Japan Resumes Hyprintspeed Part 1: A Look At The BOJ's Current, And Future, Quantitative Easing

Tyler Durden's picture

While it will not surprise anyone that Japan, which for the past 3 decades has been a monetary policy basket case caught in what bankers like calling a deflationary spiral (yet which others like Sean Corrigan merely define as prices re-indexing to a fair value absent endless cheap credit crutches), has constantly had to resort to a record loose monetary policy coupled with endless episodes of quantitative easing, some may not know that over the past month Japan has seen its current account balance swell by $250 billion, or nearly half the entire Fed QE2 monetization mandate. And as the BOJ continues to disclose the full extent of the Japanese economic devastation following March 11, we are confident that very soon the most recent episode of Japanese “printing” will surpass the $600 billion that the Fed is injecting into the US economy (in addition to the roughly $250 billion in Treasury bonds monetized by the BOJ each year): an amount roughly 5 times greater than America's when expressed as a ratio of GDP. It is thus no surprise then that Bernanke does not seem too concerned with the purported end of QE – after all money printing is merely moving from developed world point A to developed world point B. And thanks to monetary linkages of “globalization” all this brand new money will once again find its way into speculative assets, and thus, Fed mandate #3 favorite - Russell 2000.  Below we provide a closer look at what exactly the current and future, Japanese QEasing will look like.
To do that, we present some observations from an Ad Hoc Comment by GaveKal: “The Understandable Japanese Liquidity Surge.” As we presented yesterday, while for the time being the Japanese monetary base (unlike our own exploding Adjusted Monetary Base) will not show much if any change for a few months, the Japanese current account balance has “swollen by Yen equivalent of $250 billion in the past few days  (i.e., about half of the amount of QE).” This is shown on the chart below:

And since this move does not occur in isolation, it has impacted the broader total assets category of the BOJ, which is now close to an all time high following the recent surge:

So while it is now obvious that Japan has quietly, and without much fanfare moved into another monetization regime, the two questions remaining are: i) what is the mechanism by which Japan is pumping a quarter trillion into the market, and ii) and, much more important, where is this money going? GaveKal answers question #1:

Breaking down the BoJ’s increase in assets, it seems that the entire increase of the past week is pretty much attributable to one source – loans by funds supplying operations against pooled collateral (green line below). This is clearly a change in normal practices:

  • In 2002-2004, the BoJ injected cash in the system by purchasing treasury bills (dark blue above).
  • In 2008, the little the BoJ did was through the purchase of foreign assets and even then, the BoJ’s intervention was sterilized through the sale of JGBs (yellow line going down).

So what is this ‘loans by funds against pooled collateral’? Given the underlying amount, the only explanation we come up with (though we look forward to alternative theories from clients) is that the BoJ has dramatically increased its bank repo operation; in essence, making sure that the banks are not scarce of cash in the middle of the current national emergency. Importantly, so far, there seems to be no sterilization by the BoJ of this cash injection. A fact which begs a number of important questions, including:

  • Why isn’t the Yen retreating on this news? Is it just a question of delays and the markets still finding their footing after the massive exogenous shock of two weeks ago?
  • Where will that excess money go? Will it all go into rebuilding the devastated areas? Will it go into local stocks? Or will we see what we saw in 2003 onwards from Japanese investors, namely a rush for carry?

On this last point, it is interesting to note that since the G7 intervention was announced on the 18th, the typical ‘carry’ currencies, namely AUD, NZD, ZAR, BRL, etc., have done rather well:

As for question #2, as Louis Gave speculates, the excess money, instead of hitting the Nikkei, and with the dramatic relative underperformance of the Japanese stock market compared to the US this would not be surprising at all, could simply be fuelling the latest surge in commodity prices, which at this point provide far greater rates of return than stocks (by now everyone has seen the parabolic rise in silver prices in 2011 soon to be followed by gold and all other commodities). To wit:

Another possibility of course is that this excess liquidity is already helping fuel the next leg of the equity bull market while a more worrying development would be if this excess cash found its way in the hot ‘momentum’ trades of the day, namely oil, gold or silver.

Thus if the March action by the BOJ has taken about one month to translate into a nearly $20 spike in silver, just what will happen as the BOJ is forced to pump hundreds of billions more into its market? And pump it will: after holding back for over a month on the consequences of Japan’s earthquake, tsunami and nuclear disaster, the head of the central bank has finally stepped up to the plate and warned that the Japanese economic outlook is “very severe.”

