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Japan Approaches Limit To Bond Buying Former BOJ Official Okina Warns
A day after we highlighted the veritable collapse in U.S. shadow banking liquidity (down by nearly half since 2008) occasioned by a potent one-two punch from Fed bond purchases and regulatory measures designed to stem prop trading (but which have apparently impaired market making), we get rumblings out of Japan that the BOJ might have hit the limit on how many JGBs it can purchase without breaking the market. Specifically, Yuri Okina, vice chairman at Japan Research Institute, is concerned about the exact same issue raised by the Center for Financial Stability in their report on the “steep slide” in market finance: namely, that the absence of liquidity created by QE will create distortions and volatility.
From Bloomberg:
“If additional easing is done using government bonds, it may have the considerable side-effect of impairing the functioning of the market,” Okina, an economist and a former BOJ official, said on Feb. 26 in an interview in Tokyo.
The BOJ’s purchases have had a “huge” impact on the market’s liquidity, Okina said. Buying bonds at a faster pace would make it more difficult for the BOJ to exit from its easing policy when the time comes to reduce stimulus, she said.
Clearly there’s something self-evident (even tautological) about this discussion. That is, the BOJ is set to monetize all JGB gross issuance in 2015 (and may own 50% of the entire market within three short years), so yes, there are likely to be rather serious issues with market liquidity going forward.
What’s especially perturbing about this scenario, is that sapping liquidity from the market has the potential to create enormous volatility (as we saw on October 15 of last year when Treasurys staged a six standard deviation move in the space of a few hours), something the pot committed BOJ simply cannot afford lest the house of cards should come cascading down. In other words, if yields on JGBs become increasingly unwieldy because either traders lose confidence in the central bank’s ability to manage the ponzi or a lack of liquidity triggers excessive volatility (or both), it’s game over or, as BlackRock put it: “...the nightmare scenario would be a spike in JGB rates leading to a fiscal crisis.”
Given this, it doesn’t inspire much confidence that the BOJ’s actions are curtailing price discovery. Here’s Bloomberg again:
Primary dealers responsible for distributing JGBs to investors told the government in November it was getting harder to determine prices because net supply was low.
...and with no price discovery comes volatility:
Yields on benchmark 10-year Japanese government bonds fell to a record low of 0.195 percent on Jan. 20 before swinging to a two-month high of 0.45 percent on Feb. 17. Historical volatility for the past 30 days touched a 21-month high of 4.56 percent on Feb. 25.
Just as the SNB finally buckled in January, and just as the ECB faces the prospect of failing to deliver on its trillion euro Q€ promise, the BOJ could be nearing the dreaded inflection point where the market realizes once and for all that the emperor truly has no clothes. A few more auctions like last month’s 10- and 5-year sales could well accelerate the process -- this month's 10-year auction is tomorrow.
* * *
In related news, the SEC's Daniel Gallagher said today that regulators aren't doing enough to mitigate the risks posed by an increasingly illiquid corporate bond market. As we noted yesterday, the unwillingness of primary dealers to hold inventories has, to use the CFS's terminology, created a situation where "an accident" is likely.
More from Bloomberg:
Lack of liquidity in corporate bond market is “systemic risk” not addressed by regulators, SEC Commissioner Daniel Gallagher says in public remarks.
Gallagher cites 80% decline in corporate bond inventories among dealers and impact of higher interest rates on future trading needs; “that has accompanied a record level of issuance year after year since 2008 of $1 trillion-plus of corporate debt”
“I would submit to you that the lack of liquidity in our securities markets is a systemic risk,” he says at conference sponsored by Institute of International Finance.
...and a bit more from BofAML for good measure:
Historically, dealers provided liquidity by buying bonds when investors wanted to sell, selling bonds when investors wanted to buy and by holding sufficient inventory level.
Onerous capital charges imposed on many securitized products has resulted in shrinking dealer balance sheets, less competitive bids for bonds unless buyer is already lined up.
“While this has reduced trading flows and muted spread volatility over the last year or so, it potentially sets the stage for a significant volatility spike if an event, such as the downgrade of the U.S. long term debt in 2011, was to occur and the markets broadly entered risk-off mode.”
To extent dealers unwilling/unable to step in and provide liquidity, spreads will need to widen until they hit clearing levels attractive enough for other investors to step in.
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They are banksters. They lie no?
when the time comes to reduce stimulus...
LMFAO !!!!!!!!!!!!!!!!!!!!!!!!!!!
Printing out of thin air, interest rate suppression, and currency debauchery will go on until the end. There is no turning back.
Yep. The U.S. is nearly two decades into "easing" and you see how easy it is to end.
Help me out with this one ZH ... if the BoJ is buying (literally) everything in the bond universe, how exactly do rates go up? As long as they can bid them, they can control the rates.
I think the more relavent point is there is nothing left for any other banks/traders/investors, who are forced it god-knows-what kind of investments (which may have rate volatility - due to the absense of the BoJ). Should that happen, why not monetize that shit too? Like they give a flying fuck ...
