| | | Japan Bond Trading’s 73% Drop to Record Shows Stimulus Damage
August 20, 2015 — 11:00 AM EDT Updated on August 20, 2015 — 8:40 PM EDT
Japanese government bond trading has slumped to a record low and the Bank of Japan’s own analysis shows a market still in stress across a range of indicators.Trading volume sank to 15.6 trillion yen ($126 billion) in July, based on BOJ calculations using figures from the Japan Securities Dealers Association on Thursday. That’s down 73 percent from as high as 57.4 trillion yen in April 2012, a year before BOJ Governor Haruhiko Kuroda began unprecedented debt purchases. While a central bank report released two days earlier showed falling transactions and negative interest rates on repurchase agreements, it also signaled improvements in bid-ask spreads and the price impact of orders.
The BOJ’s 11-chart health check is the first in a series of quarterly updates after research in March suggested a decline in liquidity may be heightening price swings. JGBs are headed for their first annual loss since 2003, as brokerages question how long the central bank can keep buying the securities without killing the market.
“The BOJ’s bond-purchase program is so massive that the market is starting to doubt it can be sustained over a number of years,” said Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank AG’s securities unit in Tokyo. “Demand at the central bank’s buying operations will continue to decline, and there’s the possibility that at some point they’ll go undersubscribed.”
Elusive TargetKuroda has pushed back his target for achieving stable 2 percent inflation, first announced in April 2013, from an initial two-year time frame to around the six months between April and September of next year. Stagnation reflected in the central bank’s preferred consumer price gauge this year amid lower energy costs is raising the possibility of additional delays or a further expansion of stimulus.
The BOJ report shows so-called repo rates dropping below zero several times since October, when policy makers expanded asset purchases to the point that they could buy every new bond the government issues.
“A situation where BOJ operations go undersubscribed may still be a way off, but the lack of liquidity in the repo market has grown more severe,” said Akito Fukunaga, the chief Japan interest rate strategist at Barclays Plc in Tokyo. “The report shows the BOJ recognizes the importance of this data, so it may impact future monetary policy.”
Market FunctionalityIn the central bank’s most recent quarterly survey of market participants, conducted in May, 87 percent said market functionality was either low or not very high.
Investors had voiced concerns about low liquidity and bigger price swings in a meeting with Ministry of Finance officials in March, when a measure of historical volatility peaked at 4.1 percent, the highest since late 2003. It has since retreated to around 2.3 percent.
Japan’s sovereign debt has declined 0.1 percent this year as of Thursday, according to Bank of America Merrill Lynch indexes, even after rebounding 0.6 percent in the third quarter, helped by demand for haven assets globally as concern about China’s economy mounted. The benchmark 10-year note yielded 0.35 percent on Friday in Tokyo.
“There’s been a temporary rise in liquidity as investors turned risk averse, but it’s hard to imagine there’s been a true recovery in the market,” said Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “We’re not going to return to the situation when we could say liquidity in bond markets was limitless
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we are seeing a growing number of global markets start to break down into an area between functional disarray and outright not really functioning as capitalism set them up.
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