Back in October of 2014 [18], 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.
[19]
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 [20]", 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."
[21]
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 [22]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.
