The Bank of Japan is just unstoppable.
We’ve written recently about how its bond-buying is now more than making up for the bond-selling being done by the likes of the Federal Reserve, the impact on Japan’s massive overseas savings and the new governor’s intellectual heritage.
The cherry on the cake was Deutsche Bank’s titbit that the BoJ “may” have bought more than 100 per cent of some Japanese government bonds, as it buys the JGBs, lends them out again to ensure the market still has some supply, short sellers borrow it and dump them in the market, only for the BoJ to buy it once more.
Here is a killer chart from Oxford Economics’ Norihiro Yamaguchi that puts more flesh on the bone. After buying a record ¥20tn of JBGs last month, the BoJ now owns more than 100 per cent of all on-the-run 10-year Japanese government bonds. In fact it owns almost 140 per cent of the most recent issue.
Here’s Yamaguchi on the BoJ’s Catch-22:
◼ The Bank of Japan enhanced its funds-supplying operations in January, after widening the tolerance band for 10-year JGB yields in December. The January actions are aimed at bringing down yields while avoiding further direct JGB purchases, but long-term JGB yields are staying stubbornly high, and market liquidity has not recovered. Maintaining the Yield Curve Control (YCC) policy is more costly now than ever.
◼ Since the December meeting, speculation of further yield hikes has increased. The 10-year JGB yield has been staying close to the new cap, and a kink in the yield curve remains. With the BoJ aggressively purchasing the JGBs, all on-the-run 10-year JGBs have effectively been absorbed from the market. Money market rates imply the shortage of JGBs is severe.
◼ To improve market liquidity, the BoJ is conducting securities lending daily, and raising its bid amount since late-December. Ironically, part of the bonds provided by this lending are used to construct short-sell positions in JGBs, resulting in further upward pressure on yields. To avoid such use, the BoJ has announced an increase in its fee. Given the new fee will be applied to all borrowers, this action is likely to limit liquidity provision.
◼ The BoJ’s January decision lowered both the JGB and swap rates considerably. The operation came with solid demands from financial institutions, at least for now. However, its impact on the market has been limited except for the initial reaction.
◼ The slight improvement in the JGB market functioning has raised the possibility that the bank will be forced to re-expand the target for the long-term yield in the not too-distant future. It will help the new governor to buy time to conduct a comprehensive review of the policy framework.
