The Bank of Japan’s Mental Game: Massive Bond Purchases to Cap the 10-Year Yield? Does not occur. Bond holdings actually fell. But it worked
Maybe the BoJ doesn’t want to totally crush the yen?
By Wolf Richter for WOLF STREET.
The Bank of Japan strenuously asserted throughout March that it would buy unlimited amounts of Japanese government bonds (JGBs) to keep the 10-year yield below 0.25% (it’s at 0, 23% currently), amid wild rumors in the financial media of massive buying by the BoJ as it tried to defend the yield peg against markets selling JGBs in spades.
But surprisingly, despite all the rumors of massive buying and market intervention, the BoJ’s holdings of Japanese government securities fell in March, as revealed by the BOJ on April 7, via its balance sheet release through March 31, and are now down 2.6%, or the equivalent of $113 billion, from the February 2021 summit.
And even more surprisingly, his holdings of short-term Treasuries increased in March, while his holdings of longer-term and long-term JGBs – the same bonds he should have bought to cap the 10-year yield. – fell by 1% during the month, reaching 511 trillion yen ($4.130 billion) at the end of March.
The Bank of Japan, after pushing QE to extremes of “shock and admiration” under Abenomics from 2013, instituted “yield curve control” in 2016 on top of that, threatening to trade quantities unlimited amounts of JGB to keep the 10-year yield at ” around zero percent. Markets assumed this meant a range of -0.10% to +0.10%. The 10-year yield remained close to 0 %, while the BOJ accumulated huge amounts of JGB.
But at the end of 2020, Abenomics was declared dead and the BOJ began to scale back its bond purchases. Its holdings of government securities peaked in February 2021 at 540 trillion yen ($4.37 trillion) and then zigzagged lower. In March, they fell to 526 trillion yen, down 2.6% from the peak in February. The BOJ has now lost the equivalent of $113 billion in Japanese government securities!
One of the reasons the BoJ needs to be careful with its money printing is that the yen has been crushed as other central banks tighten, and Japan is a huge importer of commodities, including almost everything. its natural gas and crude oil, and a weaker yen make imported goods much more expensive for Japanese businesses and consumers to obtain.
This is probably why the BoJ played this mental game with the market by buying large amounts of bonds when in fact it was more concerned about the weak yen.
The other thing over-hyped: corporate bonds, stock ETFs and J-REITs.
The financial media has long promoted the BOJ’s purchases of corporate bonds, commercial paper, stock ETFs and Japanese real estate investment trusts (J-REITs). But the amounts have always been tiny by BOJ standards, and haven’t gone away since February 2021. All combined, they’re or just 6.6% of the BOJ’s total assets:
What went up in March: Stimulus loans.
The BoJ runs pandemic loan programs and pre-pandemic loan programs, designed to boost bank lending. Together, they constitute the second largest item on the BoJ’s balance sheet, after government securities, and represent 20.6% of its total assets. These loans continued to grow and jumped from 6.9 trillion yen in March to 152 trillion yen:
To give an idea of the proportions, here are the three main asset classes on the BoJ’s balance sheet as of February 2020: government securities (purple), loans (green) and the combined total of equity ETFs, J-REIT, corporate papers and corporate bonds (red line at the bottom).
Driven by the increase in lending, and despite the decline in government securities and corporate credit and ETFs combined, the BoJ’s total assets increased by 5.3 trillion yen to 736 trillion yen (5.95 trillion dollars) at the end of March.
The economic religion of Abenomics under Prime Minister Shinzo Abe began in early 2013 and ended after Abe’s departure in late 2020, when the BoJ quietly began to scale back its asset purchases.
Note the Quantitative Tightening (QT) period from January 2006 to June 2007 (circled in green) when the BoJ cut its assets by 36%, ending five years of QE:
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