The future of JGB

Last year we have talked quite a lot about BOJ and the unsustainable balance sheet it holds. Now, with the rising yield pushed by FRB, the BOJ has to face a substantially worse situation as it has increasingly little room for monetary policy while the prospect of economy and inflation are still in gloom. I will continuously gather the relevant articles in this blog.

Japan – It’s Finally Happening

Large hedge fund managers like Kyle Bass or Crispin Odeywere have been shorting JGBs for a while. After all, it was an awfully compelling story. It’s difficult to see how Japan will be able to manage its monster debt load without inflating it away.



Yet the great global bond rally of 2016 that drove European sovereign yields to batshit crazy negative levels, dragged Japanese government bonds along. ->  One of the most overindebted countries in the history of modern finance trading with a 0% thirty year bond.

-> Then a crazy thing happened. Worried its bonds would trade at negative yields and pressure the financial system, the Bank of Japan pegged its 10 year yield at 0%. -> In doing so, the BOJ moved from a set rate of balance sheet expansion to one that varies based on whether that peg is either too high, or too low. -> If the equilibrium level of 10 year rates was in fact below 0%, the Bank of Japan would be forced to sell bonds to keep rates stuck at 0%. If there was demand for credit and 10 year rates moved higher, then the BoJ would be forced to buy bonds to keep them from declining. -> at its heart, the BoJ was giving up control of its balance sheet so it could peg a specific part of the yield curve.
(Of course Central Banks do this all the time. The difference is they usually operate at the front part of the curve, and when there is too much demand or supply, they change the rate.)

-> The Bank of Japan had not eliminated volatility, but merely postponed it.

–>> An expansionary feedback loop: Eventually the Bank of Japan’s massive balance sheet expansion would kick in. At that point, inflation would pick up, credit would be demanded (?) and the BOJ would be forced to defend the 0% peg -> be forced to buy an unlimited number of bonds at a level below the market and expand the amount of base money, which if not offset with a decline in the velocity of money, would create more inflation, etc… All of this would be occurring with an already highly supercharged Japanese Central Bank balance sheet.


BoJ was tested by the market last week as the JGB 10 Year bond spiked through the previous high yield on news the BOJ would not be expanding their balance sheet quite as aggressively as expected in their regular QE program.
(“Market looks to have been looking for a broader spectrum of purchase increases to reaffirm the commitment”)

  • The short-term policy rate, which applies to some bank reserves, was held at -0.1 percent.
  • The long-term policy rate, which is a target applied the yield on 10-year Japanese government bonds, was left unchanged at around 0 percent.
  • The inflation forecast for the fiscal year starting on April 1 was kept at 1.5 percent.
  • The GDP projection for the fiscal year was raised to 1.5 percent, from 1.3 percent.




As yields popped through the previous 0.10% yield ceiling, the Bank of Japan came charging into the market. <- The BoJ bid 3-4 basis points through the market with unlimited size to push yields back down to the 0.10% level. (Many analysts interpret the BOJ’s target of around zero percent to mean a range between positive and negative 0.1 percent.)

–>> The market is finally saying the demand for credit is enough to force the Bank of Japan to buy bonds to keep rates down. And that was the signal of shorting JGBs. 

+ BOJ faces the challenge of seeking to hold down borrowing costs just as accelerating inflation and an improving outlook for some of the world’s biggest economies push up bond yields globally.
(putting upward pressure on Japanese yields while also pushing down the yen. -> Further weakness in the currency, which would support exporters and help the central bank toward its distant inflation goal [A weak yen helps to boost exports and corporate profits, which should also encourage more investment and wage growth, though these flow-on effects have been disappointing so far.], may also raise the ire of Donald Trump and provoke a protectionist response that Japan can ill afford) 



(However, It would be just like the Market Gods to finally usher in the JGBs collapse once all the hedge fund guys had given up on it…)




Moreover, Japan’s biggest banks benefits from this trend

Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. are on course to exceed their fiscal-year profit goals, having all beaten analysts’ estimates for third-quarter earnings. Surging global bond yields and market volatility since Trump’s November election victory have been a boon to the banks’ fixed-income trading, helping to offset weak lending profitability, the results showed. And bank executives have welcomed Trump’s moves to relax financial regulations in the U.S., where the three firms have operations.
1000x-11(Bond and securities trading profit jumped and credit-related costs fell)

Other tailwinds include a weaker yen, which has fueled inflation expectations (weaker yen inflating earnings abroad) and prompted economists to predict that the BOJ’s monetary easing is over.

