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Japan Central Bank Admits Sending Schizophrenic Signals To Market As JGB Liquidity "Evaporates"

Tyler Durden's picture


It doesn't take an Econ Ph.D to realize that what Japan is trying to do: which is to recreate the US monetary experiment of the past four years, which has had rising stocks and bonds at the same time, the first due to the Fed's endless monetary injections (and pent up inflation expectations) and the second due to quality collateral mismatch and scarcity and shadow bank system funding via reserve currency "deposit-like" instruments such as TSYs, is a problem. After all, those who understand that the BOJ is merely taking hints from the Fed all along the way, have been warning about just that, and also warning that once the dam breaks, and if (or when) there is a massive rotation out of bonds into stocks, it is the Japanese banks - levered to the gills with trillions of JGBs - that will crack first.

Apparently, this elementary finance 101 logic has finally trickled down to the BOJ, whose minutes over the weekend revealed that members are pointing out "contradictions" in the Kuroda-stated intent of doubling the monetary base in two years, unleashing inflation, sending the stock market soaring, all the while pressuring bondholders to not sell their bonds.

As the FT reports, "According to the minutes of the April 26 policy meeting, released on Monday, a “few” board members said the BoJ’s original stance “might initially have been perceived by market participants as contradictory”, causing “fluctuations in financial markets”.

More on Mrs. Watanabe's confusion from the FT:

After Haruhiko Kuroda’s first meeting as BoJ governor on April 4, the bank said it would lower interest rates across the yield curve, thus pushing investors into riskier assets such as loans and stocks. At the same time, it said it aimed to achieve a 2 per cent rate of inflation at the earliest possible opportunity – implying upward pressure on rates.


Since then, prices of bonds have slumped amid record levels of volatility, as traders have struggled to adjust portfolios in light of what some called the “Kuroda shock”.


Kazuhiko Sano, chief strategist at Tokai Tokyo Financial Holdings, said investors are “very confused”, adding that “many are reluctant to buy bonds right now”.

Which is why tomorrow, the BOJ has no choice but to "explain" to banks that they must all hang in there and nobody must sell JGBs, or everyone drowns at the same time: "the BoJ plans to hold a meeting on Wednesday with traders of Japanese government bonds to discuss ways to fine-tune its bond-buying operations." Expect the BOJ to be quite persuasive in forcing yet more capital misallocation. Why? Because as we first showed over a week ago, according to the BOJ itself, a 100bp (parallel) rise in market yields would lead to mark-to-market (MTM) losses of 20% of Tier-1 capital for regional banks and 10% for the major banks. And, as we added, "he who sells first wins..." We already got a first instance of panic dumping last week when the 10 Year JGB hit 1% and when the stock market crashed. How long until the second case of first selling? Indeed, the BOJ is at least finally pointing out what has been obvious to most for years: "In its latest report on financial stability, published last month, the BoJ said that a “substantial” rise in JGB yields without any improvement in economic activity could weaken banks’ capital ratios, thus “affecting the resilience of the financial system and the real economy”."

Luckily, at least some at the BOJ realize just how idiotic such jawboning against logic is, perhaps those left over from the Shirakawa regime, who also understand that 2% inflation and soaring yields for a country with 240% debt/GDP is suicide:

Yet the comments from the BoJ board members revealed in the minutes are a sign of the “tensions” behind the united policy front, said Naka Matsuzawa, chief Japan bond strategist at Nomura.


Mr Matsuzawa said the BoJ was “chasing two rabbits at the same time”, alluding to the bank’s stated desire to lower nominal yields while pursuing a higher target for inflation, which implies a rise in interest rates.


“Eventually, the target is the same, to push up the economy. But en route, they are having contradictory implications for JGBs,” said Mr Matsuzawa.


While it is unclear how many BoJ board members have raised concerns about “contradictions”, Masaaki Kanno, chief economist at JPMorgan and a former BoJ official, said “a few” probably meant two in this instance.

In the meantime, that biggest threat to market stability - liquidity evaporation - has appeared in the world's second largest bond market:

After the April 4 announcement that the BoJ would increase its bond purchases to about Y7tn-8tn each month in an attempt to double Japan’s monetary base within about two years, liquidity within the JGB market has evaporated, sending yields soaring. Banks have raised their long-term prime lending rates to compensate, meaning that monetary conditions have tightened, rather than loosened, under the new governor.

Not only that, but as we showed over the weekend, the number of repo fails involving JGBs has exploded. How long until the far smaller Japanese shadow market slams shut?

