Wednesday, April 6, 2016

How Weird Is The Bank Of Japan's Policy? As Unnatural As You Can Imagine

First off, the bank itself is pretty strange.
See, for example, 2013's "The Bank of Japan is the Weirdest Central Bank in the World":
And to think it looks so normal from the outside. AP Photo/Koji Sasahara

But what's emanating from inside those conventional looking walls is just twisted.
From FT Alphaville:

Are the BoJ’s negative rates a con?
Some guesswork from Jefferies on Wednesday:
The upcoming 27-28 April BoJ meeting is likely to push the authorities into finally admitting a plan to consolidate the JGB holdings into perpetual bonds alongside a formal move away from inflation targeting to nominal GDP targeting. There is a growing realization that there are effective limits to how much more JGBs can be acquired… 
Although there is certainly room for deposit rates to be dropped further into negative territory and possibly the BoJ acquiring local government debt, there is growing realization that at some point the BoJ is likely to announce a ‘tapering of JGBs’ towards the end of 2016 or early 2017… 
Currently, the Bank of Japan is buying just over Y80 trillion of JGBs per annum or the equivalent of three times to the rate of JGB issuance. The BoJ is approaching a shortage of JGBs for the central bank to buy, as commercial banks, pension and insurance funds have run down their holdings. Indeed, an IMF working paper that we quoted in the Japan 2016 outlook ‘Portfolio rebalancing in Japan: Constraints and Implications for Quantitative Easing’ that given the collateral needs of banks and the asset-liability management constraints of insurers there is a natural limit to JGB purchases. 
In this sense, we continue to believe that the BoJ’s sudden policy U-turn on negative deposit rates in January was driven by the need to collapse the yield curve into negative territory as far as possible. The authorities are attempting to push bond yields down below existing nominal GDP, so that the existing debt can be converted or ‘consolidated’ into a perpetual zero coupon bond presumably before any ‘tapering announcement’. 
This is a drum that Jefferies has been banging for a while btw. Last time they explained it a little more fully: “This will allow it to do outright debt monetization whereby the central bank buys the bonds with the intention of never selling them...