The Chart That The BoJ Is Most Worried About (And So Should You Be)

Tyler Durden's picture


Until the last few days, the attention of the mainstream business media has been on how 'wonderful' Japan's policy prescription must be since its stock market is soaring at a record pace. The reality is that the far bigger JGB market has been crumbling. As we explained here, this is a major problem for the bubble-blowers, as the extreme volatility (VaR shock) that the Japanese Government Bond market has been through in the last few weeks has some very large and painful consequences, that as yet, have not been discussed widely. The term 'shadow banking' has been one ZH readers are by now extremely familiar with as we have discussed this as the panacea of unseen leverage (most recently in Europe and China) for years; the funding markets in Japan, so heavily reliant on JGB repo for short-term liquidity and the efficient functioning of two-way markets in the bonds, are hitting a wall. As JPMorgan notes, the number of JGB 'fails' - where a repo deal breaks down - has more than doubled in the last week. For a market that represents 40% of the total Japanese money-market, this will be a critical area to watch for a JGB waterfall.



Via JPMorgan:

The sharp rise in JGB volatility has not left the JGB repo market unaffected. The ¥80tr large Japanese repo market accounts for 40% of the total size of Japanese money market (which it also includes CDs/CPs, currency swaps, BoJ money market operations, and Call transactions) and it is an important lubricant of the JGB market. This is because repos with JGBs as collateral, account for more than 99% of domestic repo transactions. The haircuts are typically very low in the JGB repo market ranging from zero to 2%. This is because market participants are comfortable or accustomed to control risks through margin calls without often setting a haircut upfront.


But these margin calls or haircuts where applicable, tend to rise when volatility rises. And the rise in margin calls or haircuts has caused a rise in “fails”. 175 fails in the month of April represents a sharp increase from March but it is still much lower from the >1000 figures seen immediately post Lehman. A fail is a situation where a recipient of JGBs in a transaction does not receive the JGBs from the delivering party on the scheduled settlement date.


Typically the number of fails in Japan is quite small, partly because market participants try to avoid fails in advance, and because some market participants have never experienced fails. According to the BoJ, the situation is quite different from that prevailing in US repo markets, where fails occur much more frequently than in Japan and where market participants take action in accordance with the fails practice on a daily basis.


The retrenchment in Japanese repo market is then fed into the JGB market propagating the initial volatility (VaR) shock. The repo market is used by market participants for funding or short selling and its functioning is important in maintaining a two-way market for JGBs.

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Sun, 05/26/2013 - 17:05 | 3600114 This just in
This just in's picture

Rook out Berow!

Sun, 05/26/2013 - 17:27 | 3600143 butchee
butchee's picture

Raughing out roud...ROR!

Sun, 05/26/2013 - 19:54 | 3600303 This just in
This just in's picture


Mon, 05/27/2013 - 08:28 | 3600778 Zero Govt
Zero Govt's picture

that's the wracist comment, Sir i obrject!

Mon, 05/27/2013 - 10:08 | 3600971 THX 1178
THX 1178's picture

Epic FAIR, Zelo Govt

Sun, 05/26/2013 - 17:10 | 3600124 buzzsaw99
buzzsaw99's picture

just pretend everyone has the collateral they say they have and call it a day

Sun, 05/26/2013 - 17:48 | 3600175 knukles
knukles's picture

Absolutely.  What could go wrong?
One of the best treaties on disappearing collateral I've run across.

(Oh no, after you!)

Sun, 05/26/2013 - 17:53 | 3600184 gatorengineer
gatorengineer's picture

Collateral?  How about these CDS's on MBS's?  or some Rehypothecated Greek Bonds?  I dont need no stinking collateral....

Sun, 05/26/2013 - 18:04 | 3600203 bank guy in Brussels
bank guy in Brussels's picture

Here is 'repo of collateral' in a fabulous 35 seconds of cinema

Tom Cruise getting his 'Collateral' briefcase back with a semi-automatic pistol

Superb clip (pun intended)

For those who have never heard gunfire on real city streets ... this is what it is really like :

Sun, 05/26/2013 - 18:21 | 3600223 buzzsaw99
buzzsaw99's picture

jabba wants to know why he must pay 50,000

because the bounty hunter is holding a thermal detonator as collateral, that's why.


this bounty hunter is mind kind of scum... [/jabba]

Sun, 05/26/2013 - 17:13 | 3600128 TeamDepends
TeamDepends's picture

Our spidey sense is tingling off the charts.  Anybody else think we will get some "game changing" news next week?

