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Markets (Economics)

The Terrifying Spectre of Normal Growth Haunting the Japanese Markets

Strategic Insights

— 1 min read

The Bank of Japan's officials are increasingly anxious about the prospect of sustained growth, which could force the institution to become a buyer of last resort for Japanese Government Bonds (JGBs). This concern is fueled by the revision of the Bank of Japan's "Accounting Rules," which no longer requires the marking to market of JGBs. Instead, they are valued at amortised cost, determined by an undefined moving average method. This change may indicate that the BOJ is planning for a scenario where it will have to absorb a large amount of JGBs, potentially leading to a significant increase in its bond holdings.

Key Takeaways:

  • The Bank of Japan's officials are worried about the prospect of sustained growth, which could force the institution to become a buyer of last resort for JGBs.
  • The BOJ has revised its "Accounting Rules," which no longer requires the marking to market of JGBs, potentially hiding losses on these securities.
  • "Real money" foreign investors have been selling off their JGB holdings, while Japanese public investors have shifted back into the stock market.
  • The Japanese Ministry of Finance needs to issue 36.6 trillion yen of new bonds before next March 31, which may be challenging if investor interest in JGBs continues to decline.
  • Relations between the BOJ and the Ministry of Finance could become strained if the BOJ is informally required to peg JGB rates, potentially leading to an increase in tensions between the two institutions.
  • The BOJ officials have been studying the history of the Federal Reserve from 1942 to 1951, when the Fed had to buy up all the government paper it was offered, potentially seeking to avoid a similar scenario.

Statistics:

  • 36.6 trillion yen: the amount of new bonds that the Japanese Ministry of Finance needs to issue before next March 31.
  • 3.6 years: the average duration of Japanese city banks' JGB holdings last year, which has decreased to just over 3 years as of March 31.
  • 55 basis points: the low yield of the 10-year JGB last year, which has increased to a high of 1.9 per cent last week.
  • 2 per cent or 2.5 per cent: the potential pegged yield of JGBs, which could be informally required by the Ministry of Finance.

Sources:

  • The article does not mention any specific sources, but it refers to the Bank of Japan's "Accounting Rules" and the Ministry of Finance's plans to issue new bonds.

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