Mutiny At The BoJ: Board Member Warns Of "Dire Consequences"

Tyler Durden's picture

There’s trouble in Keynesian paradise. 

Earlier this week we noted that economist (and former BOJ member) Yuri Okina has become concerned about the destabilization of the government bond market occasioned by Japan’s move to monetize all of JGB gross issuance. At issue is a lack of liquidity which in turn inhibits price discovery and promotes volatility. We also noted that while this exact same dynamic is unfolding in the US (as shadow banking liquidity dries up), Japan is probably the most vulnerable to violent swings in government bond yields: 

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.

We saw evidence of this just one day later when the monthly auction for JGB 10s was weak causing yields to jump. That same day, Abe adviser Etsuro Honda expressed further doubts about the utility of additional easing, saying (basically) that the BOJ should just quit while it’s ahead (or while it’s not as far behind as it would be if continues to double and triple down on the ponzi scheme). 

Today, courtesy of Takahide Kiuchi (who voted against the latest round of QE), we get perhaps the strongest rebuke of Kuroda-style easing yet, as the BOJ board member warns of “dire consequences” if the central bank continues to blatantly disregard the “side effects” of its policies. 

What side effects you ask? Why, the very same illiquidity and volatility that we’ve been pounding the table on for years. 

From Dow Jones: 

Mr Kiuchi said if the bank continues with the current program, which absorbs nearly all of newly issued government debt, the market will see a drop in liquidity--the ease with which investors can buy or sell bonds when needed. Should liquidity fall, "there is a risk interest rates will rise sharply if some incident or event happens.” (ZH: We assume this “incident” or “event” is akin to the “accident” that the CFS predicted in its report on the steep decline of market financing)

"There is a possibility that (the BOJ) would suddenly become unable to buy" its targeted amounts of bonds through market operations, he said. That would call into question the future course of the bank's policy, possibly causing "considerable confusion" in the market, he said.

For his part, Kuroda called the notion that demand for JGBs would dry up “very unlikely.” 

Kiuchi is also skeptical about the ability of further asset purchases to boost inflation and even went so far as to suggest that the BOJ’s prediction of 2% inflation by mid-2016 is nothing more than a fairytale.  As the following chart shows, he is almost certainly correct as the central bank’s previous efforts haven’t had the best track record when it comes to changing inflation expectations…



...which is entirely consistent with what we’ve seen across the globe…

More from Kiuchi: 


...and from Reuters

The Bank of Japan should give itself more time to achieve its ambitious price target, board member Takahide Kiuchi said, warning that an appropriate level of inflation forJapan is currently lower than the bank's 2 percent target.


The remarks by Kiuchi, who has long been skeptical of the central bank's radical stimulus program, contrast with Governor Haruhiko Kuroda's conviction that Japan is on course to meet the inflation target during the year beginning in April.

Kiuchi repeated his calls for watering down the two-year timeframe for meeting the inflation target, warning that Japan will see prices rise only gradually given the economy's low growth potential.


"Inflation may reach 2 percent at some point in the future if, as hoped for, structural reforms progress and boost Japan's growth potential," the former market economist told business leaders in Maebashi, a city north of Tokyo, on Thursday.


"But it's important to guide policy based on the understanding that an appropriate level of inflation for Japan now is lower (than 2 percent)," he said.

*  *  *

We have long known that the BOJ has all but lost control in the market. Now, it would certainly appear that it is losing control of the narrative which, when one is playing a confidence game, is the worst thing that can happen. 

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Carpenter1's picture

So, issue more bonds? As if Japan wouldn't LOVE to do that. What am I missing?

Cognitive Dissonance's picture

In ten years time it will be obvious what went wrong and why. The only real question remaining pertains to the shape of the world ten years hence. I suggest we might be further down the rabbit hole to hell and the expected re-set will not heal all wounds.

MarketAnarchist's picture

september this year. The Shemitah.

A Nanny Moose's picture

Question: With all the info gate keepers out there; when TPTB warns of "dire consequences"

Form whom is the "warning" meant?


Tall Tom's picture

Both you and I and all not in the club.


Just what do you think that a collapse will do to the bulk of humanity?


When one writes of dire consequences he is not considering himself as the target...although he needs to be.


Retaliation will be both brutal and ENDURING. They will suffer long before they perish.

BrosephStiglitz's picture

More bonds = Higher interest premiums if bought = more pressure to seize assets or inflate.  However, more bond issuance to anyone of consequence is unlikely*, because unless the BoJ starts going around holding a gun to CFO's heads (or Japanese households) nobody is going to purchase a debt obligation with a high probability of default.

The only way (at this stage) that bond purchases might be viable, is if they open their bond markets to some particularly stupid clique of foreign investors. 

Maybe Japan can start a kickstarter fund. Bond issuance for promises of glow-in-the-dark sushi. 

*I mean, yes they will issue bonds to keep the facade going, but my bet is that a very low percentage are being sold to anyone other than the proxy institutions of the government. 

Falconsixone's picture

30yr. cancer bonds for the children. aaah .... that's nice

RaceToTheBottom's picture

I'll buy yours if you buy mine...

Grown up oligarchs playing doctor.



leveler001's picture

This is bullish for us stocks

remain calm's picture

Do you think Kyle Bass has any blood flow going to his brain at this time?

lesterbegood's picture

Called being between a rock and a hard place.

MrTouchdown's picture

There is a very old Japanese tradition that important decision makers would do when they failed completely that Kuroda should revisit. If he doesn't own a sword, I will gladly lend him a butter knife (I don't have a sword either).

FieldingMellish's picture

I have a rusty meathook that I was saving for just such an occasion. I'll even help him do the honors.

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) MrTouchdown Mar 6, 2015 7:23 AM

Modern Banker suicides are comminted with nail guns and three shots to the back of the head. Get up with the times.


Look to the US political class for an example of "devoid of any honor" .  

andrewp111's picture

Why even go through the farce of borrowing at all? The Japanese Treasury should just create Yen directly in order to spend in excess of receipts.

yogibear's picture

With Japan already in the process of destroying itself with the Federal Reserve's Abeonomics  they may go before Draghi takes down the European union.



TeraByte's picture

The amazing power of printing press has put all the other religions redundant. Heaven on earth is already here with unlimited digital capabilities. Buy now indulgencies from the Holy Mother Church of Central Banks and you are saved.

Batman11's picture

Central bankers are getting too big for their boots.

Investment bankers are supposed to rig markets not central bankers.


Last of the Middle Class's picture

The world supply of musical chairs gets a little smaller as QE fades. Good luck there Japan.

Fukushima Fricassee's picture
Fukushima Fricassee (not verified) Mar 6, 2015 7:26 AM

Japan should start selling treasuries immediatly and buying gold hand over fist. They should dump the USA kick Obama out and invite China to take over thoses Military bases. That might save them.