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.


The aging population and a “new normal”

An outlook report from Prudential Investment Management offers an interesting view towards recent turbulence from the perspective of demography


The Turbulent Teens at Halftime: Will Low Rates and Slower Growth Continue?


A world of  a “new normal” with the relatively modest economic growth and record low interest rates of the past several year [1]

The aging population helps explain: labor force growth will be slower

female labor force participation soared and then peaked
the Baby Boom phenomenon has not been repeated



The lowest interest rates in human history

Interest rates in nature reflects the behavior of borrowing and lending money.

スクリーンショット 2016-08-02 19.11.12スクリーンショット 2016-08-02 19.11.53

Long sovereign interest rates tend to be around 5%.

Slow growth and deflation alone cannot explain if one reviews the history full of financial crises, worse growth and deflation.

Globalization of product and capital markets might help keep rates low

greater global competition helps keep inflation low, reducing inflation expectation
increased capital flows might mean lower returns in some parts of the world and help keep rates down everywhere


But maybe it’s just Central bankers have never been as aggressive as they are today at using monetary policy to try to influence economic activity.

スクリーンショット 2016-08-02 19.27.18.png

From 1651 to 1934, policy rates tend to be around 4%, ranging from 2-6%.
During the Great Depression and World War II, rates hit new lows below 2%.
During the inflation of the 1970s, rates soared into double-digits.
In response to the financial crisis of 2008/09, rates hit all-time lows.

In addition to low rates, central banks buy bonds on the open market, paying for them with central bank credits.

スクリーンショット 2016-08-02 19.55.18.png

If it’s all about artificially low rates due to the emergency of the financial crisis, the Fed funds rate might rise to that 2-3% range over the next few years like FOMC expects

However, market prices suggest that investors are not buying the Fed’s expectation, and rates will likely stay low by historical standard for the foreseeable future.

What rates would be without Central Bank intervention?

If rates are artificially low, we would expect borrowers to borrow as much as possible [2]

banks is clearly not trying to borrow more
Households have been de-leveraging

スクリーンショット 2016-08-02 20.14.18.png

It is  possible that today’s rates might not be far below fair prices. If so, why the lowest interest rates in human history?


The aging population

only one fundamental factor that is bigger now than it has ever been before: the greater number and higher prosperity of older people.

スクリーンショット 2016-08-02 20.19.01.png

That upward kink of 65+ corresponds roughly to

“savings glut”: the idea that excessive savings (assumed to be mostly from Asian nations with high savings rates) was holding down rates below

the housing bubble in the US: excessive demand for fixed income product relative to supply

The older get richer

スクリーンショット 2016-08-02 20.27.00.pngスクリーンショット 2016-08-02 20.33.50

Skew in wealth distribution to older Americans helps explain investment flows:

during the bull market of the 1980s and 1990s, when Baby Boomers were in their 30s to 50s, equity funds received the lion’s share of flows

but over the past ten years, reduce risk in portfolios by shifting from equities to fixed income
(There also could be a change from active to index)

スクリーンショット 2016-08-02 20.35.39.pngスクリーンショット 2016-08-02 20.37.18.png

In terms of spending, borrowing and saving:

Older people are more price sensitive and more likely to skew purchases to necessities like health care

older folks save more and borrow less



1. interest rates might stay relatively low, even as Central Banks, led by the US Fed, start to “normalize” rates

6%is gone, 3% for the 10-year Treasury bond yield might be a new average, as the aging of the population will both increase the demand and suppress the supply of debt

bonds might deliver returns of 2% or so and the expected nominal return of stocks might be 6-7% (with a 4-5% risk premium unchanged)

2. Inflation is unlikely as older people have greater price sensitivity and a lower marginal propensity to consume than younger people




Continue reading “The aging population and a “new normal””

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

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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.