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Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands

Tyler Durden's picture




 

Back in October of 2014, when we explained what the BOJ's "shocking" QE expansion really meant, we showed a chart that showed the key aspect of Japan's shock and awe monetization: Kuroda is now monetizing 100% of gross bond issuance.

 

We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that "The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation."

We are almost one year after this forecast (and a little over two years left before 2018), and not only is Japan's economy not improving, but it just posted a negative GDP print for the second quarter, suggesting unless there is a remarkable comeback, Japan may suffer its fifth recession since 2007.

All of this was, or should have been, widely known.

But something that wasn't known, and that has "suddenly" become a very big problem for Kuroda, is precisely what we warned last year would happen sooner or later, and which is a major headache for both the Fed and the ECB: a lack of monetizable supply.

Yesterday, in a story detailing the holdings of Japan's second largest pension fund, "New Whale Seen Moving Tokyo Markets", Bloomberg reported that with Japan's massive $1.2 trillion GPIF "whale" pension fund having largely completely its rebalancing out of JGBs into foreign and domestic stocks (and pushing the Nikkei to 15 year highs in the process) "investors are looking at Japan Post Bank Co. as the next actor big enough to move markets."

Fair enough: "The bank owned 101.6 trillion yen in sovereign debt at the end of June, with the ratio falling below 50 percent of holdings for the first time."

 

This is where it gets interesting: as Bloomberg explains, "the Bank of Japan needs to find about 45 trillion yen in JGBs from the market to meet its annual goal for boosting money supply to stimulate the economy. Japan Post Bank, with 49.2 percent of its 206.5 trillion yen held in domestic debt, fits the profile and needs to seek higher profits ahead of a possible public share sale this year."

In other words while the BOJ is ravenously soaking up all debt it can find, it suddenly can't find any debt to soak up!

The punchline:

“GPIF sold massive amounts of Japanese debt and the BOJ absorbed it very quickly,” said Shuichi Ohsaki, a rates strategist at Bank of America Corp.’s Merrill Lynch unit in Tokyo. “So now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations."

Oops: reread the bolded sentence again because in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, "suddenly" pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan's QQE going.

The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ's going not only in 2016 but also 2017 and onward. The answer: less and less.

And this is where our warning from late 2014 comes in: by monetizing more than the entire Japanese budget deficit, the BOJ is running of out willing sellers. Without those, Japan's QE, just like that of the ECB, where gross supply is also a key issue for a continent with a trade surplus, will grind to a halt. Better yet, this creates a vicious loop, because with every passing month, the inevitable D-Day when the BOJ has no more TSYs on the offer gets closer, which in turn will force those who bought stocks to sell in anticipation of the end of QE, and to seek the safety of bonds themselves, in effect precipitating the next inevitable Japanese stock market crash.

Don't expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016's business. However, one thing is certain: the BOJ will not boost QE, and if anything will have no choice but to start tapering it down - just like the Fed did when its interventions created the current illiquidity in the US govt market - especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGB event for the market to realize just how little actual natural buyers and sellers exist.

It also explains why Kuroda himself is hinting that the future the of BOJ's easing trajectory may be limited: in a WSJ article yesterday we read that "recent economic data from Japan is stoking speculation that more easing measures could be on the horizon, but people close to the country’s central bank are playing down the need for such action."

The real reason why such "actio"n is being played down is not because the BOJ keeps missing its deflation mandate, which is now long forgotten, but simply because the BOJ knows very well, its hands are "suddenly" tied.

 

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Thu, 09/03/2015 - 11:03 | 6504281 JustObserving
JustObserving's picture

Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations

Just dump your JGBs and buy AAPL.  What could go wrong?

Kuroda may turn out to be a bigger disaster than Fukushima. Who needs Godzilla when you have Kuroda?

Thu, 09/03/2015 - 12:09 | 6504692 BetterOffDead
BetterOffDead's picture

Silly Tyler.  All they have to do is double the budget deficit, which doubles the number of bonds issued.  Problem solved.

Thu, 09/03/2015 - 12:24 | 6504765 Leopold B. Scotch
Leopold B. Scotch's picture

And you get to wear the Krguman hat for today!

 

I propose we are all given money printing presses to run in our basements.  Think of all the economic stimulation we could pursue!

Just stay out of the way of my helicopoter blades cuz I'll cut you down.