Sun, 05/26/2013 - 17:21 | 3600136 auric1234
auric1234's picture

Option expiry next week. COMEX default around the corner?


Sun, 05/26/2013 - 17:31 | 3600147 TeamDepends
TeamDepends's picture

Bingo!  That rumbling you hear is Phyzz moving from here to there, vault to truck, truck to waiting nervous wealthy hands...

Sun, 05/26/2013 - 20:24 | 3600342 Caviar Emptor
Caviar Emptor's picture

We regret to inform our subscribers that there is no more gold. For further information please dial the suicide hotline, you're on your own amigo. 

Sun, 05/26/2013 - 22:06 | 3600466 Dead Canary
Dead Canary's picture

Hey fellers, don't look now but I just saw Bernanke, Geithner and Obummer at the airport wearing wigs and mustaches boarding a plane to the Bahamas!

Sun, 05/26/2013 - 20:39 | 3600363 JLee2027
JLee2027's picture

HKMEX didn't default, they just cash settled. COMEX will do the same. It will never be an announced default. One day they will simply close, mysteriously.

Sun, 05/26/2013 - 22:45 | 3600511 Go Tribe
Go Tribe's picture

So basically the owners are saying "We're ready to retire to Florida and we're going to have a fire sale of our inventories and close our doors. It's been very nice doing business with you all these years, but time's running out and it's 5 o'clock somewhere."

Is that pretty much it?

Mon, 05/27/2013 - 10:45 | 3601031 auric1234
auric1234's picture

So the MSM won't call it a default, but in here at least we can call things by their names. If they're unable to deliver money and instead offer you some worthless paper, that's a default.


Sun, 05/26/2013 - 17:59 | 3600193 HungryPorkChop
HungryPorkChop's picture

HKMEX is busted.  Now we'll see the SHTF.  Time to call back in another Corzine to save the system.


Sun, 05/26/2013 - 17:23 | 3600138 auric1234
auric1234's picture

Makes me wonder, what are the Japanese sheeple putting their savings in? US treasuries?


Sun, 05/26/2013 - 17:43 | 3600166 buzzsaw99
buzzsaw99's picture

the mattress

Mon, 05/27/2013 - 10:42 | 3601028 auric1234
auric1234's picture

They buy mattresses? Or they put something inside.

If they put something inside, are they foolish enough to put yen in it?

I don't think they're massively buying gold. We'd have noticed by now.


Sun, 05/26/2013 - 17:37 | 3600155 Hulk
Hulk's picture

The japanese repo market, coming soon to a sovereign near you !!!

Gotz Gold ???

Sun, 05/26/2013 - 17:41 | 3600162 alphamentalist
alphamentalist's picture

Having done my time in the ‘Land of the Setting Sun’ I can tell you first hand how batshit-crazy in-your-hair-annoying avoid-at-all-costs a fail is (even if you are just tangentially involved). In the unfortunate event of a fail you are pestered incessantly by the mid/backoffice people and their managers (who are presumably harassed by higher managers and regulators) from about 1 day before an expected fail until it is resolved. It is cultural. Anything that can be measured and declared a success or failure is monitored and made into a point of institutional obsession. Having lived on the edge of a few of these I am shocked that they happen at all. They are that bad. Given that stigma and hassle, a spiking number is a HUGE warning sign.

Sun, 05/26/2013 - 18:01 | 3600198 knukles
knukles's picture

Talk about fails...
About 3 or so centuries ago I was a portfolio manager at one of the larger trust departments in the US and the bank had custody responsibility for a large number of state and local depository accounts which had to have a specific amount of US Treasury bill collateral set aside for security purposes.  Was just the contractual practice at the time (Today they're probably taking Spider-man towels) 
So one day I got a call from the custody area asking me to purchase some t-bills for cash (that day) delivery.... which I made damned clear to the 3 or so firms I went to asking for the offering... Y'all gotta make delivery today, folks, its for a state collateral account.
So Salomon Brothers (how many of you never heard of them, eh?) has the most competitive offering and I said it as a done predicated upon having the stuff in hand, cash settlement.