First a quick overview of what was disclosed about the Japanese economy in the past week: factory output fell at a record monthly pace in March, household spending declined at a record annual rate and another private survey showed manufacturing activity languishing at a two-year low. This is about as catastrhopic for a deflationary economy as it gets. And with apologies to Larry Kudlow, there is no boost in GDP coming any time soon. In fact, March monthly GDP was cut to the lowest since Lehman.

So with its back to the wall, what is Japan to do? More of the same of course. From Reuters:

Bank of Japan Governor Masaaki Shirakawa said on Saturday that the country's economic outlook was very severe and that the central bank would take appropriate action to support the economy.

But he offered few clues on whether and when the BOJ would expand its asset-buying scheme, only saying that its next policy step would depend on economic conditions at the time.

"The BOJ sees the outlook for Japan's economy as very severe," Shirakawa told a financial committee meeting in the lower house of parliament.

"We'd like to take appropriate policy steps as needed while monitoring the economy and prices, taking into account that uncertainty over the outlook is high," he said.

Asked by a lawmaker whether the BOJ would consider buying more government bonds to support the economy, Shirakawa said only: "We'd like to consider in earnest what would be the desirable step to take."

The BOJ kept monetary policy unchanged on Thursday even as it lowered its growth forecast for the current fiscal year, which began in April, and warned of uncertainties over the extent of damage that last month's devastating earthquake would inflict on the economy.

Shirakawa reiterated that having just expanded its asset purchasing scheme days after the March 11 quake, the BOJ preferred to spend more time examining the impact the step would have on the economy.

But he also left open the possibility of easing monetary policy further if damage from the quake proved bigger than expected, stressing that the central bank was focusing on downside risks to growth for the time being.

In a sign some in the BOJ were more cautious about the economic outlook than Shirakawa, Deputy Governor Kiyohiko Nishimura proposed on Thursday expanding the central bank's asset buying scheme by 5 trillion yen ($62 billion).

While the proposal was outvoted by the board, some market players said it may be a sign the BOJ may loosen policy as early as next month.

And loosen it will, because unfortunately as the past 30 years have shown, the country at this point has no other choice but to take the same toxic medicine which merely removes the symptoms briefly, while making the underlying problems far worse.  Also, with the Fed threatening to end QE2 in precisely two months, someone out there has to be dumping hundreds of billions in infinitely dilutable 1 and 0s into primary dealer prop desks. Furthermore, as shown above, the BOJ needs not to buy securities outright: tinkering with the shadow economy in the form of the repo market will provide just as desirable an outcome… If, of course, said outcome is to see gold and silver continue on their relentless rise to new all time record highs. And/or higher. Because the only thing limiting the price of gold is price stupidity and the amount of paper money in existence. Both are infinite.

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DoChenRollingBearing's picture

I am no expert on Japan, but I would guess that no one really knows how this is all going to play out, the financial effects of rebuilding the devastated areas of Japan.  I offer two thoughts only scantily addressed above:

1)  Jim Willie CB says that Japan will sell LOTS of US$ denominated assets (mostly bonds, to raise funds for rebuilding) and that will help drive DOWN the dollar as China has announced moves to lighten its $3tn worth of US assets.

2)  The Bearing becomes more concerned every day of supply chain breakdowns, not only in fine quality Japanese automotive bearings (slight disruptions up to now), but perhaps very severe disruptions of certain goods (electronic components?) that they made (in the Sendai area) that few others do.

I look forward to seeing what our amazing ZH community has to say about Japan and its critical role in the world economy.

Is there any chance that the USA could begin to get its act together to bring manufacturing back here?  Alas, I doubt it with the political/economic trends in Washington, DC.  Pity that...  Capital goes to where it is treated best...


EDIT:  Jim Willie believes that inflation in the USA will go up FASTER than dollar depreciation, thus NEGATING a stronger Yen.  Again, for me a fascinating subject I will read this weekend.

Oh, and a final "gold bitchez" as it does look like most of the central banks will print rather than impose austerity.

Ham Wallet's picture

Is there any chance that the USA could begin to get its act together to bring manufacturing back here?  Alas, I doubt it with the political/economic trends in Washington, DC.  Pity that...  Capital goes to where it is treated best...

