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The Bank Of Japan's Liquidity Crisis In One Chart

Submitted by Tyler Durden on 04/01/2015 07:39 -0400

It’s by now no secret that the Bank Of Japan’s mammoth QE effort is creating distortions in the JGB market where the central bank is on a mission to monetize the entirety of gross issuance. A lack of liquidity (which three fourths of dealers see but somehow Governor Kuroda does not) creates widening bid asks which in turn inhibits price discovery and creates volatility. As we’ve said on a number of occasions, this is very, very bad for the BoJ as a sustained spike in yields could quickly deteriorate into a fiscal crisis as the entire ponzi scheme collapses on itself (don’t take our word for it, BlackRock said the same thing). Indeed it was just last week that JGBs suddenly collapsed as yields blew out on surging Treasury yields and disappointing economic data.

But if you needed further proof that asset purchases are sapping liquidity, look no farther than the following chart from BofAML which shows bank JGB trading volume:

Here’s BofAML to elaborate:

A key indicator of that will be the trading activity of the city banks. Liquidity has become the hot topic after the BOJ's recent release of the results of its bond market survey and a working paper on JGB market liquidity, and the decline in city bank trading activity in the JGB market can also be seen as evidence of a decline in liquidity. The JSDA says that the city banks had a monthly trading volume in coupon JGBs of around ¥27trn up until the implementation of QQE in April 2013, but that dropped to a monthly average of ¥11.8trn in FY2013. Trading activity recovered in FY2014, and the monthly average trading volume was ¥24.7trn up until the BOJ expanded QQE in October. However, the monthly average dropped sharply again from November to around ¥7.5trn. When trading volumes decline, there can be a sharp increases in volatility. Although the city banks are unlikely to increase their JGB holdings when the new fiscal year begins, they are also unlikely to abandon the JGB market. We expect they will return to the market in some form, but the high level of volatility is keeping investors away, and the risk of further raising volatility should probably be a concern. There is a possibility that another additional easing or a change in policy by the BOJ would again increase the risks. On the other hand, one of the aims of QQE is to encourage investors to leave the JGB market and invest instead in loans and/or risk assets. The time may have come to seek a solution to the drop in liquidity that is a side effect of the BOJ's large-scale JGB purchases.

* * *

Meanwhile:

KURODA: BOJ EASING WON'T CONTINUE AIMLESSLY

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Wed, 04/01/2015 - 07:48 | 5947887 NoDebt

Obviously, they need to run much larger deficits and issue far more JGBs to restore liquidity in the market.

- Paul Krugman.

Wed, 04/01/2015 - 07:51 | 5947891 Headbanger

Liquidity?

You mean like, water from the toilet??

Wed, 04/01/2015 - 07:53 | 5947893 Cognitive Dissonance

Our house cat would approve.

Wed, 04/01/2015 - 07:58 | 5947897 Headbanger

And for the idiots who haven't seen it:

https://www.youtube.com/watch?v=-Vw2CrY9Igs

And Amazon has gone fuller retarder-er today as well:

http://www.amazon.com/

Wed, 04/01/2015 - 08:17 | 5947917 negative rates

Kudos to kuroda for promoting blind injustice.

Wed, 04/01/2015 - 08:19 | 5947931 max2205

Lube quidity

Moar lube, we're all dry down there

Wed, 04/01/2015 - 07:59 | 5947894 GetZeeGold

You mean like, water from the toilet??

No....from the heavens....but....

I don't think the heavy stuff is gonna come down for quite a while...

https://www.youtube.com/watch?v=r95a3p8Os-w

Wed, 04/01/2015 - 09:49 | 5948304 Mr. Bones

I've never seen new growth come out of the toilet.

Wed, 04/01/2015 - 07:53 | 5947892 Cognitive Dissonance

KURODA: BOJ EASING WON'T CONTINUE AIMLESSLY

Clearly an improvement of random walk theory.

Wed, 04/01/2015 - 07:54 | 5947895 madbraz

"yields blew out" , "surging treasury yields"

what is this? CNBC?

Wed, 04/01/2015 - 08:08 | 5947905 Cognitive Dissonance

Economic sex talk. Apparently they get off on it. Whatever floats their boat.

Personally I think they are some kind of deviated preverts.

Wed, 04/01/2015 - 08:06 | 5947907 pashley1411

Its obvious. Having turned the market into an artificial, plastic, creation; they now need to make up artificial participants in the market. Buy, sell, write articles, make trading recommendations.

Before abolishing the market entirely. After all, its not a "market" if there is no real exchange going on.

Wed, 04/01/2015 - 08:10 | 5947910 Quinvarius