Remember that for all the hollow rhetoric about this and that, the main reason why the Fed first tapered and then ended QE is because it literally ran out of bonds to monetize: as first Zero Hedge [6]and then the TBAC [7]warned last summer, and as we saw on October 15, the liquidity in the bond market dropped so much thanks to the Fed's endless attempts to "fix the economy and the middle class" that the $12 trillion bond market flash crashed [8] forcing market participants to pull a page right out of the May 2010 playbook and "turn those machines back off."
Furthermore, the reason why the task of carrying the weight of the developed world's flow was put on the shoulders of Japan, is that while the country is now an official economic basket case, at least it has a lot of Treasurys to monetize. Indeed, as the following chart from JPM shows, while the BOE and Fed peaked at about 35% of total 10 Year equivalents monetized (a metric we have been using since 2012 even as the Krugmans [9]of the world look at the the bond market in the gross and inaccurate terms of GDP over notional), Japan is only just ramping up.
[10]
Well, there may be a problem: unlike US Treasurys where a vast majority are held by fast money accounts, in Japan the bulk of the Private Sector holdings, those from which the BOJ will be purchasing, appear to be far stickier. As Bloomberg reports, citing Shinji Hiramatsu, senior investment manager at Sompo Japan Nipponkoa Asset Management, the BOJ boosting its bond purchases is "crowding out the market", and the already broken Japanese bond market is about to get even more broken, until we get a repeat of April 2013 when every single day the JGB market was halted limit down, or up, and the BOJ had to radically change its approach to monetizing debt, meaning hire a whole lot of Goldman consultants to explain just what is going on.
According to Bloomberg, "the Bank of Japan’s plan to step up bond purchases by 60% will obscure price discovery and add to concerns about the nation’s fiscal position."
"The presence of a big buyer who snaps up securities regardless of yields risks preventing the market from reflecting growth and inflation accurately,” says Shinji Hiramatsu, senior investment manager at Sompo Japan Nipponkoa Asset Management, which oversees the equivalent of $9.8b. “The BOJ’s move on Oct. 31 was favorable for my investment, but made me very concerned about a loss of fiscal discipline."
Shockingly, even in the basket case country that is Japan, those who directly benefit from the BOJ's terminal experiment are now openly and vocally slamming it because they know that if continues, the final endgame is now near.
As a reminder, Japan’s outstanding debt at a record 1.04 quadrillion yen ($9.1 trillion) is over twice as much as its GDP, the highest in the world.
Major JGB investors’ monthly net purchases this year averaged 2.33 trillion yen; that was about 36% of the amount bought by the BOJ
It has gotten so bad that Japan's population, living in unseen "misery" has had enough [11], with more respondents to a recent poll stating that the negative effects of Japan's QE surpass the positive. Perhaps that is why the approval of Abe's cabinet is suddenly crashing.
- Japan Cabinet Approval Rating Falls 8 Ppts to 44% in NHK Poll
- 38% of people said they don’t support the cabinet, up 4 ppts from last month’s survey, NHK reports on TV and website.
- On question as to whether govt should raise sales to 10% in Oct. 2015 as planned, 20% said yes, 41% said it should be postponed, and 33% said it should be cancelled
- 56% of respondents said that they couldn’t say whether the BOJ’s recent increased monetary easing would be good or bad for the economy, with 14% saying positive effects would be larger and 20% saying negative effects would be larger
Perhaps this explains why, suddenly, Abe - who already had a stint as Japan's PM tragically cut short due to an explosive bout of diarrhea - suddenly appears quite focused on existing stage left:
- ABE MAY DISSOLVE PARLIAMENT THIS MONTH ON TAX DELAY: YOMIURI
Needless to say, if Abe - who is the critical link in the reflation experiment - is gone, and Japan's QE ends prematurely, it's all over.
