One of the conventionally accepted "truths" (as wrong as they may end up in retrospect) for 2014 is that in addition to the ECB eventually commencing Fed-style QE (and if it doesn't, anyone holding peripheral bonds at these idiotic levels - watch out), the BOJ will launch an expanded dose of bond monetization as soon as April (certainly not last night, despite what some were expecting) maybe because so far Abenomics has failed to boost wages for 18 consecutive month, maybe because the coming sales tax hike is sure to crush any fleeting nominal economic gains, or maybe energy import prices just aren't stratospheric enough yet and those record monthly trade deficits could be... record-er. So yes: a new QE may or may not happen, but in the meantime, a new development is emerging: Japan is near the limit for the bond buys it can do under its current mandate.
As Japan Times explains [17], the BOJ bought ¥6.8 trillion worth of sovereign notes in December, the least since it boosted the program to more than ¥7 trillion a month in April, data compiled by Totan Research Co. show. The buys may slow further to avoid exceeding the average annual target of a ¥50 trillion increase in the BOJ’s holdings for the year, said Tokai Tokyo Securities Co. and Totan, a Tokyo-based research unit of money-market broker Tokyo Tanshi Co. The holdings swelled by ¥50.3 trillion in the nine months that ended Dec. 31.
Looks like the BOJ was in such a hurry to boost the Nikkei and crush the Yen, it already surpassed its annual monetization quota!
So what happens if we do get a slowdown?
Well, the JPY, which since early November has been selling off by the boatload, pricing in expectations of at least one more QE in April will soar [18]. And then the verbal diarrhea will really begun as Kuroda "could signal to the market that a slowdown does not represent a scaling back of his accommodative policy or he could raise the holdings ceiling, according to Sumitomo Mitsui Banking Corp." In other words, forward guidance is about to come to Japan. Alas, forward guidance does not work, and should the last dynamo of real unsterilized monetary injection, Japan, flicker then die, all bets would be off.
“The BOJ’s monthly purchases will decline to about ¥6.4 trillion,” Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities, told reporters and institutional investors Wednesday. “I don’t think the decreases would have a large impact on the market, considering investors paid little attention to the decline that we saw in December.”
Well, now that you pointed it out, investors - which these days are mostly clueless algos programmed by 19 year old math PhD's will be paying very close attention.
In the meantime, everyone is hoping and praying that any slowdown in purchases resulting in a market drop, would be met with a prompt pick up:
The BOJ will boost stimulus by the end of September, 80 percent of the 35 economists polled last month estimated.
“The amount the BOJ needs to buy this year is about ¥6.5 trillion a month” after taking into account its bond holdings that come due, Izuru Kato, the president of Totan, wrote in a research note on Jan. 9. “The BOJ is more likely to boost purchases should the decrease destabilize bond yields.”
“Investors think the BOJ is just taking a break and will increase buying when the effect of the sales tax hike comes in,” said Tadashi Matsukawa, the head of fixed-income investment at PineBridge Investments Japan Co. “Japan’s yields are staying at these levels because of this assumption.”
Well, maybe not. In a note released overnight, Bloomberg is reporting what we have said all along: epic QE in Japan may not be driving up the right inflation - namely wages - but it sure is sending the bad kind of inflation higher, that of import prices for food and energy, and other commodities. Which is why for the first time, many are refuting the rumor first launched in early November that a BOJ expansion in QE is just around the corner, and may instead be delayed.
From Bloomberg [19]:
Accelerating inflation is prompting analysts from HSBC Holdings Plc. to Daiwa Securities Co. to push back forecasts for when the Bank of Japan may add to record monetary easing.
The percentage of economists predicting an expansion of already unprecedented stimulus between April and June fell to 33 percent from 56 percent three months ago in a Bloomberg News survey of 36 economists conducted Jan. 10-15.
With the BOJ’s preferred benchmark gauge showing inflation at more than half of its target 2 percent pace, the central bank may wait to assess trends in wages and the effects of a sales-tax increase in April before deciding on any extra stimulus. Governor Haruhiko Kuroda and his board will keep policy on hold when a two-day meeting ends today, according to all economists in the survey.
“The speed of inflation is the main reason for pushing back my forecast,” said Maiko Noguchi, senior economist at Daiwa Securities and a former central bank official. “The BOJ can take a breath and watch developments in prices and the impact of the sales-tax increase.”
Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year.
Needless to say, a delay in QE would crush Abenomics, as it would mean a surge in the Yen, a plunge in the Nikkei - really his only accomplishments so far - even as wages never rose, pushing the economy back in the deflationary limbo from whence it came as everyone rushes to sell financial assets.
What happens then? Well... "The BOJ’s total assets have climbed to ¥229 trillion, or 48 percent of the nation’s nominal gross domestic product. The central bank aims to increase its balance sheet further to ¥290 trillion by the end of this year."
Richard Koo adds, "It may be too late to prevent long-term rates doing something crazy” should the BOJ hold off on tapering before inflation reaches the target, said Richard Koo, the chief economist in Tokyo at Nomura Research Institute Ltd. The stimulus is leaving Japan at risk of falling into a quantitative-easing “trap” of being unable to taper without a surge in long-term rates and subsequent damage to the recovery, according to Koo, a former Federal Reserve economist."
Good luck Japan. You will need it very soon.