So what is the bottom line? Simple: more Fed copycatting, which means the arrival of the monthly POMO schedule:

Some analysts say the BoJ should make its actions more digestible by shifting to a system of daily purchases of Y300bn-Y400bn, rather than eight operations a month of about Y1tn each.


And instead of giving the market a couple of hours’ notice each time, the BoJ should supply a detailed schedule of its purchases a month in advance, they say, spelling out sizes and target maturities in a similar manner to the US Federal Reserve.

Bottom line: the BOJ's very credibility is now on the line:

Without better management of the world’s second-biggest bond market, nerves will remain fragile, said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch.


“The BoJ has to kill the volatility it has raised. [The governor’s] credibility is at stake, right now.”

And since for the voodoo priests of monetarist, Keynesian policy, credibility, i.e. faith in an artificial and failing fiat construct, is all that matters, they better not blow it, or as the former CEO of Alliance Bernstein warned last night, and despite the best wishes from Buba's Jens Weidmann, Kuroda's experiment will be short if very violent one.

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Tue, 05/28/2013 - 07:49 | 3603042 GetZeeGold
GetZeeGold's picture



Japan Central Bank Admits to being Schizophrenic


There.....fixed it.

Tue, 05/28/2013 - 07:51 | 3603045 hungarianboy
hungarianboy's picture

This is good news for the global economy. Let the rise continue. I have no problems with it.

Tue, 05/28/2013 - 08:11 | 3603074 maxmad
maxmad's picture

they will all fall on their Samurai sword!

Tue, 05/28/2013 - 08:16 | 3603078 GetZeeGold
GetZeeGold's picture



That was the old school.....this is the new school and no one is gonna do that.

Tue, 05/28/2013 - 09:24 | 3603235 knukles
knukles's picture

Krugman-o-Nomics at work for You

Ah its good to be in the hands of Kings

Tue, 05/28/2013 - 07:49 | 3603043 Motorhead
Motorhead's picture

Good morning again, bitchez!

OT - Larry Summers at Fed chairman?  Mother fuck me...but would we really be surprised?


Tue, 05/28/2013 - 08:01 | 3603061 buzzsaw99
buzzsaw99's picture

i support summers for fed head

Tue, 05/28/2013 - 08:11 | 3603071 philipat
philipat's picture

The other choices: Dudley, Yellen and Geithner. Hmmm, tough choice yes? We are totally fucked.

Tue, 05/28/2013 - 09:18 | 3603217 buzzsaw99
buzzsaw99's picture

if summers gets in there he will blow that shit sky high. if you want an end to the fed summers is the man for that job

Tue, 05/28/2013 - 09:26 | 3603240 knukles
knukles's picture

Why don't we just do Dudley and just be done with the farce.

Tue, 05/28/2013 - 07:52 | 3603046 NipponMarketBlog
NipponMarketBlog's picture



Amazing that the BoJ though it could control rates AND volatility....



Tue, 05/28/2013 - 07:52 | 3603047 ekm
ekm's picture

Panic, pure and simple.


Also, Japan central bank cannot do anything without coordinating with the Fed.

This is world panic.

Tue, 05/28/2013 - 08:17 | 3603081 Lost My Shorts
Lost My Shorts's picture

Hey, with all that fracking going on, burning water skis are probably more common than you think.  And with your water skis on fire, you will never see the turtle coming.

Tue, 05/28/2013 - 07:53 | 3603048 buzzsaw99
buzzsaw99's picture

capital ratios? raff my ass off. bankers are institutionalized, they can never fail, and their books are a sham. capital ratios? good one.

Tue, 05/28/2013 - 07:56 | 3603049 DormRoom
DormRoom's picture

All this easy money, and the reach for yield will transform sage capital allocators into capital misallocators, which is destructive in the medium, and long run for the economy.  But a presentism bias pervades Central Banks as authorities try to map economic cycles on top of election cycles.


We've already crossed the economic Rubicon given that most Central Banks are applying some form of QE.  Let the game of Empire play out.


Tue, 05/28/2013 - 07:56 | 3603052 ghengis86
ghengis86's picture

Does this island's fiat affect American Idol?
Does this Abe cunt print dollars or Yen?
Will my SNAP card get refilled in 4 days?
Can I get a 92 month NINJA loan for that $72,999 Escalade?


Murica, FUCK YEAH! We'll show those zipper heads how its done!