Fri, 09/04/2015 - 07:59 | 6508280 jonytk
jonytk's picture

it's called "warrateed social income" and some leftists partys in Europe are pussing for this minimun salary, because everyone is entitled to free money just for being a human being!

Thu, 09/03/2015 - 10:45 | 6504283 GMadScientist
GMadScientist's picture

Sanitize this nuclear waste while you're at it, Kuroda.

Thu, 09/03/2015 - 10:47 | 6504300 KnuckleDragger-X
KnuckleDragger-X's picture

Now this is truly nifty. Japan has painted themselves into a corner, I guess they need to call saint Krugman in for another seance with the ghost of Keynes.....

Thu, 09/03/2015 - 13:59 | 6505274 Ouagadoudou
Ouagadoudou's picture

Better call Schiller, he will be pleased to calculate an intrinsic value on the Nikkei ....

Thu, 09/03/2015 - 10:49 | 6504306 LawsofPhysics
LawsofPhysics's picture

Fuck it, allow everyone to monetize their own purchases/assets and use "mark to fantasy" accounting.

 

What could go wrong?

 

LOL!!!  Let me say it again, Global Wiemar motherfuckers!!!

Thu, 09/03/2015 - 10:58 | 6504350 The Carbonator
The Carbonator's picture

Global Wiemar +1

 

LOL

Thu, 09/03/2015 - 11:25 | 6504472 Syrin
Syrin's picture

Remember, it was "unexpected".  Who could have seen this coming, right?

Thu, 09/03/2015 - 11:46 | 6504558 Sages wife
Sages wife's picture

Global hyperinflation is inevitable.

Thu, 09/03/2015 - 13:16 | 6505046 angel_of_joy
angel_of_joy's picture

...Let me say it again, Global Wiemar motherfuckers!!!

It's actually Weimar, and it's happening already. If you don't believe it, go into your closest mall or grocery store and check prices. Then try to remember what were they like 1 year ago... or 2 years ago. Another exercise (a litle trickier) would be to remember how much was the gallon of Regular Gas, last time when the oil was at 50 bucks. We are going bankrupt following the exact sequence described by Hemingway: "gradually, then suddenly". It's just that we haven't hit the "suddenly" transition point yet...


Thu, 09/03/2015 - 10:49 | 6504311 youngman
youngman's picture

Talk about a Cental Bank that has gone beserk...Japan has one....very strange what they are doing and have done for 30 years now...just overboard....

Fri, 09/04/2015 - 15:11 | 6510686 HardAssets
HardAssets's picture

" Talk about a Cental Bank that has gone beserk...Japan has one....very strange what they are doing and have done for 30 years now...just overboard.... "

Japan doesn't have a central bank, the One Bank has Japan.

Thu, 09/03/2015 - 10:54 | 6504332 Crocodile
Crocodile's picture

This is an article to bookmark; for when this comes to pass...it will be something to remember.

Thu, 09/03/2015 - 10:55 | 6504335 g speed
g speed's picture

None can describe the boundles blessings that TBs, foreign held by countries that want to sell, can be.

Thu, 09/03/2015 - 10:58 | 6504348 Consuelo
Consuelo's picture

Like Japan does anything in this arena without 'guidance' from Big Brother Gaijin...

Thu, 09/03/2015 - 11:03 | 6504366 tommylicious
tommylicious's picture

Can someone please elaborate on the mechanics of this line: "the inevitable D-Day when the BOJ has no more TSYs on the offer gets closer, ". 

Thu, 09/03/2015 - 11:14 | 6504403 Ghordius
Ghordius's picture

the key word is credibility. the very moment the BOJ has bought up all TSYs, there is no further "classic" QE it can do, and so it is, in the new monetary journalistic parlance, "powerless"

the key fact behind it is that the most important thing about inflation/deflation is expectations

meaning that's it's people, be them consumers or CEOs or investors or savers that decide, in aggregate, if it's time to buy that equipment or not, do that investment or not, etc. etc. all based on their expectations

so this newfangled theory (because the case is unprecedented, to be fair) is that Mr. and Mrs. Japanese one day wake up and decide they will postpone all their spending/investments for next year, because prices will be way lower, etc. etc. because the BOJ cannot make further QEs

which is something that can drive sweat on the brow of CEOs and CFOs, and so on investors, etc. etc., being the dreaded "deflationary spiral" that lurks on the still waters of a liquidity trap

imo this whole theory is way too much based on the rationality of people to reflect reality, but we will see...