“A year ago the outlook was for continually lower rates, whereas now we’re starting to see prospects of higher rates going forward”

(However, Domestic interest margins remain tight, interest rates are low or negative and competition is fierce,” “Japan’s megabanks still face a tough environment.”)


Update 2017/02/14

No Laughing Matter for Kuroda With BOJ Near 40% of Bond Market

The BOJ holds more than 40 percent of Japanese government bonds, and the central bank’s stake continues to rise and rise.


As the central bank’s need to control yields drives unprecedented purchases of benchmark 10-year debt ->  exacerbating concerns it will run out of willing sellers to supply it with bonds to buy.

“The BOJ actually decreased the pace of purchases late last year, but after the market started to price in the risks to drive the yield up to 0.15 percent, and forced the central bank to accelerate again”

-> The yen rallied after the increased operations showcased concerns the BOJ’s shift to targeting the yield curve hasn’t removed questions about the durability of its quantitative easing.


BOJ is also aimed at steepening the yield curve:
With Japanese investors selling off Treasuries at the fastest pace since 2013, it also raises the likelihood of pension funds and life insurers, which need long-term assets to meet similar liabilities, being drawn back to so-called superlong bonds — worsening the BOJ’s potential supply constraint
+ raising stimulus-sustainability issues: banks are seen getting closer to their target limits when it comes to selling down JGB holdings. (Japan’s banks sold 141 trillion yen of government debt in the first 3 1/2 years of Kuroda’s easing, playing a key role in supplying the 298 trillion yen that the BOJ bought in the same period. Banks have just 219 trillion yen of the securities left, and they need to keep some of that to meet regulatory requirements. That all adds up to the real possibility that the BOJ will face constraints on its capacity to buy bonds.)


And almost a third of the bonds it owns have no income — or just pay it 0.1 percent a year in interest.
-> surge in bond prices over the past four years could still create losses for the BOJ, because most of the debt it buys costs well above face value, even though face value is what the central bank will get back, because it plans on holding the securities to maturity. The looming balance sheet shortfall that creates is another of the concerns surrounding the long-term sustainability of the policy.

Looking forward, it seems the BOJ can’t stop buying, otherwise it would lose control of yields while its inflation target remains far from 2 percent. Yet it can’t go on buying forever either, thanks to a lack of ready sellers.


PS.1 China’s Bond Market Has a Forgery Problem

PS.2 Bank of England Is Right to Ignore Inflation

PS.3 Germany’s Worrying Squeeze


Japan’s Government are Losing Revenues


Kuroda Money-Go-Round Undercuts Japan Negative-Rate Windfall

BOJ’s Eventual Stimulus Exit Could Eat Up Reserve in Five Months

BOJ Bond Valuation Losses Are Said to Be $8 Billion in 2015


2016/09/09 update



Japan’s government is not profiting from negative yields!

1.The BOJ buys debt from the market
-> pushes prices up and yields down
-> gives extra money to the MOF.


2. The Finance Ministry pays interest income to the BOJ for the bonds it now holds
-> although rates is low (10-year notes currently at 0.1 percent)
-> the amount is huge (BOJ owns almost 327 trillion yen in sovereign debt)
-> interest income in 2015: 1.29 trillion yen


3. The BOJ then uses some of its income to pay for the valuation losses on owned bonds
<- Because BOJ buys debt for more than the face value, and has to write it down [1]
-> BOJ wrote down the value of JGB holding by 874 billion yen in 2015, 40% of the interest income


-> Obviously, if the amortization losses from the BOJ’s bond buying operations become too large, income could go less, even negative

-> The BOJ will buy 120 trillion yen worth of bonds this year(80 QE+40 Redemptions) [4]
-> if it buys 100 yen bonds at 103 yen, that would mean a total loss of 3.6 trillion yen
-> if we assume the average period is 10 year, that would mean 0.36 trillion loss increased per year !  [2]
-> BOJ’s last year coupon income is about 1.3 trillion, it will take only 4 years to make it negative under recent price level.
-> And don’t forget with prices high and coupons low, more and more of the debt on its books will have a negligible income and a high price that needs to be written down.

