Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks
And there’s a bitter irony.
The Bank of Japan’s surprise Negative-Interest-Rate party for stocks set a new record: it lasted only two days.
Today a week ago, the Bank of Japan shocked markets into action. As the economy has deteriorated despite years of zero-interest-rate policy and Quantitative and Qualitative Easing (QQE) – a souped-up version of QE – the BOJ announced that it would cut one of its deposit rates from positive 0.1% to negative 0.1%.
Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe – the Eurozone countries, Switzerland, Sweden, and Denmark. But it was just another desperate move, a head fake, and once the dust would settle, the hot air would go out [read…QE in Japan Nears End: Daiwa Capital Markets].
Now the dust has settled and the hot air has gone out.
On Thursday, January 28, the day before the announcement, the Nikkei closed at 17,041 down 19% from its Abenomics peak of 20,953 in June 2015. Today, it closed even lower.
This situation is a bit of an embarrassment for the BOJ which has pushed Japanese asset managers of all kinds, including pension funds, particularly the Government Pension Investment Fund (GPIF), the largest such pension fund in the word, to get off their conservative stance, sell their Japanese Government Bonds which made up the bulk or entirety of their portfolios, and buy risk assets with the proceeds.
This they did, near the peak of the Abenomics bubble. While the BOJ was eagerly mopping up JGBs, the asset managers bought mostly Japanese equities, but they also bought global equities and corporate bonds. And the mere prospect of all this buying, the front-running by hedge funds, and then the actual buying drove up Japanese stock prices in 2014 and early 2015. The bet seemed to work out. Wealth had been created out of nothing. A few more years of this, and it might actually resolve the Japanese underfunded pension crisis.
Then the party stopped, and Japanese stocks swooned. In the second quarter of fiscal 2015 (June through August), the most recent report available, the GPIF lost ¥7.9 trillion, or 5.6%!
It was its first quarterly loss since 2008 during the Financial Crisis. Its decision to yield to the pressures of the government and the BOJ to plow into Japanese stocks, global equities, and corporate bonds, when they were at the peak, has turned into a fiasco.
So now the BOJ is trying to re-inflate these assets. For over two years, BOJ Governor Haruhiko Kuroda has been giving whatever-it-takes and no-limits speeches that were once lapped up by hedge funds and that fueled the big Abenomics rally, but that have since become ineffectual, and perhaps the butt of many jokes, as Japanese stocks continued to swoon.
Hence, on Friday last week, the bazooka: negative rates. After some volatility, the Nikkei soared 2.8% for the day. On Monday, it gained another 2%. But then the hot NIRP air came out of the market, and the Nikkei has dropped every single day since. Today, it closed at 16,819, having given up all of the two-day NIRP party gains, plus some. It’s now down 19.7% from its Abenomics high.
Pension fund beneficiaries in Japan will be ecstatic when they learn what this strategy is doing to their future.
That two-day 4.8% NIRP bounce set a new record for brevity and shallowness. In the Eurozone, the expertly managed rumors and eventual announcement of NIRP and QE powered a majestic rally in late 2014 and early 2015. But shortly after they actually kicked in, the house of cards came tumbling down.
Since the peak in April 2015, the DAX in Germany has plunged 25.1%, the CAC 40 in France 20.5%, the MIB in Italy 28.6%, and the IBEX 35 in Spain 28.4%.
Turns out QE and NIRP aren’t even doing anything for the real economy: after growing a measly 0.3% in the third quarter, Eurozone GDP is now expected to have grown another measly 0.3% in the fourth quarter. Those are the optimists that forecast that.
Like Kuroda, ECB President Mario Draghi has been out there with his speeches, signaling wildly about more easing, more NIRP, more or longer QE, more whatever-it-takes … to accomplish what exactly?
No one knows. Because these NIRP economies are sinking into the mire, stocks have crashed, and inflation, which these central bankers would love to heat up, remains stubbornly near something resembling price stability.
But there is a major asset class that has forcefully reacted to NIRP and QE: government and high-grade corporate bonds. In the NIRP economies, government bond prices have jumped, and yields have plunged. The German 2-year yield dropped to negative 0.5%, the 5-year yield to negative 0.25%. The 10-year yield, now at 0.29%, is barely positive. And the 30-year yield hovers at just 1%. In Japan, everything below the 10-year yield is negative. The 10-year yield, currently at 0.03%, could dip into the negative at any time.
The bitter irony for Japanese pension funds? The very JGBs that they sold to the BOJ upon the BOJ’s urging have since soared in price, while the prices of the risk asset they bought upon the BOJ’s urging have plunged.
So for government bond markets, the message is clear: central banks that print their own money rule. And for stock markets, the message is even clearer, and very ominous: The power of central banks to inflate stock prices, or even just prop them up, is toast.
But that’s apparently not going to discourage the Fed. Read… Negative Interest Rates Already in Fed’s Official Scenario[views]