About an hour later just as the Fed wires closing, the custody folk tell me no gots.  I call Solly back... no gots.  I said the deal was for cash.  They say too fucking bad.
I said it was for cash.  I'd made ta clear.
They said go fuck yourself (We ain't got 'em so we can't make delivery, so tough knobs, Knukieboy)
So I told them I'd buy their sweet little asses in.  (Meaning I buy at whatever price necessary to get deliver today, they pay the difference)
They told me good luck, no can do because nobody'll have the bills.
I said that I'd buy in at 105 and betcha I could get a whole fucking bunch.
They materialized out of thin air ... real quick
The bill trader wouldn't do business with me for a long time. 
He went on to being an influential government figure.

Go figurel....

Sun, 05/26/2013 - 18:36 | 3600233 Obadiah
Obadiah's picture

It is trueley fiat money that makes all that type of shit successful



Sun, 05/26/2013 - 20:53 | 3600377 realtick
realtick's picture

we're going down together, but japan is leading the way

Lands Of The Setting Suns

Mon, 05/27/2013 - 03:20 | 3600636 Kiwi Pete
Kiwi Pete's picture

There's only 3 reasons for a fail. No stock (unlikely in the JGB market in Japan one would think), instructions don't match (you've got your unmatched trades report to give you 3 days to match the trades. Should be 100% possible.) or counterparty No Cash. I wonder which it is? lol

Sun, 05/26/2013 - 17:46 | 3600170 ChaosEquilibrium
ChaosEquilibrium's picture

Nikkei down 3.3% on open?.....or am I getting bad data feeds?  Anyone verify!!

Sun, 05/26/2013 - 18:06 | 3600206 Yen Cross
Yen Cross's picture

    Nikkei CFDs

Japan NI225    14,318.00    14,568.00    14,628.00    14,098.00    [-250.00 ]   -1.72%    22:03:0

Mon, 05/27/2013 - 03:29 | 3600644 flyingpigg
flyingpigg's picture

Funny thing is they show green arrows if market is down and also the negative delta is printed green on the large screens. If market goes up they use red. Is it something cultural?

Sun, 05/26/2013 - 17:55 | 3600188 Headbanger
Headbanger's picture

Again, this is all well and good but the "horses are already out of the barn", the ship has hit the iceberg..  It's now too late to say why and how it happened but rather to try and plan ahead for the economic implosion dead ahead.

Sun, 05/26/2013 - 17:58 | 3600192 Michelle
Michelle's picture

What is the point of pointing out these fails? More failures in the U.S. makes Japan's seem rather benign.

Furthermore, 4+ years and counting and no big bang. What's the point of all these articles when the governments and the central banks keep saving the day? The CB's would love nothing more than the likes of Kyle Bass to disappear into a black hole.

Heeding all these warnings has been horribly costly from an opportunistic standpoint for almost every ZH'er over the past 4 years and nobody can predict when the bell tolls.

Start the mudslinging comments - I always laugh at you fools.


Sun, 05/26/2013 - 18:18 | 3600220 M2Market
M2Market's picture

Sure, the goverments and CB's keep saving the day so why not start start selling those knock in swaptions 5 sigma from the mean to earn a few basis pts?   The Maginot line is defended by the BOJ and MOF and it is unbreakable, so this is only the rational move isn't it?  . 

Sun, 05/26/2013 - 18:22 | 3600225 reload
reload's picture

I think you will find ZH was predicting that printer boy Ben was going to push stocks higher from at least 3 years ago.

Many on here will have had a ride on the money tide 

Many more have simply decided to leave the rigged casino. 

Many are grateful for the education and the shining of light into the darker corners of finance.

if you want stock tips ZH is not the place to look.

"On a long enough timelinei" is a clear warning from ZH,  nobody can predict how long the current fiat regimes prevail.




Sun, 05/26/2013 - 22:18 | 3600476 disabledvet
disabledvet's picture

you will hear them COMPLAINING about this fact...nay, veerily. "equity negative for the whole ride" (save for Tuesdays.) with the last leg of the TD stool rolling over (gold) it's time for the Great Sovereign Reset to begin. this one is a Double Dipper. It is not too much to say "the Japanese economy is Ginormous." It is also not too much to say "so is the EU's." there will be no inflation probably for the next century. my drinks and chips just dropped 50% in price from last weekend. i'm expecting a much further fall in the prices for pretty much everything as "the Dollar conquers earth..then sets it sights on Mars." these are breathtaking events folks...enjoy the comment stream cuz we're the only one's pointing out the obvious here.