Nah.  I expect Mexico and other select locations in South America becoming the new "china".  That or India.  A

billion people there await....

No way they bring those manufacturing jobs back to america.

falak pema's picture

You're right. The name of the Oligarchy game is : "international labour arbitrage". Its now irreversible. Investments will go where labour yells for work at give away prices. There are so many hungry regions with a RM base and docile populations in the economic free-for-all chaos now called globalization... S America is obvious candidate, as is India, then Africa. The only cloud on the RM base front is peak oil dependency on ME supply, now a powder keg that the Oligarchy has difficulty controlling (three wars there already!), and food shortages world wide that could chain react populations into rampant riots (not good for investment horizons). So wars of repression and RM access are very much a part of NEW NWO scenario. Dangerous, unpredictable, volatile, paradigm change times...Won't be easy for debt leveraged Oligarchy...their could be cracks appearing between rival groups...and US Oligarchs don't rule that roost alone anymore!

spanish inquisition's picture

Strategy at this point in Risk is pretty straight forward if you own NA, Eur, ME to Australia. Africa has always been the hardest to hold next to Eur and Asia, but paid less continent bonus so was harder to defend. You need to block off all supply routes to N Africa from other players in the area and then make a treaty with SA. SA is growing, but doesn't want to risk a conflict at this point AND you don't want to waste resources because your troops are pretty thin.  Once you secure Africa its resources and labor, it's a war of attrition and after a few turns you don't need to play nice and clear the board....

(Or course Risk is a just a game, so I am pretty sure that it is more complicated than this)

Bananamerican's picture

"Capital goes to where it is treated best..." a benign view, DoChen....

Capital in the age of "globalization" is a different animal nowadays.....i'm thinking, "locust"

Auricle of Omaha's picture

Been so long since I played RISK... Who knew it's lessons would be so valuable in the coming years of global supremacy!

css1971's picture

The Bernank has 2.N trillion worth of treasuries which he can sell to mitigate dollar inflation. Hence "transitory".

You get higher interest rates as a result.

However, real growth (in stuff, not money) is only possible through cheap energy, and that isn't coming back[1], so equities are always going to be trailing commodities.


[1] America has a natural gas glut just now, but it will take years to convert autos, power generation etc.

legal eagle's picture

Solution: in the name of humanitarianism, immediate Green Cards for Japanese. The US would benefit from their work ethic, stoicism, and they will bring their PMs with them. We do, afterall, have some empty houses to fill!

anonnn's picture

OT:   Mr Bearing...what is it about made-in-Japan bearing quality, say, compared to SKF or Timken

Stuck on Zero's picture

I can tell you from my experience.  U.S. made bearings beat all in quality.  Unfortunately, they cannot compete in price with mercantilists.

DoChenRollingBearing's picture

anonnn and Stuck,

Many years ago Timken (USA) indeed make the best bearings of that type.  I do not believe that now there is a significant quality diffrence between USA (Timken), German (INA & FAG) and Sweden/Germany (SKF).

Japanese bearings are very respected in Peru in the automotive aftermarket.  Peruvians will NOT pay 20% more for a wheel bearing that says Timken USA vs. Japanese.  Japanese brand "Koyo" is part of Toyota's keiretsu.

The MINES are a different story.  They, still, will only take US / Germany / Sweden for big bearings.

DollarDive's picture

Through all this easing and QE insanity around the world....I'm going to ask the question "What if ??"  

I'm asking this question because I really don't know the answer to the question.  I'm  asking because it woud be helpful for my own understanding with regard to world finance.  Anyone that can shed some light on the subject is welcome to comment.

OK....here's my "What if" question: 

What if the rest of the world is forced into easing (ex. Japan) - at a rate that is greater than that of our own FED ? ..... such that our own easing (slower rate) is perceived by the markets as tightening ? ....and as a result.... we end up with a rally in the US Dollar ? 

Conceptually, currency seems to be a relative game.  Isn't it really all about rates of easing ? If country A eases at a rate greater than country B, then their currency is weak.  If currency A continues to ease at that same rate (QE1, QE2.... etc) and country B accelerates their rate of easing such that their rate of easing becomes greater than country A ..... couldn't country A be perceived as tightening, when in fact their still carrying out QE4........QE10 etc. ? 

This seems to be a zero sum game.  At some point the rest of the world is going to forced into easing at a rate faster than the USA ..... no ? 


Stranger things have happened.....



