JGB Market Supported by Massive BoJ Buying

When 10-year JGB yields briefly spiked to the 1% level on Thursday last week, the BoJ intervened massively in the market, injecting almost $20 billion (2 trillion yen) to support prices. On Friday it followed up by buying another 900 billion yen in bond purchases (600 billion of bonds maturing between 5 and 10 years, 300 billion of bonds maturing in over 10 years) Thus the BoJ bought altogether bonds worth $30 billion in a mere two trading days to keep yields from going higher. Relative to the size of the economy, this would be equivalent to the Fed buying $90 billion in treasuries in just two days. However, the size of Japan's gross public debt is not much below that of the US. It amounts to about 1.2 quadrillion yen, or $12 trillion. As a percentage of economic output it is at 230 percent, however, and this is far more worrisome, it amounts to 2,700 percent of annual tax revenue.



The BoJ intervenes heavily to stop the sell-off in JGBs – click to enlarge.



BoJ chied Haruhiko Kuroda noted on Friday that it was 'extremely desirable' that the JGB market remain stable, noting that:


“We are going to conduct our market operations in a flexible manner to head off, as much as possible, volatility in long-term interest rates, which were rising temporarily recently.”

Mr. Kuroda also said the BOJ will continue to strength its communication with bond market participants.”


He has a great many 'communications' with bond market participants ahead of him we would wager. The recent release of the minutes of the BoJ's late April meeting showed that a number of board members were 'concerned' over the bond market's volatility. There was apparently also a 'rift' over the time line in which the 'inflation target' can be reached, but this just continued the debate of the previous meeting. Apparently two board members felt that if the central bank fails to achieve its stated target in the designated time period, its 'credibility will suffer'. Regarding the bond market, there was a recognition that  ultra-low yields and 2% CPI inflation may not be compatible:


“At the April 26 meeting, a few members said the market turbulence was due to a tug-of-war between downward pressure on yields from the BOJ's huge bond buying and upward pressure from expectations the central bank is determined to achieve 2 percent inflation at an early date, the minutes showed.

Some board members called for the need to continue examining steps to prevent a decline in liquidity in the JGB market that was blamed for the bond market volatility, the minutes showed, although they did not discuss any details or likely new ideas.”


In what has to be a very worrisome development from a contrarian point of view, Kuroda said in a recent speech delivered to academics that “Japan's financial system as a whole seems to possess sufficient resilience against such shocks as a rise in interest rates and deterioration in economic conditions.”



Japan, gross debt
Japan's gross public debt compared with that of other countries (via Japan's MoF) – click to enlarge.



The VaR Dance Into the Abyss

The reason why the BoJ may have countless opportunities to 'communicate' with its allegedly well-prepared financial system participants regarding the JGB market is encapsulated in a recent article at the International Financing Review that recounts the last time Japan faced rising JGB yields, more than a decade ago. There is of course a crucial difference between now and then: the public debt has become much larger.  The IFR writes:


“Extreme volatility in the Japanese government bond market could trigger a sell-off on a par with a market rout in the third quarter of 2003. That was when local banks and foreign investors were forced to dump their JGB holdings after heightened volatility caused the assets to exceed internal value-at-risk limits.

According to analysts at JP Morgan, the threat of a so-called “VaR shock” highlights one of the unintended consequences of quantitative easing, and the situation could be exacerbated this time around.

“The proliferation of risk parity investors and funds, which are strict value-at-risk investors and are heavily invested in bonds currently, is likely raising the sensitivity of bond markets to self-reinforced volatility-induced selling,” said Nikolaos Panigirtzoglou, head of flows and liquidity for Europe at JP Morgan, in a report.

Last month, Japan’s central bank confirmed plans for a ¥120trn (US$1.19trn) liquidity injection that is intended to boost inflation to 2% over the next two years.* The result has been a surge in JGB volatility and rising yields on anticipation of widespread shift from fixed-income to equities.

