Japan's situation grows increasingly perilous...

The Bank of Japan has been withdrawing money from the economy at an unprecedented pace since 2008, which is already raising bond yields and complicating its fight against inflation and the weakening yen.

## Draining liquidity

The Bank of Japan (BOJ) has decided that it is time to begin collecting the harvest from years of expansionary monetary policy. It is doing so at a pace not seen since the financial crisis of 2008. In August, Japan's monetary base contracted by 15.7% year-on-year. To give you an idea, economists had expected a smaller drop of 13.5%.

The BOJ is actively draining liquidity from the system. How? Primarily by allowing bonds in its portfolio to mature without reinvesting the money. This has caused the average pending monetary base to fall from 554.9 trillion yen in July to 543.0 trillion yen in August.

## Bond yields rise

This withdrawal of yen from the system has a direct consequence: there is less money circulating to buy Japanese government bonds. As a result, JGBs (Japan Government Bonds) have reached 31-year highs across all maturities. This means the cost of debt for the Japanese state is rising.

The BOJ attempts to normalize its monetary policy after more than a decade of printing money to stimulate the economy. The problem is that it is trying to do this just when inflation is already quite high and the yen is weak. This combination is what is making the situation increasingly delicate.