1x-119スクリーンショット 2016-08-28 19.30.22

-> Therefore BOJ could go bankruptcy if bond purchasing continues! [3] 
# but of course BOJ can prolong the duration of its holdings

4. BOJ then returns much of its leftover profits to the MOF as dividend.


5. BOJ has to cut dividend so that it could back up its reserve 

-> In 2015, the BOJ cut 450 billion yen from its dividend to the government so it could increase its reserve to cover potential losses on bond holdings. [6]
-> According to Bloomberg, Japanese Government benefited 110 billion yen extra money from NIRP [5]
-> The government’s revenue actually decreased under massive stimulus!!

6. Things might be going to worse

The BOJ has approximately 2.7 trillion yen in provisions for potential bond losses after setting aside 450 billion yen in 2015, given its financial statement 

If the BOJ tapers stimulus, it will face potential losses on

  1. bond holdings
  2. higher interest payments on lenders’ reserves

Policy maker Takahide Kiuchi estimated the central bank could face losses of 7 trillion yen per year during a taper of its stimulus.1x-122

“When people realize the limits to the BOJ’s finances, it could possibly create a massive shock”
“The bank has about 7 trillion yen in capital, but that would be eaten up quickly.”

7. Conclusions

A. If BOJ continues its recent project, both the government and BOJ will lose money and go bankruptcy

B. If BOJ suddenly exits from its unprecedented easing policy, existing reserves will be insufficient and it will go bankruptcy

C. The BOJ have to exit, or do helicopter money. But it will definitely avoid selling its bond holdings, and “instead will probably try to maintain its balance sheet by raising the deposit rate”



So that the book value eventually equals the principal. The basic point is that as BOJ committed to hold these bonds until maturity, it doesn’t value the bonds at market price but takes the markdown gradually so that at maturity the book value equals the principal.

More specifically, for the most recent 10-year note, the MOF initially auctioned it for 101.96 yen and the BOJ probably paid more than that. It will now have to take a 2 yen or more loss on each of the bonds in that series it owns, so that when it matures in 2026, the price on its balance sheet will be back at 100 yen. The benchmark bond price was 101.779 yen, with a yield of minus 0.08 percent


In its purchase operations on June 10, the BOJ bought 416 billion yen worth of the No. 342 10-year bond, at an average price of about 102.65 yen.

The BOJ will earn 416 million yen income annually from the 0.1 percent coupon on these bonds, and will have to write down 1.1 billion yen each year to account for the 2.65 yen by which the purchase price exceeded the principal.

And don’t forget BOJ’s purchases often occur at a slight premium to the current market price.



“The BOJ couldn’t go bankrupt in the way a private bank could”

“One could make an economic case that the balance sheet of the central bank should be of marginal relevance at best to the determination of monetary policy,” Bernanke said in the speech, made years before he enacted unprecedented stimulus as Fed chair. “There are many essentially cost-less ways to fix” it, including assistance from the Ministry of Finance, he said.




Japan’s Ministry of Finance made about 110 billion yen ($1.1 billion) more in the year to April than it would have if yields had been zero


The central bank is holding on to as much as half of the profits from the interest received on its bond holdings, after an accounting rule change in November.

Japan’s Fiscal Stimulus Won’t Work


Japan’s New Stimulus Is Just the Same Old Thing


What’s Wrong With Japan’s Economy?