At any rate, help me with the mechanics for how rates actually go up while this bid-monster is on the loose ...
Regards,
Cooter
If that were the case then every country would just print a gazillion bonds, buy them, and spend them so everyone could live in utopia.
Think about it, eventually the currency is going to get crunched. That is Yen 120 to 140 to 200 to 400 to 1000. Eventually rates go up.
Oh, I know it won't work and I know the outcome isn't good, but I like to be able to follow the mechanics all the way through. As long as they can keep buying the bonds, they can hold rates down.
But what you are point out is that eventually traders/banks/investors/citizens want to walk away from the *currency* at which point it isn't so much a rate move as it is a currency collapse (i.e. they can keep rates down, but no one wants the currency).
Hell, rates may not even matter at that point.
Regards,
Cooter
Rates won't go up, Cooter. Eventually, the currency will go to hell, and they will be forced to raise rates or starve.
Probably would have happened already, if there were not so many countries in worse shape.
When the human race has finally finished racing and we're all gone, only our debt will be left to indicate we were ever here. Cities crumble to dust, even the great pyramids turned back into sand from whence they came. But the debt will live on. Our greatest legacy.
"...make it more difficult for the BOJ to exit from its easing policy when the time comes to reduce stimulus..."
They have been trying shit for 25 fucking years now, why the worry about reducing stimulus now?? LMFAO!
Are you talking about the Japanese Starving Ritual?
http://www.strangefeed.com/japanese-starving-ritual/
I never knew any religion where suicide is condoned. Interesting.
Now, what will the Japanese do when all the food is radioactive? Or, more than it already is?
Either rates go up or the currency goes down. There really is no alternative. BOJ wants the currency to go down. I'm guessing they get their wish. But once the yen starts dropping in earnest (a la Zimbabwe), there is no way they can suck all that worthless paper back up again.
There will b no end net nuetrality going to make these kinda discussions disapear and we will never again know about easing or debt levels it will be all ok so gobble up the news now my fellow ZH ers cause soon all our news sites will be decllared untruthfull sites by ggogle and blocked lets hope we are not picked up and sent for re education but you know what I think is they can stick their re education up there ass
it isnt really to end our noise, but when they want to make a big lie, they dont want us all to out it immediately. And they have a whopper or two or more to throw our way soon !
Buying bonds at a faster pace would make it more difficult for the BOJ to exit from its easing policy...
Exit haha!!!
Exactly. ONE HALF of Japanese government revenue, comes from the issuance of these NEWLY PRINTED BONDS. n Japan is a total scam. They have no way out but to default.
Yeah, when it's time to reduce stimulus. That should be around the 15th of never.
How long has Japan been stimulating? 20 years?
Always.
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If you broke it, quit fixing it.
easing isn't going to happen. never, the countries printing will print until FORCED to stop.
at this point, i find it sad, but the united states is hoping to start a big war, they are just trying to find two suckers out there to punch each other out, so in the end, the us can come in (just like ww1 and ww2, what a surprise) and mop up the dead and claim to be 'winners'.
the wars we 'lost' - korea, vietnam, iraq, afganistan (i missed a few) - those were simply about spending tax money on MIC for their profit.
this time, they need a big one. an really big 'please mr. big fcking USA, come and save us from ourselves and the horror', a game changer globally. that will start to wipe out debt, will also strenthen the dollar when possibly japan exits from existence on the planet. or russia and europe really start to rub some elbows again.
overall, they like to plan 100 years ahead, and HAVE done that in a few ways. What seems like stumbleing is very fine(?) acting.
At first I thought this meant Japan 'wouldn't be ABLE" to buy bonds and I was going to ask if Belgium was interested lol.
Possibly one of the biggest jokes of 2015:
"....impairing the function of the market".
The time to exit stimulus will never come. It is the zero interest rate trap written about by many.
Amazing what they can accomplish with just words.
Just to cap it off - Since July '11, Japan has also purchased $346 billion in US Treasury debt to the Fed's $800 billion over the same time. funny thing is Japan did this while running huge trade and budget deficits making you wonder...if Japan had to use all their dollars to buy energy, etc. in the post nuclear shutdown...where did all the dollars come from to buy US Treasury's that could only be bought w/ recycled dollars???
http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-6-debt.html
Ham: I've often wondered this myself! And I laugh my ass off everytime I see the Yen referred as a "safe haven" currency.
They buy that with Janet money, not their own....swaps
exit? what exit?
I hope Japanese pensions are smart enough to use this opportunity to run for the door
Rimit Bond Buying by Centro Bank? Yu Tu Funny round eye.
ok. no problem. he who panics first? https://www.youtube.com/watch?v=vWz9VN40nCA
2015 finals of the global seppuku competition.
So you are talking bond bubble.
Here are 2 bubbles that slipped by.
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
Thanks