Japanese Monetary Policy: That Which Is Unsustainable Will Not Be Sustained
The Bank of Japan’s use of yield curve control to curb inflation is likely to fail.
December 21, 2022
| By Scott Minerd, Global CIO
On Dec. 1, 2022, Scott Minerd, Chairman of Guggenheim Investments and Guggenheim Partners Global Chief Investment Officer, delivered a keynote address at the Program on International Financial Systems 25th annual Japan-U.S. Symposium, “Symposium on Building the Financial System of the 21st Century: An Agenda for Japan and the United States.” Participants at the Washington, DC, event included Haruhiko Kuroda, Governor of the Bank of Japan, Masato Kanda, Vice Minister of Finance for International Affairs of Japan’s Ministry of Finance, Nellie Liang, Undersecretary for Domestic Finance of the U.S. Department of Treasury, other officials from the Japanese and American governments, as well as leaders from Japan’s banking and business community.
Minerd’s presentation, titled “That Which Is Unsustainable Will Not Be Sustained,” addressed the impact of rising debt levels in Japan on its economy, bond yields, and the yen, and the perils of yield curve control as a monetary policy tool. The presentation illustrates Japan’s stunning level of indebtedness after 20 years of ultra-accommodative monetary policy: At approximately 220 percent, its government debt-to-Gross Domestic Product (GDP) level is twice that of the United States, the United Kingdom and the Eurozone; the assets of the Bank of Japan (BOJ) alone are over 120 percent of GDP, dwarfing the Federal Reserve (Fed), which has assets equal to just under 40 percent of U.S. GDP; and the Bank of Japan owns almost 50 percent of its country’s outstanding government bonds, compared to the Fed which owns just 25 percent of outstanding Treasury securities. Ultra-low interest rates in Japan have kept interest expense to just under 1.5 percent of GDP, but this will increase as yields rise and GDP growth weakens. In addition, rising rates will leave the BOJ with large mark-to-market losses.
With this background, Minerd’s presentation focused on the inextricable dilemma faced by central banks that must battle inflation while coping with losses on securities in their portfolios. Nowhere is this dilemma more palpable than in the case of the Bank of Japan, which has chosen to artificially peg the yield on 10-year Japanese Government Bonds (JGBs) in its efforts to stoke inflation. Now that these efforts are bearing fruit and inflationary pressures are rising, the peg on the 10-year JGB is being exposed as an increasingly untenable policy.
The key takeaway from Minerd’s presentation is that while the BOJ’s policy moves and Japan’s fiscal situation is challenging, it is not an outlier among developed nations. Rather, it is a cautionary example for other nations that have pursued very easy monetary policy, and perhaps a harbinger of things to come.
Important Notices and Disclosures
This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.
This material contains opinions of the author, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.
Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
© 2022 Guggenheim Partners, LLC. All rights reserved.
VIDEOS AND PODCASTS
Anne Walsh, Chief Investment Officer for Fixed Income at Guggenheim Investments, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.
Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Fixed Income, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 3.31.2023 and includes leverage of $14.7bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. GCIF 2019 and GCIF 2016 T are closed for new investments.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as Institutional Investors
. To change this, update your preferences
United States Important Legal Information
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”