When last we checked the numbers on the “Tokyo Whale,” the Bank of Japan’s ETF holdings had ballooned 80% in the short space of 12 months to a cartoonish 16 trillion yen.
That would be “trillion” with a “t” and that total would represent something like three quarters of the entire Japanese ETF market:
The truly hilarious part about that effort is the fact that something like 85% of ETF purchases announced by the BoJ have occurred on days where the TOPIX registered a negative return. In other words, they are literally “buying the fucking dip.”
Of course you shouldn’t lose sight of the fact that Kuroda has also cornered the JGB market to the point where, by some accounts, it barely even functions.
This week, courtesy of the latest BoJ flow of funds report, we learned that as of the end of March the bank owned nearly 40% of outstanding Japanese government bonds.
That’s a lot.
And it’s up from 13.1% in 2013 before quantitative and qualitative easing (QQE) kicked off:
In April 2013, the BoJ began purchasing large amounts of JGBs under QQE. In the four years since then, the BoJ’s holdings of JGBs, excluding T-bills, have increased by ¥293trn to ¥387trn (Chart 2). After years of continual increase, this amounts to 40% of outstanding JGBs. The BoJ’s purchases are trending downward now, but they still outpace the net supply of JGBs by a wide margin. Although the rate of purchasing is likely to slow, the BoJ’s holdings will continue to expand. Banks (including Japan Post Bank) have reduced their JGB holdings by ¥124trn over the past four years, making them the main sellers, but they are gradually approaching the limit of their selling capacity. From the viewpoint of monetary policy sustainability, the introduction of YCC and the target shift from quantity to interest rates will become more meaningful with the passage of time.
As a reminder, the BoJ is the Spinal Tap of central banks.
“Most central banks are playing at 10, all the way up, all the way up, you’re on ten, where can you go from there?”
Right, so if you’re the BoJ, your knobs “go to 11” – or at least when it comes to the size of your balance sheet relative to your GDP. Have a look:
And here’s what we mean when we say that they’ve basically broken the JGB market:
Simply put, there’s no trading (left pane). On top of that, the dearth of liquidity means that bouts of volatility around policy changes are almost guaranteed. Let’s go to BofAML one more time:
JGB transactions by megabanks in the secondary market have greatly declined since QQE was introduced. Before QQE, these transactions averaged slightly less than ¥30trn per month, but they have sunk by 90% to about ¥3trn recently (Chart 7). The JGB market’s volatility sharply declined after the introduction of YCC, giving the impression that the policy was working effectively.
However, in a market with reduced liquidity and activity, attention should be paid to the risk that a slight movement could send volatility much higher. In the past, BoJ policy changes have been followed by reduced liquidity and higher volatility (Chart 8).
What do you imagine is going to happen when they try to unwind all of this?
Here’s a hint: