Japan QE Limit Approaching As Goldman Says BoJ Risks Losing Crediblity

As the BoJ continues to widen the gap between Japan’s haves and have-nots with its JGB monetization frenzy and multi-trillion yen foray into Japanese equity markets, and with the now unfabricated wage growth data from 2014 suggesting Abe’s “strategy” whereby wage growth begets economic growth which in turn begets confidence either isn’t working very well or never existed in the first place, the chairman of Nippon Life is joining a bevy of other folks in Japan who apparently still live in the real world and are skeptical of the sheer insanity that passes for monetary policy in Tokyo. As Reuters reports, Kunie Okamoto thinks further easing is foolhardy as the central bank already has a monopoly on the market:

It is... unwise to assume that Japanese yields will not spike simply because domestic investors hold more than 90 percent of government debt, Kunie Okamoto said in an interview with Reuters.


"Additional monetary easing is not desirable," Okamoto said on Friday.


"The BOJ is already buying around 90 percent of bonds in the market. It is not good for this to be sustained."


Nippon Life Insurance and other life insurers are major buyers of long-term government debt because they need a steady income stream to offset their liabilities, so their views on the bond market carry weight.

Note that Okamoto also warns against becoming too complacent about a spike in yields, which, as we have warned on several occasions, would be a veritable disaster as it would effectively collapse the ponzi scheme and plunge the country into BlackRock warned would be a fiscal crisis. 

Meanwhile, back in Kuroda crazy land, deputy BoJ governor Hiroshi Nakaso sees no reason to alter the central bank’s inflation pledge despite the fact that plunging crude prices will make it impossible to hit. Nakaso cites “evidence” that the country is shedding its “deflationary mindset”: 

The BOJ is under pressure to cut its forecast that inflation will hit 2 percent within the current fiscal year at a twice-yearly review of its projections on April 30, due to the impact of falling oil prices.


But while acknowledging that inflation was moving away from the BOJ's target, Nakaso said there were clear improvements in inflation expectations such as the rising number of firms promising wage hikes, including for temporary workers.


"We're seeing some positive changes in corporate and household behaviour that rarely happened when Japan was mired in deflation," Nakaso said.


"That's evidence that Japan is shaking off its deflationary mindset."

We suppose Nakaso isn't counting inflation expectations as “evidence” because, well…


...and Goldman isn't buying it either...

Regime shifts occurred in the forex market in January 2013 (when the 2% inflation target was introduced) and in the JGB market in March the same year (when the current BOJ governor took up his position), according to our Markov regime-switching model estimates. Had regime shifts not occurred, we estimate that the shadow rates for USD/JPY and the 10-year JGB yield would be just under 95 and around 1% as of February 2015, respectively. This suggests that under an ‘extreme’ hard landing scenario (an abrupt return to a normal regime from the current BOJ commitment regime), both the forex and JGB markets could experience major shocks.


We see little sign that the 2% inflation target will be met in the near term. We expect core CPI to continue to slow down and believe the BOJ likely undertake further easing as early as July 2015. Even so, with the 2% inflation target looking out of reach, we think the BOJ will need to revise its 2% commitment out of concern that it may otherwise lose its credibility. However, given concerns of an above-mentioned reverse regime shift in the markets, we think the BOJ would handle its exit strategy with extreme delicacy. We forecast that the bank would eventually switch from a rigid 2% inflation target to more realistic one like a 1-2% band and start tapering from 2H FY2017, by which time the adverse effects of the second consumption tax hike is likely to have eased. In view of potential delays with fiscal consolidation and possible major shocks to the markets, however, we think any tapering would end up being very limited, with the BOJ continuing to purchase a certain amount of bonds.

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Finally, underscoring the risk that yields could suddenly rise (a risk which is of course exacerbated by the fact that BoJ purchases, like Fed Treasury purchases, have sapped the market of liquidity and impaired price discovery), Okamoto suggests that with yields artificially low, the central bank shouldn't take the life insurance industry bid for granted: 

Okamoto also warned that simply because banks and life insurers have been reliable buyers of JGBs in past does not mean that they will continue to do so in the future.

Is the BoJ's back against the wall? We certainly think so as the evidence increasingly supports the notion that the central bank is bumping up against the limits of accommodative monetary policy and may soon be headed — as we've variously predicted —for "failed nation" status.