First to be clear, the BOJ has basically very little room to maneuver, although we know it has to. [1]

However, the worse part is, a “new” but moderately sized and mediocre fiscal stimulus package is never going to work


Reason 1. It’s nothing new

Abe unveiled the outlines of a package worth 28.1 trillion yen in total, but

– less than half of this is new, and only 4.6 trillion is planned to fall in the current fiscal year. [2]

– Roughly half of the immediate stimulus will take the form of higher welfare spending, with outlays on new and repaired infrastructure making up most of the rest [3]

スクリーンショット 2016-08-15 2.15.37スクリーンショット 2016-08-15 2.16.36

– Neither infra investment nor welfare spending looks like convincible

More importantly,
1x-111Japan’s governments have made a habit of over-promising and under-delivering when it comes to budget planning!

– the actual stimulus is always far smaller than the plan’s headline figure

– Japan’s stimulus bills are a more-or-less constant flow of deficit spending
(not the temporary, recession-fighting measures typically employed in the U.S. and advocated by most Keynesian economists)


Reason 2. The economy is already at full employment

スクリーンショット 2016-08-15 0.36.18

Studies of fiscal multipliers typically agree that return is much lower when unemployment is low. [4]
And there are simply very few Japanese people left to put to work.

Also, fiscal sustainability will be actually undermined

– Japan’s deficit was just moving to be barely sustainable in the long term, thanks to the government’s sales-tax hike, zero interest rates and healthier corporate profits

– the new spending would raise talk of more consumption-tax hikes to plug the hole without a clearer support from BOJ


Tough but true Remedy

スクリーンショット 2016-08-15 2.51.02

The fully employment can be better


Instead of continual fiscal stimulus, government should focus on worker efficiency.

– Japan’s labor productivity has been essentially flat for a decade.

– Monetary and fiscal stimulus have put everyone in Japan into jobs, but they aren’t doing the kind of work that takes full advantage of their skills.

スクリーンショット 2016-08-15 0.51.59.png11

“Productivity-focused reforms — improving corporate governance, liberalizing labor markets and opening up protected domestic markets — are the best move, even though they will take years to have an effect.”


Continue reading “Japan’s Fiscal Stimulus Won’t Work”

2 Reasons for BOJ’s failure: Cashing Holding and Aging


BOJ’s Comprehensive Policy Review Has a Lot to Take in: Primer

Abenomics Won’t Work. And That’s OK.

IMF working paper: Unstash the Cash! Corporate Governance Reform in Japan

IMF working paper: Cashing in for Growth: Corporate Cash Holdings as an Opportunity for Investment in Japan


Varied policies already being pursued by the BOJ

1. QQE

スクリーンショット 2016-08-13 17.49.46
asset price bubble bursting      Q                      E

QE isn’t something new, and BOJ’s bond purchases are a continuation of previous policies. What changed is the scale of buying and various different programs.



category known as the policy-rate balance applied to about 25.7 trillion yen by July 15

1x-15NIRP drove down borrowing costs across the economy, cutting into commercial bank profits and pushed bond yields below zero.

3. In addition, a number of lending programs including a $24 billion dollar-lending scheme and lending government securities as pledge


Overall, the policies are meant to stimulate lending and demand for loans

– more specifically, push a transition from stimulus-driven to self-sustaining growth based on private consumption and investment


Problem 1. high corporate savings 

However, it won’t works as Japanese nonfinancial firms have accumulated huge cash holding at the expense of investment, dividends and wagethus holding back both aggregate demand and potential growth

スクリーンショット 2016-08-13 20.47.03Japanese nonfinancial firms held cash assets in 2013 of about 50 percent of nominal GDP or 250 percent of aggregate investment.

– more than half of Japanese nonfinancial firms could repay all their interest-bearing borrowings with cash. [2]
– means the real sector in Japan has become a net lender at a time of negative real interest rates

4 main reasons for accumulating cash in theory

  1. expenses of funding by selling assets or raising external finance
  2. uncertainty of cash flow position (profitability)
  3. agency problems that allow management to pursue risk-averse
  4. accumulate cash in foreign subsidiaries to avoid tax expense

“Transaction cost(1) and precautionary demand theories(2) can sensibly explain about 80 percent of the variation in cash holdings between Japanese firms and between 1999 and 2011”

But, they failed to explain the raising cash-to-asset ratios since 2011 [3]


More precisely:

  1. Japan’s high cash holdings are not driven by a particular industrial sector but rather broad based.
  2. SMEs have been the main contributors to high corporate cash balances, but more recently larger companies have also increased cash holdings.

