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”

20 Years Downside Trend In Real Interest Rate












  1. 信息信息技术革命快速降低了硬件和软件的价格,使得单位美元的投资支出变得事半功倍。
  2. 互联网经济(云计算、大数据、物联网和移动互联),共享经济模式能够颠覆传统企业和行业的边界,使得传统资本品的使用效率显著上升,使得私人投资需求可能显著下降
  3. 互联网省去了传统生产流通渠道的不必要的环节、损耗效率的环节,实现了服务商和消费者、生产制造商和消费者更加直接地对接。需求的空间和内涵被不断创造和拓展,新的需求的产生和旧的需求的消亡的速度都可能是指数级的。甚至在某一阶段对总需求的边际影响是整体下行的。
  4. 商品和服务的价值构成被改变后,宏观上的表现就是增长开始淡化资本投入(CAPEX)的效应,生产函数被重构。因为投入的重要性在降低,对传统要素的争夺自然会变得不那么激烈,价格便有了下行的压力,更低的通胀有了微观基础。菲利普斯曲线框架下低利率政策只是货币当局对于增长中枢的反应。








  1. 贫富差距扩大会带来边际消费倾向的下降,会进一步加剧名义总需求不足(贫富加剧导致平均储蓄率上升,并抑制投资需求增长)。死循环。陷阱。
  2. 如果依赖永久性的极低利率来避免长期停滞,似乎将难逃整个系统不稳定厄运。不仅仅是金融和经济层面的,更会外溢至政治和社会的动荡。左倾政治,民粹主义、保守主义、孤立主义。



  1. 结束超常规货币政策,财政扩张。抑制与生产性投资无关的信用扩张(金融资产交易),运用公共政策支持社会所必须的基础设施的长期投资,以弥补总需求不足。
  2. 破坏性的,反自由贸易倾向,反全球化。



  1. 未来全球资产市场波动率会显著加大
  2. 当交易者彻底意识到,央行们不能再推动资产价格上涨,那时候他们就会撤离市场。
  3. “高频震荡+宽松货币”的状态可能持续成稳态?或是最后形成一个巨大的波动来终结?

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.

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

Korekiyo Takahashi and Helicopter money

Learn from history: Korekiyo Takahashi and Helicopter money

Three questions left:

  1. What drives the different outcome of helicopter money in the history?
  2. Why did government bond rate remain low and there is no inflation after the unprecedented QE?
  3. Does helicopter money work today?

The reason for 2 might be the rising asset price and stalled wage level. The slump of commodity price is a best proof for the mismatched capital.


Helicopter Cash Clues Lie in Life and Death of Japanese Viscount



In the early 1930s, Viscount Korekiyo Takahashi initiated the equivalent of helicopter money, using the BOJ to directly finance deficit spending by the government.

Takahashi’s reflationary policies “brilliantly rescued Japan from the Great Depression,” Ben S. Bernanke said in 2003. A steep yen decline helped.

So what lessons should be drawn today as Kuroda seeks to stave off a deflationary downturn?

Helicopter money:

– a fusion of fiscal and monetary policy
– Rather than issuing debt, a national government draws newly printed money from the central bank, then injects that cash straight into the economy.

– Unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens

(Ricardian posits that debt-financed government spending doesn’t lift an economy because citizens know it will have to be paid for with future tax increases, depressing demand.)


economists have long insisted a free lunch doesn’t exist:
its repeated usage ultimately spawns hyper-inflation. (See the U.S. Confederacy during the 1861-1865 Civil War or Zimbabwe in the last decade.)

But in some cases like Takahashi’s one, the inflation looks like controllable


The BOJ by law is prohibited from buying government bonds directly from the finance ministry. Instead, it purchases them from intermediaries such as banks.

“Unless the existing legal framework changes, helicopter money isn’t possible,” Kuroda told Japanese lawmakers on April 19.

Fact: Japan is already engaged in a strategy that involves helicopter money

Because of the negative yields on Japanese government debt, banks have little incentive to buy them unless they expect to sell them later to the central bank under its asset buying program

Whether that’s financed by issuing bonds at roughly zero interest rates or by drawing money from the central bank “doesn’t make a whole lot of difference”

We might actually see policies that economics students only ever talked about in an imaginary or long ago world (i.e. the 1930s) become real.”






リーマン・ショック後、ベン・バーナンキは、危機を乗り切るため、フリードマン氏の主張するヘリコプターマネーに近い金融緩和策、QE (量的緩和) 策を実行し、ゼロ金利脱却に成功した。


政府の財政出動は政府債務を増やし (金利を上げ)



















Fidelity‘s fund ideas

Three articles from “Fidelity – Markets and Insights – Fund ideas” that shows some recent views of fund managers.


Travelling FAST


“Excessive quantitative easing has meant that asset prices have been inflated and have not reflected underlying fundamentals”, and “I’ve been concerned that such artificial conditions cannot last forever, this has started to play out over the last 12 months.”

“As far as China is concerned, fears about an economic slowdown and currency devaluation are reflected in valuations.”

“While the portfolio has no exposure to the A-share market, I do own Hong Kong and US-listed consumer, technology, industrials (and services) names that I believe are good quality long term franchises.”


Value – about to make a comeback?


“Quantitative easing by central banks has distorted stock markets, with the result that growth stocks have outperformed strongly while value areas of the market have fallen far behind.”

“An underweight allocation to value stocks, examples of which are commodity-sensitive stocks, financials and industrials, while quality and growth areas of the market such as healthcare and consumer staples have become a very crowded trade.”

“The divergent performance of these style groups has now reached extreme levels and may be due for a reversal. Signs that inflation is re-emerging in Europe could be the catalyst for value to favour.”

“3 signs that inflation might be poised for a pick-up: 1. oil price; 2. wage inflation in Europe’s labour market ; 3. average level  of capacity utilisation due to underinvestment.”


All around the world


“Japan is a deep market with a good cross-section of opportunities”, and “Companies tend to be well-managed and conservatively run and, at the margin, there are signs that they are becoming more shareholder-friendly.”

“More than 15 years on from the dot.com boom these stocks have matured into very high return, cash generative businesses which dominate their local markets”, and “They’ve also started to demonstrate a willingness and ability to pay and grow dividends.”