Thu, 09/03/2015 - 11:48 | 6504557 LawsofPhysics
LawsofPhysics's picture

Some purchases can be put off, others cannot.  So long as the human population is 7+ billion, deflation in anything required for a decent standard of living is a fucking myth.

Thu, 09/03/2015 - 12:46 | 6504886 armageddon addahere
armageddon addahere's picture

Not a MYTH, a POLITICAL ACCCOMPLISHMENT

Thu, 09/03/2015 - 12:48 | 6504895 tangent
tangent's picture

Countries with a lot of money now seem to have flat-lining populations, while countries with a little money have slowing growth.

Thu, 09/03/2015 - 13:08 | 6505014 tommylicious
tommylicious's picture

i thought they were referring to Japan selling US TSYs.  under what circumstance in the context of the article would BOJ do that?

Thu, 09/03/2015 - 11:12 | 6504373 Youri Carma
Youri Carma's picture

Japan braces for outbreak of gang warfare http://www.telegraph.co.uk/news/worldnews/asia/japan/11840788/Japan-braces-for-outbreak-of-gang-warfare.html

Coincidence or not I am just watching this Steven Seagal movie: Into the Sun (2005) https://en.wikipedia.org/wiki/Into_the_Sun_%282005_film%29

Hunter and Mac discover a plan by Kuroda, the new boss of a new Yakuza outfit, to build an enormous drug-dealing network with a Chinese Tong outfit leader named Chen (Ken Lo), and Kuroda is killing everyone who gets in his way.

 

Thu, 09/03/2015 - 11:08 | 6504391 B2u
B2u's picture

I called my Chinese friend, Ho Li Fuk.  He said "sum ting wong"....

Thu, 09/03/2015 - 11:15 | 6504415 Youri Carma
Youri Carma's picture

And I can speak a little Japanses Fuck Son!

Johnny "Guitar" Watson - Ain't That A Bitch! https://www.youtube.com/watch?v=3sYUthjyTb8

 

 

Thu, 09/03/2015 - 11:12 | 6504398 Irishcyclist
Irishcyclist's picture

Sense of panic is palpable. Given the regional central bank difficulties, I'm looking at you China and your CB, Japan is a bit further down the road in it's own Kamakazi CB policies than the Chinese are.

We're at the stage of trying to second guess which plughole willbe responsible for the implosion of the international capitalist systm.

If we survive to 2020, the international economic landscape will look very different to the one at September 2015.

 

Right now all we're doing is whistling louder as we walk beside the graveyard.

Thu, 09/03/2015 - 11:16 | 6504421 q99x2
q99x2's picture

Kuroda is a traitor and works for Lloyd Blankfein.

Thu, 09/03/2015 - 11:18 | 6504428 Herodotus
Herodotus's picture

The BOJ could always buy gold.  That is a monetizeable asset.

Thu, 09/03/2015 - 14:34 | 6505463 asteroids
asteroids's picture

Buy gold with what?

Thu, 09/03/2015 - 11:21 | 6504448 pebblewriter
pebblewriter's picture

Not a problem, they'll just put more money into equities. http://pebblewriter.com/japans-equity-trap/

Besides, the ONLY THING that matters is that the yen continues to decline.  They can obviously accomplish it without additional QQE, just a little harder to rationalize.

http://pebblewriter.com/the-yen-carry-trade-explained/

Thu, 09/03/2015 - 12:33 | 6504815 onewayticket2
onewayticket2's picture

other debts - public and private - current AND FUTURE.  

all bets have long been off....so why cant they start buying 'education vouchers' for everyone under 18.  pump the money into universities.  'Health vouchers' for everyone with a pulse.  (pump the money into hospitals).  Food vouchers for everyone with a pulse.  (pump the money into agriculture and food providers).   Heck, Hillary is already floating $350B in education "assistance"

 

point is....they can kick this can for a while longer.....no?

 

agree or disagree?

Thu, 09/03/2015 - 18:54 | 6506772 pebblewriter
pebblewriter's picture

Agreed. IMO, the BoJ has gone beyond the point of no return, and the FOMC and ECB aren't far behind.  I can't see them giving up now.  In fact, I see last week's fun and games as a deliberate effort to ensure that BoJ expands.

http://pebblewriter.com/an-offer-japan-cant-refuse/

Thu, 09/03/2015 - 11:42 | 6504538 Atomizer
Atomizer's picture

9075- TSE (Japan) Also traded in: Germany
Fukuyama Transporting Co Ltd

http://www.gurufocus.com/term/Long-Term%20Debt/TSE:9075/Long-Term%2BDebt....

