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Japan is Fast Approaching the Quantitative Limits of Quantitative Easing
The Bank of Japan is running out of government bonds to buy.
The central bank's would-be counterparties have become increasingly unwilling to sell the debt that monetary policymakers have pledged to buy, and the most recently issued 30-year Japanese bond didn't record a single trade during a session last week as existing owners opted to hoard their holdings.
But safe assets like government debt aren't just attractive to central banks looking to force investors into riskier asset classes and push down the cost of borrowing or to pensioners looking for a reliable source of income—they're also in high demand by financial institutions for use as collateral.
That's because where there is a dearth of safe assets, there is also an incentive and tendency for them to be manufactured; that is, improperly labeled as such. Past results certainly haven't been pretty.
"There is a growing realization that there are effective limits to how much more Japanese government bonds can be acquired," he writes. "The BoJ is approaching a shortage of Japanese government bonds for the central bank to buy, as commercial banks, pension and insurance funds have run down their holdings."
BOJ Negative Rates Risk Destroying Loan Market as Freeze Deepens
The freeze in Tokyo’s market for overnight loans looks set to extend into a third month as the Bank of Japan’s negative rate policy makes it harder for brokers to price and process transactions.
Two months after the BOJ said it would start charging interest on some lenders’ reserves, the outstanding balance in the interbank call market tumbled to a record low 2.97 trillion yen ($27 billion) on March 31, according to Tanshi Kyokai data going back to 1988. While the brokers association and the Japan Securities Depository Center said two weeks ago they had upgraded systems to settle transactions at sub-zero yields, traders say more than technical issues are preventing a revival.
“Among central banks, the BOJ is the one that destroys functioning markets the most,” said Izuru Kato, the president of Totan Research Co. in Tokyo. “Companies will slash staff and scale back operations where activity is grinding to a halt, exposing markets to spikes in rates when the time comes for normalization.”
Why a firmer yen when rates are negative?
One reason that this is not weakening the yen as it should could be hedging.
“Everyone is talking about huge, huge outflows. But we think they’re increasingly being hedged and that’s limiting their effect,” says Mitul Kotecha, head of Asia currency and rates strategy at Barclays.
Japan stands out as the worst performing major developed equity market so far this year, barring Italy. The Topix is down 18 per cent, dropping 13 per cent since early February.