Tue, 05/28/2013 - 07:59 | 3603055 buzzsaw99
buzzsaw99's picture

you can't say zipperhead on here no more dumbass

Tue, 05/28/2013 - 07:57 | 3603053 Yen Cross
Yen Cross's picture

    How many U.S. banking arms does Japan have for Bernanke to POMO (oops) swap with, to buy JGBs. (ala Europe style to keep yields artificially low)

Tue, 05/28/2013 - 08:04 | 3603065 fonzannoon
fonzannoon's picture

Hey Yen why do European equities get to ride this euphoric wave when it is the fed and BOJ doing all the heavy lifting?

Tue, 05/28/2013 - 08:10 | 3603072 Yen Cross
Yen Cross's picture

    Because the Fed. and BoJ are stupid enough to lend/give European banks money to buy worthless PIGGS bonds. (keep yields low)  It's MAD(mutual assured destruction) Fonz. They all know if one block goes we all go.

Tue, 05/28/2013 - 08:19 | 3603082 fonzannoon
fonzannoon's picture

You think the BOJ pulls it off and smoothes out volatility?

FWIW one of my best friends is a real estate attorney. He said the last few weeks a lot of his clients who are purchasing are screaming bloody murder over mortgage rates going from the low 3's to the high 3's. The U.S ten year is the wirldcard in all this.

Tue, 05/28/2013 - 08:23 | 3603086 Yen Cross
Yen Cross's picture


    Are you referring to the 10 year JGBs Fonz?

Tue, 05/28/2013 - 08:28 | 3603091 fonzannoon
fonzannoon's picture

I'm actually referring to the 10yr U.S yields. I am positive that every JGB selloff triggers a selloff in the U.S 10yr and 30yr bonds via power reverse dual currency notes. So as JGB yields rise so will U.S yields. That will start wreaking havoc in the U.S real estate market.

My point being is the Bernak, should things continue, will have to explain why he is increasing QE as everyone ponders him tapering it.

Tue, 05/28/2013 - 08:41 | 3603107 Yen Cross
Yen Cross's picture

   Japanese yields follow U.S. yields, not the other way around Fonz.(in normal markets usd/jpy strengthens when T-10 yields rise,as it's taken as a signal that traders are moving into risk/equities)

   If Bernanke increases QE SWHF. People are catching on to Bernankes backdoor financing of the southern European bond markets.(Thanks to Tyler) Japan has a massive bond market, that dwarfs southern Europe. ( the amount of additional QE needed would be huge)

Tue, 05/28/2013 - 08:49 | 3603136 fonzannoon
fonzannoon's picture

This is reverse Lehman YC. By the way I meant Yen selloff, not JGB selloff. My bad. As the JPY weakens the hedging on the PRDC note duration needs to be reduced, which has dealers selling the long-end of the US treasury curve. If they Yen continues to slide it will cause U.S yields to go higher. I am curious to see how they get around this.

Tue, 05/28/2013 - 09:17 | 3603213 Yen Cross
Yen Cross's picture

    I'm not sure how much of an direct effect that would have on T-10s fonz. The Japs have about $1 trillion of U.S. bonds and I'm not sure what the duration profile is. The U.S. treasury market is huge.

Tue, 05/28/2013 - 09:35 | 3603270 fonzannoon
fonzannoon's picture

From my understanding, and I feel pretty good about where I am hearing this, the size of those currency notes are huge. Huge huge.

Tue, 05/28/2013 - 07:59 | 3603057 EclecticParrot
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So I sat down.  He asked me several things, but I couldn't answer, indeed I didn't even understand the questions.  So I said: "Perhaps you are sorry now that you invited me, so I'd better go." . . .

"Stay," he said, "that was only a test.  He who does not answer the questions has passed the test."

- F. Kafka

Tue, 05/28/2013 - 08:04 | 3603062 fonzannoon
fonzannoon's picture

"Which is why tomorrow, the BOJ has no choice but to "explain" to banks that they must all hang in there and nobody must sell JGBs, or everyone drowns at the same time"

They should have known that already.

Do the Japanese people have the 401(k) equivelant? This would solve a lot of problems.

Tue, 05/28/2013 - 08:05 | 3603067 philosophers bone
philosophers bone's picture

"The Japanese banks - levered to the gills with trillions of JGB - ... will crack first"...

What a bunch of rookies!!  B of J needs to take the trillions of JGB off the banks' balance sheet and put it directly on its own and then buy all of the new issues.  

Come on, this is so easy.

Tue, 05/28/2013 - 08:07 | 3603068 mayhem_korner
mayhem_korner's picture



Powder keg.

If the Chinese felt they had enough gold under wing, I could see them granting safe passage to a couple Japanese bankers in exchange for dumping a few Ytrillion of bonds.