Japanese specific factors:

  1. entrenched deflation expectations; 
  2. aversion to bankruptcies and lack of pre-packaged bankruptcy procedures; [5]
  3. takeover regulations and ownership structure; [6]
  4. role of banks in financing firms; [7]
  5. weak corporate governance [1]


  1. assisting small enterprises to obtain non-bank finance
  2. improving corporate governance in Japan could significantly reduce corporate cash holdings [8]

A better and simple way to reduce cash holdings:

– policies aimed at bringing rates of CEO duality in Japanese nonfinancial firms into line with international norms [4]


Problem 2. demography


It’s entirely possible that near-zero growth is the natural state for a mature economy in such circumstances.

+Increasing productivity growth / -decreasing labour force = rising per-capita GDP

also, +increasing aggregate supply / -shrinking demand = chronically mild deflation

Therefore, the underlying growth rate for Japan’s economy can only be increased if

  1. there’s a significant technological shock driving up productivity
  2. policy makers are willing to accept immigration on a large scale

“The lack of demand in Japan is chronic, and a one-off fiscal stimulus won’t jolt its economy into a lasting expansion.”


(The more urgent problem will be if to take additional easing action to prevent any additional rise in the yen)


Continue reading “2 Reasons for BOJ’s failure: Cashing Holding and Aging”

BOJ Trade and GPIF Loses

Several articles in Chinese from wechat public account “Tokyo Exchange”.

And a Bloomberg news about the recent GPIF Loses


2013/4/4 BOJ宣布实行“量的質的金融緩和”(QQE) 每年增加货币基数60万亿 其中55亿通过国债实现

“日银交易”(BOJ trade)是收益率快速下行的一个重要原因


スクリーンショット 2016-07-31 19.29.15.png

日债在金融缓和导入初始阶段收益率横亘于0.5%之上 成交量低位徘徊


  1. 13年4月开始的养老金调整资产压缩国债份额的节奏渐缓
  2. 日本央行每月购债稳步推进
  3. 美国加息暂缓,ECB降息
  4. 14年10月份日央行决定追加缓和到80万亿95%购买国债(稳定横扫2年期以上国债发行量90%以上)
  5. 投机参与者间形成有序合作(券商和对冲基金)

Winter is coming?

一旦日本政府通过发行永续债(perpetual bond)来实现直升机撒钱的影响:

  1. 日本央行大概率放弃现有购债计划,并将货币政策转向全面承销永续债,做财政政策的后盾,这将导致现行扭曲的收益率无人接盘
  2. 财务省可能逐渐停止永续债以外的国债发行,券商将失去存在意义,二级市场萎缩
  3. 对通胀的担忧也将重创国债的需求






2 流动性枯竭



3 负超额准备金利率



日本金融机构于是横扫一切-10bp以上收益率,导致5y 7y 10y 15y相继落入负收益10y40y大幅收窄

スクリーンショット 2016-07-31 20.21.05

如今日本国债已经完全失去持有利差(carry&rolldown)买入理由只剩下了升值(capital gain)



スクリーンショット 2016-07-31 20.27.57.pngスクリーンショット 2016-07-31 20.37.38.png

负债1172万亿 资产680亿 净负债492万亿  (资产以获取价格计)



スクリーンショット 2016-07-31 20.38.39.png






World’s Biggest Pension Fund Loses $51 Billion in Stock Rout


GPIF posts 3.8% investment loss or 5.3 trillion yen for fiscal year ended March, the worst since the global financial crisis

10.8 percent on domestic equities
9.6 percent on shares in other markets
while Japanese bonds handed a 4.1 percent gain

スクリーンショット 2016-07-31 20.59.52


Japanese shares sank 13 percent in the year through March while the yen climbed 6.7 percent against the dollar

GPIF doubled its allocation to stocks and pared domestic bond holdings since October 20141200x-1

GPIF’s biggest investments in stocks were Toyota Motor Corp. and Mitsubishi UFJ Financial Group Inc. in Tokyo and Apple Inc. outside Japan.
The fund’s largest debt holdings included Japanese government bonds and U.S. Treasuries.