“It’s an example of the pro-cyclicality of markets. Those with mechanical VaR-based limits will increase positions as vol reduces, and cut positions as vol increases, just like in 2003,” said Guillaume Amblard, global head of fixed-income trading at BNP Paribas. “It creates a snowball effect and it’s exacerbated by the fact that there are some big leveraged positions in JGBs.”

JP Morgan analysts note that the 60-day standard deviation of the daily changes in 10-year JGB yields has doubled to 4bp since the BoJ confirmed its monetary easing strategy on April 4 – the highest level since 2008.


JP Morgan’s Panigirtzoglou believes that regional and co-operative (or shinkin) banks are the most vulnerable to rate increases as the maturity mismatch between assets and liabilities is currently running at all-time highs for such entities. Analysis shows that a 100bp yield curve shift results in a loss of ¥7trn for regionals and co-operatives combined, which equates to 35% of Tier 1 capital.”


The most disturbing bits of information are obviously that there exist some 'big leveraged positions in JGBs' and that a 100 basis points upward move in the yield curve would wipe out 35% of the tier 1 capital of Japan's shinkin banks. It is mentioned in the article that since 'everyone knows' what is brewing, the effects will be well contained, but how is that even possible? No-one really 'knows' how things are going to play out. We would rather venture that various exposed entities are watching each other to see who will blink first. Moreover, it the market begins to decline in earnest, the losses will be booked by whoever holds JGBs at the time – regardless of what these holders 'know'.

If on the other hand, the BoJ were to institute a 'yield barrier', it could end up as the sole owner of Japan's public debt – with the money supply blown up accordingly. Note here that Japan's banks barely have any uncovered money substitutes outstanding after numerous iterations of 'QE' coupled with a decline in outstanding bank credit to the private sector. As soon as bank reserves at the BoJ grow beyond the point where they cover all remaining money substitutes in the economy, they will become the equivalent of excess cash. After all, bank reserves can be exchanged for banknotes ,i.e., standard money, on demand. Normally this serves to accommodate withdrawal demands by the public in a fractionally reserved system, but Japan's banking system won't be fractionally reserved much longer at the current rate of bank reserve creation.

It will be interesting to see what happens once that occurs, but it seems highly unlikely that the result would be 'deflation'.