Tail Dogging The Wag's picture

A rally in the US Dollar (green confetti) against confetti in different colours...  as long as people buy the confetti you'll be able to trade it for butter...   but one day people will stop taking the confetti and the street sweepers and paper recyclers will come to collect it. Silver and gold are money, everything else is credit.

ViewfromUndertheBridge's picture

Gold is rising against different currencies at different rates...or, more accurately, different currencies are losing value against gold at different rates...there is your answer.

old naughty's picture

sounded like you have another / others.

The Mighty Monarch's picture

The higher end Brooks Brothers suits are going for about an ounce of gold these days...

mhjhnsn's picture

Why do the other countries do it?

If it is for internal reasons and it stops there, they may get a bit of a bounce but unless their economy offers real opportunities the extra nominal cash will go into speculation, the carry trade or commodities and hard assets which will jump in price.

If they devalue just to keep up with the US, it could set off a competitive race to the bottom where everyone pushes everyone else into hyperinflation.

Orly's picture

I think that is correct.

Currencies are a relative game and many assets are tied to the price of the USD.  If the USD were to strengthen relative to other currencies, that would set off a spiral of a flight-to-safety, which heretofore has been pushed to the sidelines.

I have a feeling they want to keep the game up a little while longer, until the Great British Pound Sterling can walk on its own again (and perhaps have the Chinese divest of their UST holdings at the same time...) before they let it go.

Once it goes, though, the unwind in carry currencies is going to be immense, swift and brutal, with a corresponding surge in dollar-denominated safe-haven assets, such as the USD and the UST.

It reminds me of Trading Places when William and Louis are calmly waiting on the trading floor after the crop report for all the panic to reach a crescendo, then they start buying hand-over-fist.  Once the Chinese and Japanese start dumping Treasuries, there are going to be two guys waiting calmly, watching them panic.

Then, they'll get the G. I. Joe with the Kung Fu grip.

longorshort's picture

I think your asking the right questions. Keep asking and you and I probably be the only rich ones after market screws over all these commodity guys that cant liquidate physical fast enough..   This ugly game of chicken will end nasty I fear.  Spain is crawling up Germany's tight ass.  Austrailia's housing and currency boom is a big ulgy bubble.  Sorry commondities are only like 20% of your GDP in a global recession and your wages have not done dick.  UK has a big housing bubble, stagnant wages and high taxes.  At least they didnt buy into the Euro :).  They would really be sucking an egg. Canada, im sorry huge real eastate bubble backed by only the government.  By the time that one pops they may be more socialist than the French with all that housing backed debt and expensive currency that will need to deflate.  We need more zero hedge articles on the dirt in Canadian banks.  I know they cant be as perfect as people make them out to be RBC was at 50 bucks a share with negative EPS for trailing twelve months during the crash.  If your currency is higher than the dollar, your housing is higher than our bubble highs and your average family income is less.  Something stinks to high hell there.  Heh its probably gonna make Tim Geitner look like a saint when Canadians see the tab their governement left for them.

Itsalie's picture

Why would Japan be selling US Treasuries if it can print and buy its own government bonds? The spread between the 2 will keep the BoJ alive assuming the JPY doesn't strengthen from here, and why would it? G7 will make sure that doesn't ever happen. Its carry trade till the next big implosion, in 2012 but more likely now, after the next prez election, sometime in 2013, especially if a new POTUS in whire house, just like the previous buffoon. The TBTF/Fed/CBs have it so well covered not even a Greek default will scare anyone, because with Portugal's bailout, Spain's debt is not misbehaving like Portugal's when Ireland was bailed out. Everyone has all angles "covered", so the crisis will come from where the TBTF cannot reach.

damage's picture

And where do you suppose that is?

disabledvet's picture

got a little wild and crazy at the end there bro but "now you're talking."  of course "these things are unknowable" but at the same time "they will be known."  you speak of "funding"--but how is debt funded exactly?  as shown quite remarkably above "via printing presses."  so perhaps what we should be asking is "what's a FUNDING CURRENCY?"  or more to the point "what does a funding currency FUND?"  I am only speculating of course but if you say "TRADING OPERATIONS" then i think perhaps then we begin a journey towards "where millions spend all day sitting behind a computer in place called HUGE BUILDINGS."

