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.


An ultimate Ponzi finance

A quick look on Bill Gross’s monthly investment outlook



1. Our credit-based financial break down when investable assets pose too much risk for too little return.

central banks can create bank reserves, but banks are not necessarily obliged to lend it if there is too much risk for too little return
low/negative yielding credit is exchanged for gold or cash in a mattress

(How can it be too much risk when no one actually would love to take risk? Credit may cease to work, but why should one in a negative rate and deflation environment care?)


2. Low interest rates destroy savings and liability based business models. [1] If maintained for too long, the real economy itself is affected as expected income fails and investment spending stagnates.

(This will lead to fiscal plan with higher government deficit that looks like not a big problem under NIRP. And there are also helicopter money. More importantly, in a new century with IT revolution reducing transaction cost and boosting efficiency, the investment-led business model may no longer be necessary for economic growth.)


3. QE can keep on going with technical problem of repo and negative interest rates. Central bank “promises” of eventually selling the debt back into the private market can never be kept. The ultimate end for QE is a maturity extension or perpetual rolling of debt.


4. The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income. Without principal repayment, a credit-based economy ultimately devolves into Ponzi finance, and at some point implodes.

(Theoretically Ponzi finance might last forever)


5. Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories.



Because banks, insurance companies, pension funds and Mom and Pop are stripped of their ability to pay for future debts and retirement benefits.

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