Charts by: stockmaster.in, Japanese Ministry of Finance



Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • A Surprise Move in Gold
      Traders and Analysts Caught Wrong-Footed Over the past week gold and gold stocks have been on a tear. It is probably fair to say that most market participants were surprised by this development. Although sentiment on gold was not extremely bearish and several observers expected a bounce, to our knowledge no-one expected this:   Gold stocks (HUI Index) and gold, daily. As noted in the annotation above, a Wells Fargo gold analyst turned bearish at the worst possible moment...
  • May Away
      May Gone in June... Yes, now that June is here, it is indeed the end of May. Theresa May, to be precise, the henceforth former British Prime Minister. After delivering her unparalleled masterclass in “how to completely botch Brexit”, British cartoonists are giving her a well-deserved send-off, which we are documenting below. But first, in case you don't know anything about Ms. May's heroic “Brexit”-related efforts, here is an explanation of how she tried to finagle the best...
  • US Money Supply Growth and the Production Structure – Signs of an Aging Boom
      Money Supply Growth Continues to Decelerate Here is a brief update of recent developments in US true money supply growth as well as the trend in the ratio of industrial production of capital goods versus consumer goods (we use the latter as a proxy for the effects of credit expansion on the economy's production structure). First, a chart of the y/y growth rate of the broad US money supply TMS-2 vs. y/y growth in industrial & commercial loans extended by US banks.   At...
  • Elizabeth Warren’s Plan to Bamboozle American Voters
      A Plan for Everything! The run-up to the presidential primaries offers a funhouse reflection of American life.  Presidential hopefuls, hacks, and has-beens turn to focus groups to discover what they think the American electorate wants. Then they distill it down to hollow bumper stickers. After that, they pump their fists and reflect it back with mindless repetition.   A plea for clemency from Mr. 1/1024th crow. [PT]   Change We Can Believe In.  Feel the...
  • The Ugly End of Globalization
      The Ugly End of Globalization Sometime in the fall of 2018 a lowly gofer at the New York Stock Exchange was sweating  bullets.  He had made an honest mistake.  One that could forever tag him a buffoon.   Art Cashin the living hat-stand, going through a succession of DJIA milestone hats. He promised was going to crack a smile for the Dow 27,000 hat photo, alas, it was not to be. [PT]   After trading sideways for most of the spring, the Dow Jones Industrial...
  • Gold vs. Silver - Precious Metals Supply and Demand
      Is Silver Still Useful as a Monetary Metal? The price of gold jumped a whole twenty bucks last week. We imagine that the marginal gold bug is relieved to be rid of his gold, in this opportunity afforded by the highest price since early April. OK, all kidding aside, the price of silver went up a penny.     The gold-silver ratio keeps hitting new highs recently (this is actually a long-term trend, frequently interrupted by strong rallies of silver against gold). Is silver...
  • Fed Chair Powell’s Plan to Pickle the Economy
      A Loose Relationship The Dow Jones Industrial Average made another concerted run at the elusive 27,000 milestone over the last several weeks.  But, as of this writing, the index has stalled out short of this psychosomatic barrier.  By our estimation, this is for the best.   Since early 2018 the DJIA has gone nowhere, albeit in interesting ways... [PT]   While not always apparent, the stock market generally maintains a loose connection to the underlying...
  • The Italian Job - Precious Metals Supply and Demand
      Lira Comeback? The price of gold jumped 35 bucks last week, and that of silver 48 cents. The dollar is now down to 23 milligrams of gold. Keith is on the road this week, so we will just comment on one thing. If Italy is serious about moving back to the lira, that will make the euro less sound (to say nothing of the lira). That will drive people mostly to the dollar, but also to gold.   Italian deputy prime minister Matteo Salvini (as the leader of the Lega party he is...
  • Paul Tudor Jones Likes Gold
      Gold is Paul Tudor Jones' Favorite Trade Over the Coming 12-24 Months In a recent Bloomberg interview, legendary trader and hedge fund manager Paul Tudor Jones was asked what areas of the markets currently offer the best opportunities in his opinion. His reply: “As a macro trader I think the best trade is going to be gold”. The relevant excerpt from the interview can be viewed below (in case the embedded video doesn't work for you, here is a link to the video on...
  • Bitcoin: What is the Best Day of the Week to Buy?
      Shifting Patterns In the last issue of Seasonal Insights I have discussed Bitcoin’s seasonal pattern in the course of a year. In this issue I will show an analysis of the returns of bitcoin on individual days of the week.   Bitcoin, daily – since bottoming in early December, BTC has advanced quite a bit. It remains an excellent trading sardine. [PT]   It seems to me that Bitcoin is particularly interesting for this type of study: it exhibits spectacular price...
  • Silver Remains a Monetary Metal - Precious Metals Supply and Demand
      Silver Price Driven by Reservation Demand The price of gold went up a buck last week, but the price of silver dropped back 13 cents. And the gold-silver ratio marches further upwards. Keith spoke at a conference this week, about how to analyze the fundamentals of supply and demand in gold and silver. He talked about the basis of course.   Silver coins – silver prices are partly influenced by an industrial demand component, but the fact that they move most of the time with...

Support Acting Man

Austrian Theory and Investment


The Review Insider


Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from www.kitco.com]



Gold in EUR:

[Most Recent Quotes from www.kitco.com]



Silver in USD:

[Most Recent Quotes from www.kitco.com]



Platinum in USD:

[Most Recent Quotes from www.kitco.com]



USD - Index:

[Most Recent USD from www.kitco.com]


Mish Talk

Buy Silver Now!
Buy Gold Now!