Catullus's picture

Perhaps they've been pumping the repo market because of the repatriation of dollar denominated assets back into dollars. What they had was 2008 all over again. Just another bank run. And it wasn't that bad this time because they just printed the money they needed. No big deal.

I'd say this should be a note to all you doomers out there: the US has a long way to go before even Japan happens and these bank runs happen more often than you think. I'll give you "they get bigger everytime and the situation is precarious". But outside an extraneous event, this is a coordinated competitive devaluation. The world is not set to collapse tomorrow or in the next three years. People still have plenty of time to react to this.

TIMMAYYY's picture

(sorry for SPAM)


YO YO YO tyler....over here, look at me...

or not me...anonymous just hit ALEC and U.S. Chamber


write a story about that, do some reading bro. sink your teeth into something juicy...



Orly's picture

I know a doctor named Barret Brown.  Wonder if the cell phone password has a 713 area code?

russwinter's picture

MIT's price survey for Japan is now showing quite a pick up in inflation.



Gloomy's picture



I know the NY Times is not your style. But you really should post this editorial from today's paper, as a ray of hope that maybe, just maybe, some of the message is getting through.



April 30, 2011 Mr. Geithner’s Loophole


Until recently, the big threats to the Dodd-Frank financial reform law came from Republican lawmakers, who have vowed to derail it, and from banks and their lobbyists, who are determined to retain the status quo that enriched them so well in the years before, and since, the financial crisis. Now, the Obama Treasury Department has joined their ranks.

In an announcement on Friday afternoon — the time slot favored by officials eager to avoid scrutiny — the Treasury Department said it intends to exempt certain foreign exchange derivatives from key new regulations under the Dodd-Frank law. These derivatives represent a $4 trillion-a-day market, one that is very lucrative for the big banks that trade them.

A loophole in the law — which the bankers and their friends, including the administration, fought for — allows the Treasury secretary to exempt the instruments. The arguments in favor of exemption, beyond a desire to please the banks, were always unconvincing. They still are. The Treasury Department has asserted that the exempted market is not as risky as other derivatives markets, and therefore does not need full regulation.

That claim has been disputed by research, but even if it were true, it would be a weak argument. For instruments to be relatively safer than the derivatives that blew up in the crisis, necessitating huge bailouts, hardly makes them safe. Worse, dealers could probably find ways to manipulate the exempted transactions so as to hedge and speculate in ways that the law is intended to regulate.

The Treasury Department insists its exemption is narrow and regulators will have the power to detect unlawful manipulation. In their spare time, perhaps? The financial crisis made clear what happens when everyone doesn’t have to play by the same rules. And it made clear that the taxpayers are the ones who pay the price.

The department has also said that because the market works well today, new rules could actually increase instability. That is perhaps the worst argument of all. It validates the antiregulatory ethos that led to the crisis and still threatens to block reform.

The Treasury’s plan will be open for comment for 30 days. Count us opposed.

Threeggg's picture

Not one of you here is going to believe this is real. Obama roast's Trump !


But it is.

What a shame !

onlooker's picture

Corporate profits are not concerned about a Nation or the welfare of a Nation. This is an International World. There is no reason to manufacture in the USA if the service or product can be done cheaper elsewhere. This has the effect of making a level income payment field and a business environment of price trumping “Made in the USA”.


Large Corporations do not care about the welfare of the U.S. Citizen or any other citizen in the World. They exist for profit.

The question of BEARINGS was presented. Yes, the U.S. does have excellent bearings as does Germany, and Japan. However, China, India, and others can do that also. I do not know if they have and it is not well known, or if there is a reason they are not there yet.


The fact is that England went from a great power to a nation of shop keepers, is a good guide to where we are headed. ----- It is decline. And, Japan may put off the inevitable but they can not escape it. The manufacturing boom, post WW2 was ill spent and they can not recover.


Or can the U.S. and Japan recover? Or, is History about to roll over us?

Rogerwilco's picture

As we all wring our hands over the "situation" in Japan, dire as it is, producers in China have seen huge increases in the cost of raw materials. Some metals and commodities like glass are up 100% in the past year. How long can the government there hold the lid on? When this finally blows up in their face, it will be the Lehman Bros. event that triggers the next shit storm.

A Chinese collapse will be followed by Australia, Canada, Singapore, Taiwan, etc. The USA may be seen as the only "safe" bet left in a world of chaos and confusion. Bernanke will be a hero.

BigJim's picture

NOW can I short Japanese government bonds?