Tue, 05/28/2013 - 08:09 | 3603070 maxmad
maxmad's picture

So when they have their failed bond auction, they can just claim that they forgot to take their pill

Tue, 05/28/2013 - 08:17 | 3603079 Yen Cross
Yen Cross's picture

    The Japs. are commiting Hara-Kiri again. Only this time they'll be falling on JGBs instead of swords.

Tue, 05/28/2013 - 08:19 | 3603084 Watson
Watson's picture

...the number of repo fails involving JGBs has exploded.

This is scare-mongering.

Fails doubled (which looks scary), but from 100 to 200 _per month_.
Which is not scary at all, and probably reflects nothing more than overworked back offices not-quite-coping with a sudden surge in JGB settlements.

Tue, 05/28/2013 - 08:24 | 3603088 asteroids
asteroids's picture

This smells like a "SOROS" like situation. Imagine someone using massive amounts of leverage to destabalize the Japanese bond market. Up/down up/down up/down, crack!

Tue, 05/28/2013 - 08:25 | 3603089 The big unzip
The big unzip's picture

I think the central bank is being run by kamikazes bankers,                             

Tue, 05/28/2013 - 08:51 | 3603144 SoundMoney45
SoundMoney45's picture

The BOJ is just doing what the BIS tells them to.  This is just another part of the circus.  


The Japanese bank's capital ratio's are fine, they will just change the rules to allow banks to mark JGB's to a convenient number and carry on.  Perhaps the BIS will get bored and order a Cyprus Template depositor haircut to spice things up.


Tue, 05/28/2013 - 08:47 | 3603129 chindit13
chindit13's picture

In the last few years a major foreign buyer of JGBs has been China, whose goal was not so much to diversify its holdings, but rather to keep a bid under the yen to better China's own terms of trade.  Though foreigners only own somewhere between 8-10% of the JGB market, I would guess that it is these guys, plus Mrs. Watanabe, who is selling now and causing the vol.  Many regional and major banks are nearing the point of being underwater on their JGB holdings now, both because of the rise in rates, and because they "crossed" their holdings with themselves at lower yields so as to produce realized gains to run through income statements or to make contractual payouts (pensions and insurers).  They are now stuck, because the last thing any Japanese financial entity ever wants to do is to realize a loss.  The BoJ doesn't really have to coerce them not to sell, but rather determine the price at which they would sell, which is higher than where the market is now. They might FIFO a few things out, but then they will be stuck.

Even if they sell their JGBs to the BoJ, it is unlikely they will make cash available in the form of loans, as few want the risk.  More likely the banks diversify into non-yen paper, which will be inflationary, which means Japan gets inflation before growth. I believe this is called stagflation.

The Nikkei, however, could still see a bid, partly because the government will be buying ETFs through the trust banks, and maybe because Goldman et al will find muppets who want to participate in the Japan "recovery".

Tue, 05/28/2013 - 08:53 | 3603158 MFLTucson
MFLTucson's picture

No problem, better to have mixed signals then lies!  lol!!!

Tue, 05/28/2013 - 09:10 | 3603202 suteibu
suteibu's picture

When did the BOJ ever have any credibility?  Perhaps a short period after the Asian flu of 1997 which coincided with the BOJ gaining more independence from political control.  Masaru Hayami was made governor in 1998 and became instantly controversial because he refused to print money until the government instituted financial reforms.  He lost the battle after the popular Junichiro Koizumi was elected PM and has been used as the whipping boy for Japan's problems since. 

It is ironic that Abe succeeded in taking control of the BOJ by threatening to end its "independence."

Tue, 05/28/2013 - 09:28 | 3603249 Tebow
Tebow's picture

Thats the funniest comment I've read in awhile!

Tue, 05/28/2013 - 09:50 | 3603334 shovelhead
shovelhead's picture



Tue, 05/28/2013 - 10:12 | 3603374 NipponMarketBlog
NipponMarketBlog's picture



Just to be clear, Mr and Mrs Watanabe barely own any JGBs outright themselves. They own them through their pension schemes such as the GPIF plus a myriad of others. The actual decision making with regards to whether to off-load JGB holdings is in the hands of very few people.

But nevertheless, mixed signals are almost better than no signals as all....



Tue, 05/28/2013 - 21:47 | 3605946 Stockmonger
Stockmonger's picture

These Japanese don't know economics 101.  Everyone knows that when you are at the zero bound, you can generate inflation and yields will remain pinned at zero.  There's no threat of rising rates.  The IS/LM curve sez so.

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