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"Unprecedented" JGB Supply/Demand Imbalance If Inflation Stays Muted In Japan, Morgan Stanley Says

Tyler Durden's picture




 

Another day, another sign that all is not well in the Land of the Rising Sun. It was just yesterday when we noted that BoJ’s number two Hiroshi Nakaso suggested that a prolonged slump in oil prices (which, as we explained earlier, seems likely) would be a good enough justification to ease monetary policy further. This came on the heels of a survey (conducted by the BoJ itself) which showed that nearly two thirds of dealers were having “some or a lot” of trouble filling orders for JGBs with the central bank in the market for the entirety of gross issuance. 

On Tuesday, the BoJ — whose governor last week called the possibility that the market would eventually question the central bank’s credibility “very unlikely” — conducted a “liquidity enhancing” auction of around $2.5 billion in 20-, 30-, and 40-year bonds and the results were, well, bad as the bid-to-cover fell and yields rose, with the 10-year hitting its highest level since November.

With liquidity drying up, bid-asks getting wider, and everyone from dealers to current and former BoJ officials expressing extreme consternation about where this is ultimately headed, here’s Citi to explain why, if anything, the BoJ will likely increase the amount of JGBs it’s willing to purchase: 

Declining liquidity in the market is prompting investors to estimate the deadline for QQE, possibly caused by a lack of sellers… 


The consumption tax is expected to be hiked to 10% in April 2017, so it would be very difficult for the BoJ to exit from QQE after the summer of 2016 when the tax hike will be in sight. If the Bank failed to unwind the policy before that we think it is very likely to continue QQE until the impact of the tax hike is clear in later 2017, making it difficult to normalize the policy before the end of governor Kuroda’s term in March 2018. In that sense, the de facto deadline should be in the middle of 2016, so the Bank is likely to ease further especially if core CPI growth turns negative. Given that the practical deadline will come in less than 1.5 years, we think there is still room to increase JGB purchases, although we expect the Bank to enhance the lending support program by possibly doubling the maturity from the current 4 years.

… and more from Morgan Stanley…

Our economics team expects Japan's core CPI inflation rate to start rising from this spring, reach around +1% by the end of this year, and then climb towards around 1.7% into FY2016. This is not currently the market consensus, at least according to market pricing, but if such a trajectory does start to be considered more likely, then the resulting upward pressure on interest rates could help BOJ operations to go quite smoothly. Conversely, if inflation expectations remain muted, then the amount available for purchase by the BOJ is liable to be largely exhausted during the next 1.5 to 2 years, at which point supply/demand may tighten to unprecedented proportions. 

 

Of course we’re already beginning to see the malicious effects of tight liquidity in government bond markets (look no farther than October’s Treasury flash crash) and one can only imagine what sort of dislocations will materialize should supply/demand tighten “to unprecedented proportions.” As far as inflation expectations go, we would have to agree with BoJ dissenter Takahide Kiuchi who last week suggested that 2% is not around the corner

 

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Tue, 03/10/2015 - 22:56 | 5876336 Cognitive Dissonance
Cognitive Dissonance's picture

Remember the good old days when everyone in the world was singing the praises of Japanese......everything.? From manufacturing to finance to social order etc.

Wasn't it just a few decades ago when the Emperor's Palace was 'worth' more than the state of California? At the rate Japan is going with their money printing, soon enough the Palace will be 'worth' more than the rest of the 1st world nations.

Tue, 03/10/2015 - 23:12 | 5876426 taggaroonie
taggaroonie's picture

Ha! California is a negative asset. My '94 Honda Accord is worth more.

Tue, 03/10/2015 - 23:38 | 5876490 Cognitive Dissonance
Cognitive Dissonance's picture

Mom? Is that you? Are you still driving around in that old rust bucket without a license? Arnold The Governator is gone mom. Please come home now.

Wed, 03/11/2015 - 03:49 | 5876706 NidStyles
NidStyles's picture

In a few years that Accord will be worth more than most cars on the road. Merely because it will still be running.

Wed, 03/11/2015 - 01:07 | 5876593 thetruthhurts
thetruthhurts's picture

Ha! I remember telling people that my company (of two) was more profitable than Delta Airlines (when they were losing millions) and I was making thousands.

Tue, 03/10/2015 - 23:15 | 5876445 That_shits_broken
That_shits_broken's picture

Get to work! Mr. Yellen.

Wed, 03/11/2015 - 01:27 | 5876610 ThirteenthFloor
ThirteenthFloor's picture

"Prolonged low oil prices is justification for more monetary easing"

That f'in logic defines completely what is wrong today, some so called banker says and the moron millions believe it.

When global economy implodes from these con artists we'll be left with a shit hole. What a ship of fools !

PS Japan produces no oil, a net importer lower oil $$ help their economy.

Wed, 03/11/2015 - 05:29 | 5876763 franciscopendergrass
franciscopendergrass's picture

Central bank logic: did someone say lower prices?  Oh, it's time to print more money, accumulate more debt and lower interest rates!

Wed, 03/11/2015 - 01:57 | 5876644 teslaberry
teslaberry's picture

this is how zen and other spiritual mumbo jumbo was used to justify the japanese conquest of china in ww2. 

a nazi loving japanese 'sage'. 

http://en.wikipedia.org/wiki/D._T._Suzuki

 

this man was largely responsible for helping to bring an existential transcendent version of zen to the west, one which was very much critcized by traditional eastern buddhist practicioners, even many zen priests were critical of this nazi lover. 

 

the nazi's are strong on zh, their tribe is  lately spewing hatred for all things jewish as usual.

 

fuck you nazis!.  

Wed, 03/11/2015 - 03:53 | 5876712 NidStyles
NidStyles's picture

I think it's funny to read about people comparing NAZI's to Zionist haters. It tell's me that you don't know that the majority of Socialist philosophers were in fact Jewish and Zionist.

Wed, 03/11/2015 - 05:35 | 5876764 franciscopendergrass
franciscopendergrass's picture

you have to be socialist to support Israel.  how else is Israel suppose to survive without the redistribution of the wealth of Americans?  How else is Israel to survive without the redistribution of wealth to support a large military and conscrIption?

Wed, 03/11/2015 - 04:03 | 5876719 Terp
Terp's picture

He was supportive of the german government because his german relatives told him how much at peace they felt in 1936.

He also conceded that the expulsion of the jews, while regrettable for the individual, was a net positive for the german population.

 

That makes him a bad person how exactly?

 

You hasbara fucknuts are really lame. Or maybe you´re just ignorant, in that case run along bub.

Wed, 03/11/2015 - 07:20 | 5876837 hedgiex
hedgiex's picture

kami kaze CBs in full control of the flights in the currency war (escalating by the days).

 

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