Bank of Japan Governor Kuroda appeared to somewhat proudly proclaim last night during his address to government that the BoJ has bought 75% of JGBs issued in fiscal-year 2017 so far! (and yet we are reassured that this is not debt monetization… not all).
“Yields in Japan are stable” Kuroda added… One glimpse at the chart below and its clear how ‘stable’ the Japanese bond market has become – reminding us somewhat of Monty Python’s Dead Parrot sketch. As one veteran bond trader exclaimed, “they killed the biggest bond market in the world.”
This is “the result of YCC [Yield Curve Control] policy” he bragged, before admitting that it “would be hard to continue YCC if trust in debt was lost,” but Kuroda reminded his audience that “because BoJ has seigniorage, trust in yen won’t be lost.”
But is that trust starting to fade?
As Bloomberg notes, The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40% — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.
That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded, according to Japan Trading Co. Naoya Oshikubo, a rates strategist at Barclays Securities Japan summed it up, with perhaps an understatement: “the JGB market was generally thin.”
Despite the total and utter lack of liquidity in the once most liquid segment of the JGB curve, Kuroda confidently went to explain the central bank could engineer a smooth exit from its ultra-loose monetary policy, but said it was too early to debate specifics with inflation still distant from its target.
“By combining various tools, it’s possible to shrink the BOJ’s balance sheet at an appropriate pace while keeping markets stable,” Kuroda told parliament, when asked by a lawmaker about a BOJ exit strategy.
Just one quick question Kuroda-san – how the fuck are you going to be able to step back when you bought 75% of JGB issuance this year so far?
As more market participants throw in the towel on a rigged, centrally planned market, the result will – no could – be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can’t).
As the Nikkei politely concluded, “if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise.”