The Bank of Japan cracks meaning the Widowmaker springs to life


by Shaun Richards

This morning has brought some pretty significant economic news out of Nihon or Japan. It started in an area I mentioned in a reply to yesterday’s comments because bond yields had pushed higher making me suspicious. Overnight if we stay with that theme we saw this.


That takes me back to my days out in Tokyo, but in the modern era that did not happen because the Tokyo Whale otherwise known as the Bank of Japan was hoovering up ten-year Japanese Government Bonds at a yield of 0.25%. A bit like Gandalf in The Lord of the Rings when he cried “Thou shalt not pass!”

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative

financial conditions.

So we have a need to maintain what is called “face” in Japan so something significant is coming. Especially as we see that foreigners or “gaijin” are being blamed.

Since early spring this year, volatility in overseas financial and capital markets has increased and this has significantly affected these markets in Japan.

A rise in short-term interest-rates? No not that one.

The short-term policy interest rate:

The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate

Balances in current accounts held by financial institutions at the Bank.

Instead we find a move they have been forced to do once before. That is loosen the terms of Yield Curve Control. It came with a sort of denial

The long-term interest rate:

The Bank will purchase a necessary amount of JGBs without setting an upper limit

so that 10-year JGB yields will remain at around zero percent.

But then we got there.

While significantly increasing the amount of JGB purchases, the Bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points.

So we get to it. They are shifting Yield Curve Control from 0.25% to 0.5% which they then confirm.

The Bank will offer to purchase 10-year JGBs at 0.5 percent every business day through fixed-rate purchase operations, unless it is highly likely that no bids will be submitted.

If we just for the moment stay in the bond market we see that the short Japanese Government Bond trade has turned in a profit as the March futures contract fell by 1.35 points. The yield has only moved to 0.4% so far because some will take profits and others may buy knowing they can sell to the Bank of Japan at 0.5% in the worst case.

Also the Bank of Japan was in making sure the falls were not too large ( back to the issue of loss of face)


Japanese Yen 

We have been following this all year due to the significance of the moves which initially was a large depreciation. This morning, however.

 The Japanese yen strengthened by more than 3% against the U.S. dollar to 132.56, marking its strongest levels in over three months. ( CNBC )

There are quite a few consequences here of which the simplest is that some traders will have singed fingers as others wake up with a smile. Next the Japanese Ministry of Finance will be having a celebratory glass of sake as its currency intervention now looks really rather clever. Also the new stronger phase for the Yen will mean that Japan will be paying less for its large energy imports so there will be an improvement there.

For international players there is the issue of the Carry Trade. We have been observing this for more than a decade now. For newer readers one of the factors into the credit crunch was that people borrowed Japanese Yen as interest-rates were low and then panicked out as the credit crunch hit. Well this year Japan has been the last (wo)man standing on the issue of negative interest-rates. Technically it still is but you are now being hit on exchange rates and borrowing via bonds is now more expensive.

Also the stereotypical Japanese investor Mrs. Watanabe faces the prospect of getting some interest on her money in Yen. This is a big deal when you consider how much Japanese money has gone abroad chasing yield.

The Tokyo Whale

There is another reason for the Bank of Japan to be supporting the JGB market today. Imagine prices falling when you have this position.

TOKYO — The share of Japanese government bonds held by the Bank of Japan has topped 50%, hitting a record high as the central bank has accelerated its government debt purchases to hold down long-term interest rates. ( Nikkei in June)

In fact things in some bonds could get pretty spectacular.

TOKYO, Nov 2 (Reuters) – The Bank of Japan’s ownership of newly issued 10-year Japanese government bonds (JGBs) exceeds the amount sold at auction,

Let me put it another way as it holds some 563,738,252,674,000 Yen of Japanese Government Bonds on which it is in the process of taking a bath. It has another 10.7 trillion of Corporate Bonds and the like on which it will also be taking a bath.

I stopped counting when Japan was on its nineteenth version of QE partly because they changed the name to QQE. But this must be about version 30 now in old money.


The Bank for International Settlements looked at this in a Working Paper earlier this year.

From the onset of the program in December 2010, the total amount of ETFs purchased by the BOJ has continued

to increase and reached about 35 trillion yen, or 5% of the total market value of all listed stocks in Japan.

Actually it is now 36.9 trillion Yen and this is the real reason for The Tokyo Whale moniker. Plenty of other central banks have bought bonds ( although not on the same scale) but no-one else has ploughed into the equity market in such a manner.

Oh and returning to the BIS paper this is how they explain an equity put option.

In the ETF purchase program, the BOJ does not randomly purchase ETFs, but instead only purchases ETFs when the stock market faces negative price pressure.

So we see another set of holdings which have had a bad day.

The Nikkei 225 fell 2.46% to 26,568.03, leading losses in the region, and the Topix fell 1.54% to 1,905.59. ( CNBC )

It did not buy any this morning. Perhaps it was mulling its recent losses although the overall programme has a mark to market profit. The only catch is who do you sell sych a large position too?


We have seen two major central bank moves in the past few days. First the ECB and its promise of more 0.5% interest-rate hikes and now the Bank of Japan has creaked. We may see more from the Bank of Japan as you know what I think about official denials.


Let me remind you that he introduced negative interest-rates only a Beatles week ( 8 days) after denying any such intention. A Christmas present as the Japanese like to move when us Gaijin are on holiday? Probably not but…

This also shows another end to central bankers being “masters of the universe” as we see another one in retreat. What little was left of Modern Monetary Theory went too. Not the grand collapse of the Swiss National Bank in January 2015 but a significant move. The Bank of Japan will be seeing larger and larger losses on what are enormous positions.

Let me leave you with Governor Kuroda who loves to tease.

BoJ’s Kuroda: Won’t Hesitate To Ease Monetary Policy Further If Necessary


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