Since we live in a connected world, in which the central bank "Flow" must, well, flow, one emerging line of thought is that with the Fed set to taper (even by a modest $10 billion per month driven by Treasury market liquidity constraints where the Fed is now monetizing 1% of the entire bond market in 10 Year equivalents every three weeks), the BOJ will have to step in and boost its own monetization by a comparable amount. And as we noted in November [8], speculation that the BOJ will do just this set off the latest Yen crushing move, which has seen the EURJPY surge higher by a massive 1000 pips all but pricing in any BOJ moves for 2014. However, to be able to do this, Japan will need to provide its central bank with the capacity to monetize as many Treasurys (or more) as possible: after all, Japan like the US is already soaking up a record 70% of all gross issuance.
And Japan is ready to comply: as Reuters reports [9], in the next fiscal year, Japan's budget will exceed 96 trillion yen, or about $930 billion. With Japan's GDP standing currently shy of half a quadrillion Yen (not to be confused with Japan's debt load which is now over the one quadrillion mark), it means the budget will be about 20% of the country's entire economic output.
More from Reuters:
The government is in final negotiations on the general-account budget for the year from April, which will exceed 96 trillion yen ($931 billion), the sources told Reuters on condition of anonymity.
The draft budget, to be approved by Prime Minister Shinzo Abe's Cabinet on December 24, will be up from this fiscal year's initial budget of 92.6 trillion yen.
Abe, elected a year ago Monday, has used heavy government spending as one of his main tools in a bid to end 15 years of deflation and sluggish growth for the world's third-biggest economy. But with public debt of more than twice the size of the economy, Abe also aims to balance the budget over time, starting with a sales-tax increase next April.
With an economic rebound and a tax increase, tax revenues next fiscal year are tipped to clear 50 trillion yen, a seven-year high, while bond issuance will decrease from this year's 42.85 trillion yen, the sources said.
So while the total spending framework has already been set, it remains to be seen if and how much tax revenues will indeed pick up providing the funding for about half of the spending needs. And if they don't, so much the better: it means debt deficit-funding will only rise, giving the BOJ even more dry powder which to monetize and flood the global system with even more excess reserves.