In late June, the four most important central bankers in the world sat on a stage in Portugal, and fielded questions spanning from the inflation outlook and rate path, to geopolitical concerns, fiscal policy, digital currencies, and AI.
Three central bankers on the stage, from the U.S., eurozone and UK, were all well into the process of normalizing interest rates. And then there was the new governor of the Bank of Japan, Kazuo Ueda.
In my June 28th note, I called him the most important person in the room that day. He was the only one in the room that has been trying to get inflation UP, and therefore, he was the only one in the room with negative rates and running full bore QE — buying both domestic and global assets each month with no limits.
And running that policy, simultaneously, as the rest of the world tightened, is the only way his central bank counterparts were able to raise rates to combat inflation, without losing control of their respective government bond markets (i.e. runaway yields).
How? The Bank of Japan became the liquidity offset to the Western world's attempt to extract liquidity. As importantly, if not more, they have been buyers of foreign government bonds (largely U.S. Treasuries) via freshly printed yen.
All of this to say, perhaps the most interesting thing said that day: Ueda said he imagined rates would go up by a large margin in Japan, "IF they GET to normalize policy."
With Western central banks now on pause, and holding rates "higher for longer," as they say in unison, it doesn't appear that Ueda will GET that chance any time soon.
Indeed, the Bank of Japan stuck with their ultra-easy policy overnight.
And they added, they will patiently continue with easing, while "nimbly responding to developments in economic activity and prices as well as financial conditions."
This sounds a lot like (head of the European Central Bank) Christine Lagarde's comment at Jackson Hole. Just as everyone has been hoping the central bankers would step away from manipulating the economy and markets, Lagarde says we need even more "robust policymaking in an age of shifts and breaks."
"Robust policymaking" in this post-pandemic era, seems to translate into breaking things in the financial system, and then simultaneously intervening in markets to fix what they break (as the ECB did with its sovereign bond market, as the UK did with its sovereign bond market, and as the Fed did with its banking system).