As noted earlier, the Bank of Japan has a whole host of problems over its QQE with YCC attachments. Japan’s central bank has belatedly discovered Finance 101, where being one-dimensional doesn’t actually help the cause of “stimulus.” For far too long official policy has been lower, lower, and lower, whether that was carried out in JGB yields or whether it was found in the yen exchange rate. There are other dimensions to consider, yet until last year central banks didn’t appear to have ever noticed them. Thus, one side of “reflation” has been in the hope that now that central banks have noticed, it will represent the beginning step of eventually finding right and effective solutions.

That is, however, looking too far ahead of the curve (pun intended). To start with, yield curve control is meant to be taken literally. Where my analysis earlier today dealt with the second part, meaning the lack of control and the implications of it, this later version is meant to take the first part – yield curve. We are already in problematic territory where Japan dwells, as a yield curve is a piece of information derived from where bonds actually yield. At -29.8 bps, for example, the 1-year JGB cannot actually be classified as yielding some financial return. We can cloak it in the relativism of comparative values, but those are equally distorted and largely by the same factors (meaning that we are chasing our tails).

A negative yield means that investors are getting paid to hold that paper in other ways. In the form of Japan’s “dollar” problem, represented by a negative cross-currency basis, it makes sense to hold JGB’s at these prices for profit is derived from the basis, not the negative “yield.” Therefore, the determination of yield in that context is merely the element of hedging or controlling risk.

In a sense, that is what a yield curve expresses, a relative demand for less risk in financial opportunity, the squelched curve a fitting description of an economy without it as the tradeoff seeking to find balance one over the other. John Maynard Keynes described a “liquidity preference” for holding money balances among consumers who at times needed reasons to spend rather than maintain liquidity. There is surely a parallel in Japan (and almost everywhere else) only in banking and finance rather than the personal hoarding of money and currency. Thus a “yield curve” might be the measure of lack of opportunity perceived in bond markets as distinct from a yield curve which presents the affirmative judgment.