Tokyo Whale Achieves Dubious Milestone As BoJ’s Balance Sheet Tops Japan’s GDP

I don’t want to say this doesn’t bear mentioning, because if that were true, I wouldn’t be mentioning it, but you should note that it was inevitable.

The Bank of Japan has now reached a dubious milestone: Haruhiko Kuroda’s “very powerful” asset purchases have “succeeded” in creating a balance sheet that is larger than Japan’s GDP. Have a look at this:

(Bloomberg)

That is pretty “impressive”, depending on how you define “impressive”, and it speaks to Kuroda’s penchant for persisting in the fantasy that if he just keeps this up for long enough, inflation will finally rise to target.

At its last meeting, the BoJ stuck to its guns on policy but its new forecasts showed the bank no longer expects to be anywhere near their inflation target before 2021. That, by extension, means these policies will have to be extended or “strengthened”, even as the side effects continue to pile up.

(Barclays)

The bank has been at pains to play down those side effects, but everyone (including the BoJ) knows JGB market functioning has been impaired. The JGB market is hopelessly moribund, despite showing fleeting signs of life over the past several months following the BoJ’s policy tweaks in July.

Meanwhile, the ETF purchase program raises all manner of questions, not the least of which is how the equity positions Kuroda has piled up can ever be unwound without triggering a rout in domestic stocks.

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Let’s Say You’ve Been Buying 6 Trillion Yen A Year In ETFs And You Want To Sell. How Would That Work?

Under YCC, the BoJ has been buying less JGBs and last month’s meeting was accompanied by a November purchase plan that revealed some changes ostensibly designed to promote better market functioning. Still, worries about liquidity and the effect this is having on bank margins continue to mount despite officials’ efforts to downplay concerns.

For some analysts, one of the biggest tail risks on the planet is the possibility that the BoJ could widen the allowable range for 10Y JGB yields sooner than anyone expects, prompting a vicious bear steepening with far-reaching cross-asset ramifications.

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The BoJ And An ‘Enormous’ Risk From A ‘Very Out-Of-Consensus’ View

Relative to GDP, the size of the BoJ’s balance sheet is anomalous in the context of the Big 3. The Fed and the ECB’s balance sheets are a “mere” 20% and 40% of annual economic output, respectively.

As ever, this is complicated by the yen’s safe haven status. If, for instance, a reduction of JGB purchases (“hawkish”) were to coincide with a bout of risk-off sentiment (JPY +), then you could get unwanted yen appreciation and that undermines the already fruitless inflation targeting effort. As the BoJ learned on multiple occasions this year, the mere suggestion that policy tweaks are in the cards is enough to create turmoil.

The bottom line is that there is no end in sight to this and it’s probably only a matter of time before all of the dynamics currently at play collide with demographic trends to necessitate a literal plunge into helicopter money. Those interested can read the full exposition of that unfortunate eventuality in the post linked below.

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Mark Your Calendar, The ‘Era Of Helicopter Money’ In Japan Has A Date