Thu, 09/03/2015 - 11:57 | 6504607 Crabshacker
Crabshacker's picture

SUDDENLY.....UNEXPECTEDLY!!.....Now I'm laughing!!!

Thu, 09/03/2015 - 11:59 | 6504625 pound the vix
pound the vix's picture

So what is the best way to profit from this?  Buy gold in yen to take advantage of the inevitable devaluing of the yen?  the Japanese stock market seems to always go up the more insane the BOJ gets.

Thu, 09/03/2015 - 12:48 | 6504905 armageddon addahere
armageddon addahere's picture

We covered this a few months ago. The big boys have been borrowing gold and using it as collateral to play the Japanese stock market. This carry trade is now several years old (when did Kuroda promise QE to the moon?).

Thu, 09/03/2015 - 12:05 | 6504633 SweetDoug
SweetDoug's picture

'

'

'

I don't know much about black holes or finance at the level of this article. As for black holes, I don't need to: They really, really suck, so don't fly to close to them!

I think the same thing applies with this article.

We're augering in.

 

•?•
V-V

Thu, 09/03/2015 - 12:00 | 6504642 MalteseFalcon
MalteseFalcon's picture

THe BOJ is ground zero for all of the bogus economic policy of the last 25 years.

Thu, 09/03/2015 - 12:07 | 6504681 scatha
scatha's picture

What's really showing the absurdity of this whole incessant financial system is the fact that in order to continue their insane QE they need to threaten the hike of the interest rates prompting the dumping of the bonds. Or they will have to buy all the garbage that is out there. In extreme they may even threaten those who refuse to sell.What a idiocy. 

This is most clear case of the failure of the so-called markets, destroyed by one dominant, unable to fail, market player such as and CB playing upon its extreme moral hazard to concentrate the wealth and destroy the market and its market participants i.e. treated as competitors.

The CBs devour markets and economies and kill money circulation.

More on that can be found at:

https://contrarianopinion.wordpress.com/economy-update/

and about japanese economic miracle at:

https://contrarianopinion.wordpress.com/2015/02/20/japan-miracle-that-wa...

Thu, 09/03/2015 - 12:29 | 6504793 Oldballplayer
Oldballplayer's picture

The answer: less and less.

 

Isn't the answer fewer and fewer?

Thu, 09/03/2015 - 12:43 | 6504868 Free_Spirit
Free_Spirit's picture

Maybe they will just helicopter money down to the people.

Thu, 09/03/2015 - 13:14 | 6504928 tangent
tangent's picture

Would not the BOJ simply find something else to buy? Say, corporate bonds for example.

Thu, 09/03/2015 - 14:13 | 6505333 Jethro
Jethro's picture

Financial seppuku....all the death, none of the dignity.

Thu, 09/03/2015 - 14:22 | 6505402 kchrisc
kchrisc's picture

The poor Japanese. Since 1989 they have been slowly plundered by Zion, and will end up slaves of China.

Sad.

Zion is a scheme, not an ethnicity.

Thu, 09/03/2015 - 17:15 | 6506322 Bertie Wooster
Bertie Wooster's picture

Thesis doesn't make sense.  IF QE > deficit causes this problem, THEN increase gov't spending.   Very simple solution, and another form of QE, albeit in a FDR-type format.

So whether 3 months or 3 years, the Jap Gov't can simply initiate spending programs, dams, Fukishima Nuclear River Valley Authority, sending people to their deaths at high weekly pay to cleanup contamination, flying cash helicopters from Mt Fuji, giving away Fuji film, whatever...

The spending can ALWAYS continue until the deflationary cycle is over.  And when it's over, THEN you have the problem, which isn't a lack of JGB supply, but a lack of sane pricing.  With oil and every other commodity at 100-year-storm lows, we're not there yet.

So frankly, this whole thing mentioned in this article is currently a non-event.

Thu, 09/03/2015 - 17:42 | 6506430 Herdee
Herdee's picture

All the talk in Japan about creating inflation is just plain horseshit.When they no longer have the confidence of the market that they can hold it together,interest rates will rise and rise rapidly.Somewhere between as low as 2.5% to 3.0% and they can't even make the interest payment on the gigantic debt load.It's just a question of time until the monetary reset happens at the IMF,a few years at the most.Extend and pretend and bullshit the general public is the name of the game.All western governments and China are insolvent.

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