Asset Weightings

スクリーンショット 2016-07-31 21.02.30.png

Almost 80 percent of GPIF’s holdings were passive investments.

The $212 billion Canada Pension Plan Investment Board had a 3.4 percent returnfor the year ended March, with its biggest gain coming from private emerging-market equity investments and real estate.

“They have more than enough room to increase their weighting to Japanese stocks”

“What’s more interesting is how this will be used politically, or even misused.”

Democratic Party of Japan pledged to return GPIF’s investments to safer assets in its election manifesto.

Disappointed market

“At present, nobody quite knows where Japan is going with its monetary policy.”


memos of Bloomberg reports on BOJ’s announsment today


Disappointed market

Today BOJ plans to pump 2.7 trillion yen a year more into stocks and continue to expand the monetary base by an annual 80 trillion yen government bond buying, then

Japan’s 10-year sovereign yield rises most since 2013
The Topix index initially slid as much as 1.4 percent
The yen surged as much as 2.4 percent

Market expects “helicopter money + a further cut to the negative deposit rate”

The maintained 2% inflation target is no believable as

 “market of strong yen shows real interest rates in Japan are higher than real interest rates in US”

Market believes Kuroda has reached the limit of what he can do without fiscal expansion and demand growing though

Kuroda reiterated that further easing will be done if needed and said the central bank hasn’t hit a policy limit.

Limits or not?

no-win situation

“If they had done nothing, people would have assumed they were giving up on QE. But they don’t want directly financing government debt. So they focused on private assets, not government assets.It was just a question of how to get out of it.”

Limit of NIRP

“the BOJ decided to stay away from a deeper cut to the negative rate because the strategy has been so unpopular, especially with big banks.”

Limit of JGB liquidity

the BOJ now holds more than one third of Japanese government bonds outstanding, contributing to a collapse in yields and a flattened yield curve

Assessment in Sept

Assessment of the effectiveness is quite unusual and might indicate the BOJ “could potentially rip up its current stimulus framework and consider more radical measures, including helicopter money.”

political pressure

the BOJ “succumbed to political pressure” to do something, partly as a result of the government’s announcement of its 28 trillion yen fiscal stimulus package

(poor structural reforms…)




For Japan’s stock market

A 3 trillion yen increase in the BOJ’s ETF holdings was within expectations, but “once they start actually buying the ETFs, the market will gradually rise”

For Japanese investors, the home market has been more rewarding in yen terms than faster-growing emerging markets such as China, India and the Philippines.

(Effect of BOJ’s ETF buying can be doubted if one remember what happened in China one year ago)

However, cheaper credit won’t be enough to boost new investment as bosses and finance chiefs would worry about a further soaring yen.

スクリーンショット 2016-07-29 19.27.00


China and Korea as beneficiaries

A strong yen benefits growth countries in the rest of Asia by taking the pressure of other Asia currency against US dollar

“you will see firms like Samsung produce better numbers”

better sentiment for RMB: “the currency is weakening, but no one’s really concerned about it”




Adding a report from Blackrock

How low can interest rates go?


Things that drive US rates:

economic performance (towards both sides)

e.g. US surprisingly strong payrolls report for June, short run absence of significant inflation pressure

political uncertainty

e.g. Brexit

global demand for U.S. Treasuries

zero and negative rates in other developed markets make U.S. rates relatively attractive, while shift of foreign Treasuries holders from offical towards private raises hedging costs of currecy risk and reduces attractiveness

limits to QE and NIRP

currency can be printed, but limits exist in the eligible bonds to buy, which force central banks into longer-maturity bond purchases

except helicopter money, little further room for monetary policy accommodation to effectively stimulate the real economy