The last few days have brought something rather significant in the financial economy of Japan. It was highlighted this morning by the Ministry of Finance issuing some ten-year Japanese Government Bonds at a yield of 1.05% on average. So Japan has issued a decent tranche of benchmark ten-year bonds (2.6 trillion Yen) at above 1% so we are seeing a big figure change. In fact that particular yield reached 1.1% at the end of last week. So we have a big figure change and we finally have reached a situation many were expecting early last year when you may recall I pointed out two reasons why it would take time.Firstly face culture and an unwillingness to embarrass the departing Governor Kuroda but also the issue of The Tokyo Whale and its enormous JGB holdings.
The Tokyo Whale
The Tokyo Whale is near a big figure change itself as it holds some 596 trillion Yen of JGBs. In fact it is over 600 trillion if you include corporate bonds. But if you hold so much of something and the yield is rising you are building up quite a stock of mark to market losses. We can do an estimate of the situation for the JGBs it bought post the Covid pandemic as all the buying pushed the JGB future above 155 whereas today it is 143. In percentage terms this is much smaller than elsewhere but this is a lot in absolute terms when you consider the scale of the purchases. Also the Bank of Japan will have the awful feeling that Paul Simon was correct.
Slip slidin’ awaySlip slidin’ awayYou know the nearer your destinationThe more you’re slip slidin’ away
I have reported for years on its enormous appetite for JGBs and am reminded of this from back in 2022.
TOKYO, Nov 2 (Reuters) – The Bank of Japan’s ownership of newly issued 10-year Japanese government bonds (JGBs) exceeds the amount sold at auction,
Other central banks bought large quantities but no-one else bought more than their government was issuing. There was a type of pact in Japan where the government ran fiscal deficits which the Bank of Japan financed at very low bond yields. So the fiscal risk was changed from a fixed bond yield ( bond coupons) to a variable interest-rate.As the official rate was -0.1% there was even a profit on the deal each year.
What’s not to like about that? Well you have an enormous balance sheet risk. Whilst I was warning about this many were treating Yield Curve Control as a stroke of genius and suggesting other countries should try it. Australia did for a while although with a difference as it targeted the three-year yield. Indeed back in 2019 a man who was much of my subject of yesterday was showing what a dedicated follower of fashion he is.
(Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari on Friday said the U.S. central bank should look into controlling the yield curve as a potential tool for monetary policy, similar to an approach used by the Bank of Japan.
Governor Ueda
I have referred quite regularly to his speech on the 30th September last year and below is why and the emphasis is mine
First, the Bank’s income has been on an increasing trend. Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs…….
Nevertheless, the amount of interest payments brought about by applying interest on excess reserves has been small compared to the rising income. Therefore, the Bank’s operating profits, which are the difference between its income and expenses, have been on a rising trend with its balance sheet expanding.
At this point the Japanese state would have had Hot Chocolate on repeat.
Baby, it’s amazing just how wonderful it isThat the things we like to do are just the same.
Everyone’s a winner, baby, that’s the truth (yes, the truth)Making love to you is such a thrill.
The government could run fiscal deficits and the Bank of Japan not only made them very cheap to finance it declared a profit on it which it remitted.
Problems Ahead
FXStreet have covered Governor Ueda’s words at the Japanese parliament overnight.
“If underlying inflation moves as we project, we will adjust the degree of monetary support,” Bank of Japan (BoJ) Governor Kazuo Ueda said on Tuesday.
Plus there was this.
If our economic, price projections and assessment of risks change, that will also be reason to change interest rate levels.
So he has again hinted at more interest-rate rises. So far he has merely taken then from -0.1% to slightly above 0%. But the Bank of Japan is no longer making a theoretical interest or running profit and further interest-rate rises will give it losses. These are small moves but of course on a large position.
A sign of the mess here is that the Bank of Japan is still chomping away.
We have maintained current pace of bond buying to avoid big discontiniuity in bond buying operations.
Or as En Vogue put it.
Hold me tight and don’t let go (don’t let go)You have the right to lose control (don’t let go)
The control freakery has reached such a level that they are afraid to stop buying. Part of this is a simple result of how “clever” they were. The buying in the market rather stopped because you were competing with The Tokyo Whale and selling stopped too as no matter how expensive the bonds became you couldn’t make money in what became known as the “widow-maker” for bond traders as the Bank of Japan manipulated things. If we spin that around this is why it is afraid to stop as it is afraid of a surge in yields and what that will do to its holdings.
Inflation
On Friday we were told this.
The core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, rose 1.9% in May from a year earlier, matching a median market forecast and accelerating from a 1.6% increase in April. ( Reuters)
I have chosen the core number because it is one of the ones that the Bank of Japan focuses on. My point is that it is no longer possible for it to claim emergency policies are needed to end what it calls deflation. There is an irony as the economy shrank in the first quarter but targeting 2% inflation is around its goal.
Comment
In some ways this is like a morality tale. You have hubris and apparent success.Indeed around the turn of the year I was pointing out that in Japanese terms thus looked quite a success. The change was in many ways minor as it was not that large a fall in the Japanese Yen compared to what we have seen that pressed the “bold action” button. Another way of looking at this is that controlling the bond market put the skids under the currency and in the end it is always like that. However for a variety of reasons it took a very long time for economics 101 to apply. It never conceived that something like the Carry Trade would happen and then implode.
You may be wondering why there a few pointing out this issue? This is because officially it does not exist. Here is Governor Ueda from last September.
However, central banks choose their valuation method based mainly on the developments in their bond holdings, and the impact on their financial statements varies from one central bank to another.
A bit like letting a student mark their own homework.
For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses unrealized gains/losses as reference information……….. However, this does not directly affect its actual profits/losses, as in the case of the Bank of Japan.