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By Tyler Durden

In late January, when Haruhiko Kuroda took Japan into NIRP, he made it official.

He was full-everything. Full-Krugman. Full-Keynes. Full-post-crisis-central-banker-retard.

In fact, with the BoJ monetizing the entirety of JGB gross issuance as well as buying up more than half of all Japanese ETFs and now plunging headlong into the NIRP twilight zone, one might be tempted to say that Kuroda has transcended comparison to become the standard for monetary policy insanity.

The message to DM central bank chiefs is clear: You’re either “full-Kuroda” or you’re not trying hard enough.

But as we’ve seen, the confluence of easy money policies are beginning to have unintended consequences. For instance, it’s hard to pass on NIRP to depositors without damaging client relationships so banks may paradoxically raise mortgage rates to preserve margins, the exact opposite of what central banks intend.

And then there’s the NIRP consumption paradox, which we outlined on Monday: if households believe that negative rates are likely to crimp their long-term wealth accumulation, they may well stop spending in the present and save more. Again, the exact opposite of what central bankers intend.

In the same vein, Credit Suisse is out with a new piece that explains why simultaneously pursuing NIRP and QE is likely to be contractionary rather than expansionary for the real economy in Japan.

In its entirety, the note is an interesting study on the interaction between BoJ policy evolution and private bank profitability, but the overall point is quite simple: pursuing QE and NIRP at the same time will almost certainly prove to be contractionary for the Japanese.

Here’s how the chain reaction works.

Obviously, as the term spread narrows, bank margins are pinched. NIM at Japanese banks has plunged over the past decade and the correlation between that decline at the flattening 2s10s spread is noticeably strong:

As CS goes on to note, “flattening of the JGB yield curve has also affected the duration of bank liabilities.”

In short, as the spread between term deposits and demand deposits narrowed, it made no sense for depositors to keep their money tied up for longer. So what did they do? Well, they just shifted to demand deposits:

Of course that’s bad news for banks because it increases liquidity risk.

Demand deposits are due.. well.. on demand and so, to the extent you were offsetting some of your maturity mismatch (which is inevitable in fractional reserve banking, but which must nonetheless be managed) with term deposits, the shift forces you to change the composition of your assets. Or, as Credit Suisse puts it:

This means that banks now face greater liquidity risk on the liabilities side of their balance sheets and must therefore invest in more liquid assets. Banks thus have …read more

Source: Never Go Full-Kuroda: NIRP Plus QE Will Be Contractionary Disaster In Japan, CS Warns

    

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Posted March 8th, 2016 in Uncategorized.