereignty.
The BRICS+ bloc member countries are well on in this and especially if their already spectacular membership process mirrors the BRI (Belt and Road Initiative) which now has 150 members, including NZ, plus another 8 observers and countries considering joining. Existing BRICS+ members have that sovereignty because they have the might of their entire bloc behind them, which provides the security for them to act as fully sovereign nations.
Sadly though countries like NZ and Aus are NATO grovellers, I call this club NATOstan (a term coined by maestro geopolitical analyst Pepe Escobar) which by definition means we are not sovereign and remain disciples of the AAZ (Anglo American Zionist) alliance, and slaves to the global financial robber barons.
The solution to turn any nation into a thriving economy within around three years and to eliminate all external debt within a decade is the easy part - tragically the road for a captive nation like NZ is not. I believe we have no show until we experience a total melt-down in our economy, surpassing even 1929, when the masses finally demanded change and at the same time provided the political architecture to accomplish this.
This came to fruition when C H Douglas completed his NZ town hall tour in the early 1930s which inspired the creation of a new party (Labour led by Mickey Savage), which triumphed in the next election, immediately completely restructured the RBNZ into a public utility, and very quickly provided the star post-depression recovery blueprint of the planet. All of this is of course a huge undertaking - the list as I see it...
#1 Develop the appetite for total fiscal and monetary reform within the Kiwi population - WE DON'T HAVE THIS YET - indeed, the 2023 election proved we are a country mile away from this when we elected a financially incompetent status quo Parliament that will do zero to implement meaningful reforms.
#2 Form a political party that is built on the foundation of the PBS (Public Banking Solution).
#3 Fill key positions with people who are financially competent and trustworthy enough to guide and implement the reform, and a means to oust them from their positions immediately if they fail in their task. NZ needs to understand that there are two distinct parts to the economy, the real economy which must be nutured because it is productive, and the financial economy which is parasitic and needs to be minimised.
#4 The human resolve and the political apparatus to hold on to the PBS model and not sell out to the global robber baron cartel once again.
As I say, the solutions are so simple they are almost no brainers, it is the road to reach them that is the mountain to climb.
Ever the eternal optimist, I outlined my vision of how NZ could become an economic miracle within one term of government and lead the world once again in demonstrating a successful working PBS model. I outlined this in Part (ii) of my sequel...
https://globalsouth.co/2024/02/09/solutions-to-the-western-train-wreck/
One thing I note in your excellent observation, J C - in regard to Japan, Germany, Hong Kong and China being the four top creditor nations - three out of four of them have historically had a large part of their entire banking industries run as public utilities.
China's banking industry is overwhelmingly run as a PBS, Japan to a degree too with its huge JPB, and Germany with its thousands of small community and savings banks*, which support their SMEs with vibrant and highly competitive banking services providing them with liquidity needed to finance the productive economy. And all done without commercial banks being involved - of course, they could be involved, but they would have to compete directly with the PBS banks in order to win customers.
*(think Sparkassen as an example - £2.4 trillion asets in 20221, 520 member entities, 200,000 employees)
Regards and thanks
Col
Too true, Middleaged - oh to be that age again!
Take the extreme example of the Soviet era with the Gosbank model - for 70 years there was only one bank in town, across 7 time zones! - it doesn't take much imagination to work out that this would always become a complete disaster for service, customer satisfaction, and indeed for the entire economy.
Even though Gosbank operated as a public utility, it was never going to work, either under communism or capitalism.
A country needs the competition of as many banks as possible - infrastructural/development, and regional, right down to local community banks and postal banking models in order to create a vibrant real economy, and provide adequate liquidity to function, and create sustainable wealth for the future.
At the local level moral hazard operates much more effectively, and savings banks owned by their customers, don't have to provide outside shareholders with a return. This allows more realistic interest to be paid to depositors and this capital can be leveraged out as finance for the local community. The fact that the PBS (Public Banking Solution) model is not inflationary then in turn encourages a savings mentality, and this means they can obtain reasonable returns on their savings.
This is the exact opposite of the present system where pitiful returns on deposits, and even on bonds, can be negative when you adjust for true inflation.
Remember too, that in most Western economies ~97% of money is created out of thin air* by commercial banks. The problem is that commercial banks lend overwhelmingly on existing assets, and this is what creates the bubbles that eventually blow, and then perpetuate the contrived pump-and-dump cycles.
* (Werner proved this in his empirical studies that he conducted in Germany)
Regards
Col
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