On Wednesday evening the US Federal Reserve will announce its latest policy decision and it will be a surprise if it does not give US interest-rates another 0.25% nudge higher. Yet we see in an example of clear policy divergence other countries ploughing on with monetary easing. For example the European Central Bank continues with monthly QE of 30 billion Euros a month and still has a deposit rate of -0.4%. However the leader of this particular pack is the Bank of Japan especially if we look at other signals of what are known as side-effects. From Bloomberg last week.
That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading C0. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”
The latter part is simply part of the Japanese concept of face. One reason for this is the size of the holdings of the Bank of Japan.
The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.
The latter sentence there is weak as pension funds and life insurers enact such strategies all over the world and have done so for decades so it is hardly their fault. Indeed quite the reverse s many national bond markets have relied on such purchases.
Whilst we keep being told the Bank of Japan is cutting back the amount of buying remains enormous.
Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.
The next bit contradicts itself as it seems to be claiming that if you buy everything you do not need to intervene. Oops!
The upside for the BOJ is that with such little going on in the market, it makes it easier to control the yield curve, with less need for intervention
The Bank of Japan is the yield curve it would seem which is we step back for a moment begs all sorts of questions. For example you might compare currencies as I have certainly done in the past by comparing bond yields yet in such a calculation there is the implicit assumption that you have a “market” rate. But no, we clearly do not in Japan and that is before we get to the moral hazard of it being set by a body trying to depreciate/devalue the Yen. Oh and if you are a Japanese bond trader you might want to send your CV to the Bank of Japan.
Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.
The Tokyo Whale
This for newer readers refers to the way that the Bank of Japan has piled into the equity market as well. The numbers are opaque as they are in several accounts but Bloomberg has been doing some number-crunching.
The BOJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank had spent $150 billion on Japanese ETFs as of Dec. 8. It owned 74 percent of the market at the end of October, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. ( ETFs are Exchange Traded Funds)
As the Nikkei-225 equity index fell by 195 points today we know that the Tokyo Whale would have been buying again.
The BOJ stepped up purchases in November after equities retreated, buying 598 billion yen of ETFs.
With there being a buy the dip strategy we can be sure that the Bank of Japan has been buying this year as there have been dips. If we were not sure then this morning’s release of “opinions” from the latest policy meeting reinforce the message.
If the current trends of the appreciation of the yen and the decline in stock prices become prolonged, business fixed investment and consumption will be restrained due to negative wealth effects and a deterioration of households’ and firms’ balance sheets,
Just for clarity the BOJ is breaking new ground here is it really believes that. Not by arguing for “wealth effects” as central bankers the world over are true believers in them. What I mean is the implication that they are larger than other factors at play whereas the evidence I have seen over time is that they are minor and thus often hard to find at all. Looking deeper we see that the BOJ seems to have little intention of changing course although a boundary is on the horizon as some holders must want to keep their ETFs meaning it cannot be long before it has to look for greener pastures.
Perhaps this are suggested last November, from Reuters.
The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank………By selling put options of Japanese stocks, the BOJ should be able to not only help bring down the stock market’s volatility but also to make it easier to wean the markets off its stimulus, said Katsunori Sago, a former Goldman Sachs (GS.N) executive.
Alumni of the Vampire Squid get everywhere don’t they? So the fact that the Bank of Japan’s policies have in effect been a put option for Japanese equities should be added to by writing actual put options. Who would be silly enough to buy these options from the Bank of Japan? It is hard to know where to begin with the moral hazard here.
If the BOJ sells out-of-the-money puts, for example, put option with strike price below the current market levels, it can reduce the market’s volatility, Sago said.
Er simply no. You can reduce perceived or implied volatility but should the market move there is actual volatility. Unless of course Sago san is suggesting that the Bank of Japan should intervene in equity markets on the same scale as it has in bond markets and I think there we have it. Whilst there would presumably be profits for equity holders as much of the Japanese markets are Japanese owned we are in many cases simply shifting from one balance sheet to another.
This is something that fits the famous Churchillian phrase.
It is a riddle, wrapped in a mystery, inside an enigma;
Why? Well it is something which all the buying above should according to economics 101 be on its way down and yet there it is at 106 to the US Dollar. You can argue the US Dollar has been weak but I note that the UK Pound £ has been pushed back to 148 Yen as well. We get a clue from this from the Nikkei Asian Review.
Foreign assets held by Japanese institutional and individual investors appear to have topped 1,000 trillion yen ($8.79 trillion) for the first time, according to Nikkei estimates. The amount has increased roughly 50% during the past five years and now is more than twice as much as the country’s gross domestic product.
The market has been responding to fears of a repatriation much more than any new flows. Also as the BOJ has to some extent driven investors overseas it has undermined its own weak Yen policy. We are back to timing effects where something may be true but for a limited time period, Keynes understood it but modern central bankers lack such humility.
We have looked at the financial economy today but lets us via the “opinions” of the Bank of Japan switch to the real economy.
For instance, although the structural unemployment rate was formerly said to be around 3.5 percent, the actual
unemployment rate has continued to decline and registered 2.4 percent recently.
I imagine each Board Member sipping from their celebratory glass of sake as they type that. But there is a problem as we see below.
Although wage increases by firms have been at around 2 percent for the past few years, real wages registered negative growth in 2017 on a year-on-year basis.
That claim about wage rises is news to me and also the ministry of labor but let us pass that as we note the fall in real wages admitted as we reach the nexus of all of this.
The weak recovery in household consumption since last summer is of concern.
You see one way of looking at the Japanese economy is of deficient domestic demand. So when we are in an official world of wealth effects, plunging unemployment and surging wages ( 2% is a surge in Japanese terms or at least it would be) it should be on the up whereas with a little poetic licence it seems still to be rather Japanese.