The following is from Hideo Tamura's regular column, "Economic Correctness," which appeared yesterday in the Sankei Shimbun.
This article also proves that he is a rare genuine economic reporter.
The U.S. banking crisis is a tailwind for continued unprecedented monetary easing.
The Bank of Japan has started the new administration of Governor Kazuo Ueda.
The U.S. banking crisis that has just erupted will be a tailwind for the BOJ's continued unprecedented monetary easing policy.
The graphs show the changes in the assets of the Federal Reserve and the BOJ, as well as the interest rates (yields) on 10-year maturity U.S. Treasuries and Japanese government bonds after the end of 2019.
Assets increase when the central bank issues funds and purchases government bonds from the market.
At the same time, the amount of money available in the market expands.
This makes it easier for long-term interest rates, as represented by government bonds, to fall.
The Fed's assets have continued to expand rapidly since March 2020 and peaked in September 2022, after which they began to contract.
March 2020 was the starting point of the pandemic of the new coronavirus from Wuhan, China, and Japan; the U.S. and Europe took large-scale fiscal stimulus measures to prevent a coronavirus epidemic.
Central banks purchased the government bonds issued as a result.
What about government bond interest rates?
The Fed's massive purchases of U.S. Treasuries successfully held down the rise in interest rates for a while, but they turned sharply higher in March 2022 and have not stopped rising even though the Fed has increased purchases.
The cause is high inflation.
Oil and grain prices, which began to rise in 2021, were spurred on by the Russian military's invasion of Ukraine on February 24, 2022.
On the other hand, the U.S. administration's expansion of fiscal spending has supported the economy under the corona and simultaneously greatly stimulated demand for goods and services.
The Fed began to raise interest rates sharply in March 2022, but high inflation has stayed the same.
When government bond interest rates (yields) decline due to the ultra-easy monetary policy's effects on interest rates and quantity, bonds' market price, or trading price, rises.
Many U.S. banks saw the rise in the bond market and invested their funds in bonds, earning significant gains on their trades.
However, when the market entered a phase of high inflation, bond yields rose, and the market price fell.
When the Fed raised interest rates and subsequently began to reduce assets, the decline in the bond market was accelerated.
U.S. banks immediately saw their earnings decline.
The first was the March 10 bankruptcy of Silicon Valley Bank (SVB) on the U.S. West Coast.
Let us look at the graph again.
The U.S. Treasury rate was 0.87% in September 2020 and was 3.616% at the end of 2022.
A yield increase of around 2.7% could cause a 26.5% drop in the market price of the 10-year Treasury note, roughly calculated.
Banks will quickly become insolvent if bonds account for a large share of total assets.
SVB, which had total assets of about $209 billion at the end of 2022, suffered a loss of approximately $1.8 billion on the sale of its bonds, leading to a run on the market.
In addition to SVB, many other banks face insolvency concerns due to rising interest rates, making depositors skeptical.
Following SVB, Signature Bank in New York State also failed.
The Biden administration has taken steps to guarantee all deposits, but credit concerns continue to smolder.
It is not unreasonable.
The unrealized losses on bonds due to interest rate hikes across U.S. banks are estimated to be $600-700 billion, accounting for more than 10% of the $5-6 trillion in securities held by U.S. banks.
The Fed will be cautious about raising interest rates further to prevent the spread of credit uncertainty.
What about Japan?
Since the new Corona disaster, the BOJ's asset acceleration has been much slower than the Fed's.
The BOJ's inflation rate is much lower than in the U.S. and Europe because of intense deflationary pressures and the rising cost of imported raw materials, and the BOJ has been controlling the rise in JGB interest rates since September 2004 through its long- and short-term interest rate control (YCC).
The YCC sets a guidance target for government bond interest rates and aims to harmonize long-term interest rates with short-term rates below zero percent.
It was not until last fall that the YCC faced an ordeal.
The yen weakened rapidly against the backdrop of a widening interest rate gap with the U.S., and at the same time, selling pressure on JGBs increased.
The economic media and some BOJ alumni who were critical of unprecedented monetary easing took advantage of the situation to call for the termination or revision of the YCC, and speculators jumped on the bandwagon.
At his inaugural press conference on April 10, new BOJ Governor Ueda clearly intended to continue unprecedented monetary easing centered on negative interest rates and the YCC.
However, the economic media continues to focus on the "side effects" of the unprecedented monetary easing.
The side effects are biased toward the position of financial institutions in terms of the functioning of bond markets and the decline in earnings of financial institutions.
They ignore that employment has increased by 5 million due to unprecedented monetary easing, and the ice age for new graduates has become an old story.
The outbreak of the U.S. banking crisis has made the Fed cautious about raising additional interest rates.
The economic slowdown has also slowed the rate of increase in U.S. prices.
The economic slowdown has also slowed the rate of increase in U.S. prices.
These factors make YCC and another unprecedented monetary easing easier to do.
Combined with wage increases in the current spring labor struggle, we expect to see a glimmer of hope for an end to deflation.
(Editorial Board Member)=Published bi-weekly
