Bitcoin thanks Japan for making it less pathetic

As bitcoin spills its credibility around the world, Japanese Haruhiko Kuroda says “hold my beer”.

On Friday, the eyes of the financial world were on a hemorrhaging yen, Bank of Japan Governor Kuroda did nothing. Not the slightest movement to plug the holes of a yen down 16% this year. Not the slightest hint that the central bank is on top of things. Incredibly little advice for traders determined to push the yen to 150 to the dollar.

It was an oddly detached performance from a respected economist hired nine years ago to restore confidence in the Japanese economy.

Kuroda, after all, got the top job at the BOJ in 2013 to end Japan’s deflation nightmare once and for all. Its predecessors from the 1990s and 2000s spent years filling the proverbial monetary punch bowl again and again. When Kuroda arrived, he enlarged the bowl, added a slew of new ingredients, and affixed a “open 24/7” sign to the BOJ headquarters.

Things didn’t go as planned. At the start of 2013 to 2019, aggressive Kuroda easing inflated gross domestic product and stock prices here and there. But the virtuous cycle of wage gains leading to higher consumption and inflation never materialized.

Then came the Covid-19 in 2000, the supply chain chaos of 2021 and Russia’s invasion of Ukraine. The cumulative effects of these events mean that Kuroda’s team is finally experiencing 2% inflation, and they couldn’t be less happy about it.

Inflation in Japan is of the “bad” kind. It does not stem from organic increases in demand. On the contrary, Japan imports inflation through the purchase of commodities at high prices with a falling currency. The yen’s fall to the 135 level, the weakest in 20 years, should tell Kuroda’s team all they need to know about why Friday’s policy meeting was so crucial. And why its inaction means the yen is now competing with bitcoin in a race to the bottom.

Admittedly, the BOJ is in a terrible position, some two decades after pioneering quantitative easing. Kuroda’s predecessors first cut interest rates to zero in 1999. In 2000 and 2001 he designed and implemented QE. When Kuroda was hired in 2013, his mandate was to energize the BOJ attack on deflation.

Kuroda decided to corner the bond and stock markets and buy any assets that made sense in an attempt to inject support into the economy. In 2018, this hoarding increased the BOJ’s balance sheet to a size larger than Japan’s annual GDP.

Essentially, Kuroda’s institution is trapped. If he stops buying assets, the markets could panic. If he goes further to add liquidity, Kuroda risks accelerating the decline of the yen. Kuroda took door #3: pretending nothing is going on with the yen that seems in a contest with bitcoin to see which is the most pathetic store of value.

“It’s funny that Tokyo wanted to become a crypto trading centerbut the yen is very much like its own bitcoin,” a Hong Kong-based currency analyst quips.

Kuroda may have chosen the worst option of the three. Of course, as Moody’s Analytics economist Stefan Angrick points out, the BOJ added a “rare reference” to currency risk on Friday. In general, however, Angrick notes, “it otherwise retained the tone of earlier communications”. Ultimately, he said, “Kuroda refused to blink.”

But did he also suggest to global markets that the BOJ, circa 2022, lacks a pulse? On the one hand, the BOJ’s confidence that upward price pressure from rising energy costs will fade certainly has an ominous vibe in 2021. It sounds suspiciously like the argument according to which inflation is transient that caused so much trouble for the Federal Reserve led by Jerome Powell in 2022.

What is needed is proof of life in Tokyo’s political circles. Friday was an opportunity for Kuroda to remind yen bears that the BOJ has a plan for Japanese financial stability. That traders should be careful before trying the patience of BOJ and Finance Ministry officials. It was also a chance for Kuroda to regain weight in world markets.

Remember that central banking is a game of trust. When the BOJ cuts rates, it needs bankers and investors to act boldly in that decision. This is called the “multiplier effect”. This explains why Kuroda even brings up Peter Pan for dramatic effect every once in a while to entice consumers to spend more.

The BOJ’s inaction on Friday risks communicating to markets that all the magic is gone from the Kuroda era. Many assumed that was the case a long time ago. Japan’s central bank has been largely on autopilot for the past few years. And, it seems, by magic.