Mon, 05/27/2013 - 00:24 | 3600577 besnook
besnook's picture

so you think zirp can lzst forever? while it has lasted seemingly forever in japan abe has set the stage for it to end. the end ironically comes in the form of rising rates which, in the old real reality used to mean the economy was heating up and money should be rotated into stocks util the bond market signalled the economy has cooled at which time money should be cycled back into bonds. life was simple back then, like you.

now the only real thing the low rate means is the economy sux. the next real thing you will see is rising rates suck worse. you sound like you will be needing knee pads......and i hope you don't bite.

Sun, 05/26/2013 - 18:04 | 3600202 Yen Cross
Yen Cross's picture

     The Japs are going to ignore their JGB problems just like they did with their R/E market in the 90's . We saw how that debacle ended.  Gold gapped up nicely on the open.

Sun, 05/26/2013 - 21:28 | 3600419 ISEEIT
ISEEIT's picture

They'll attempt to 'paper' it over right?

This is gunna be ugly but WTF? Fun to watch how Krug and the other ministers of BS spin it...

Further down the rabbit hole we go!

Sun, 05/26/2013 - 18:22 | 3600224 q99x2
q99x2's picture

You mean it might not matter that the Democrats (think Dianne Goldman Berman Feinstein [that's Feinstein's full name and just 1 not 4 crooks)] brought California's budget to a surplus?

Mon, 05/27/2013 - 02:16 | 3600625 Treason Season
Treason Season's picture


Sun, 05/26/2013 - 18:26 | 3600227 fonzannoon
fonzannoon's picture

You guys should all do an experiment. Get hammered from this minute until the U.S open Tuesday am. Don't look at the market, don't read updates here. When you wake up from your drunken coma Tuesday pre U.S open the Japanese yields will be right around where they are right now and their equity markets will be very close to where they are right now. Anything between now and then will just be drama pushed under the ever growing rug,

Sun, 05/26/2013 - 18:26 | 3600229 Thomas
Thomas's picture

One thing I DO know is that carnage in Japan will clouds of toxicity our direction.

Sun, 05/26/2013 - 18:46 | 3600241 kill switch
kill switch's picture


What's left of AMERIKKA

Mon, 05/27/2013 - 00:39 | 3600589 DanDaley
DanDaley's picture

Ry Cooder is just soo good.  Thanks for reminding me...and that is/was America.

Sun, 05/26/2013 - 19:10 | 3600264 bugs_
bugs_'s picture

has someone figured out how to naked short tons of JGB?

Sun, 05/26/2013 - 19:35 | 3600292 They Tried to S...
They Tried to Steal My Gold's picture

Long time ago....I handled overnight Repo's and Drexel was my account. Was called in the middle of the night - Drexel has gone BUST



Sun, 05/26/2013 - 19:35 | 3600293 NipponMarketBlog
NipponMarketBlog's picture



Capital controls inbound....

Sun, 05/26/2013 - 20:20 | 3600335 Paracelsus
Paracelsus's picture

Years ago a trader at SIMEX,Nick Leeson,tried to trade himself out of a hole betting on the rise of JGB's. He kept doubling down,and then doubling down again.25k of contracts for 25k each (Bonds).He was able to hide his screwups by telling the office girls to put the losses in the "five eights" account(88888),an error account.The trouble was he was trading and settling as well,usually two different people do these functions (front office,back office).End result was the implosion of the UK's oldest bank,Barings. Funny thing was he thought the Japanese Gov't "just had to do something after the Kobe earthquake had toppled the freeways,etc.".The Japanese Gov't did sweet F.A. for months as bureaucratic inertia set in big time.But the hilarious kicker was the fellows in London were argueing about their golden handshakes until the eleventh hour,when the Bank of England rep kicked in the door and yelled "TIME". Sold to the Dutch for $1 (ING).Oddly enough Barings had to get special permission to move such large amounts of capital overseas (special permission from the Bank of England).

Sun, 05/26/2013 - 21:32 | 3600426 ISEEIT
ISEEIT's picture

What's "odd" about that? The fact that you just told us? Dirty closets really are kinda like last era, ya know?

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