Bank Of Japan May Buy Derivatives Next

Because having legal authority to buy corporate bonds, ETFs and REITs, in addition to everything else the Fed now buys, is apparently not enough to crush, mangle and suicide its currency, the BOJ is now considering adding yet another "asset" to its cocktail of eligible securities for purchase: those which Buffett once declared weapons of mass financial destruction - derivatives.

From Bloomberg: "Bank of Japan governor nominee Haruhiko Kuroda said that the central bank will consider buying derivatives if he’s confirmed as governor and signaled a readiness for a quick expansion in monetary stimulus. “We will carefully consider such a proposal,” Kuroda, the Asian Development Bank chief, said in response to a lawmaker’s question in his second Diet confirmation hearing today." This development makes intuitive sense: central banks are desperate to destroy their currencies in the fastest and most spectacular fashion, and what better way than to have your central bank load up on the riskiest of "assets", which would be one brief downturn away from wiping away all the of the bank's capital and then some, and thus sending the currency into an even greater tailspin - just the outcome sought.

After all, in the new normal, it is he who "collateralizes" their currency with the most toxic biohazard, that wins. The Bank of Japan may have just taken a commanding lead over everyone else. The question now is: how soon until Bernanke follows suit and demands that the Fed be allowed to monetize equities, HY bonds, and other E-Trade baby specials.

There is a possibility that the new BOJ head is just bluffing:

“This is a communications strategy, rather than an actual policy at this moment,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Kuroda wants to impress the markets. Any type of asset, including derivatives such as interest rate swaps, should be on the table.”


Kuroda said in an interview last month that the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.

Although with Goldman's Carney about to join the BOE and show the rest of the world how currency destruction is really done, it is much more likely that Kuroda meant every word.

Central bank purchases of derivatives are rare, according to Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo who has done research for the Bank of Japan.


“This would be a first as a systemic policy,” Schulz said. “Central banks need to be very transparent in regard to the risks involved in buying structured products, and that limits the possibilities for what they can buy.”

Ah yes, central bank transparency: all we want to know is if the BOJ will also use Citadel as an arms-length agent through which to transact its swap purchases. Like the NY Fed that is.

Whether buying derivatives could be adopted by the BOJ is “not just an issue of persuading other BOJ board members, but also the technicalities in the market,” said JPMorgan’s Adachi. “If the market is very small and the intervention by the BOJ is significant enough to collapse the market, then perhaps even Kuroda will think it’s not a good idea.”

The good news, at least for one former JPM employee, Bruno Iksil, is that his IG and HY CDX manipulation skills may soon be in great demand. Only this time he will truly have an unlimited balance sheet to whiplash the market around as he desires.

As for the consequences, we just hope to be far away when the house of derivative cards finally comes toppling down.