Bank of Japan’s Mind Game: Massive Bond Buys to Cap 10-Year Yield? Didn’t Happen. 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 vigorously asserted all March that it would buy unlimited amounts of Japanese Government Bonds (JGBs) to keep the 10-year yield under 0.25% (it’s 0.23% now), amid wild rumors in the financial media about massive buys by the BoJ as it was trying to defend the yield peg against the markets that were selling JGBs hand over fist.

But amazingly, despite all the rumors of massive buys and market interventions, the BoJ’s holdings of Japanese government securities actually fell in March, as the BOJ disclosed on April 7, via the release of its balance sheet through March 31, and are now down by 2.6%, or by the equivalent of $113 billion, from the peak in February 2021.

And even more amazingly, its holdings of short-term Treasury discount bills increased in March, while its holdings of longer-term and long-term JGBs – the very bonds it would have had to buy to cap the 10-year yield – fell by 1% during the month, to ¥511 trillion ($4.13 trillion) at the end of March.

The Bank of Japan, after pushing QE to “shock and awe” extremes under Abenomics starting in 2013, instituted “yield curve control” in 2016 on top of it, threatening to trade unlimited amounts of JGBs to keep the 10-year yield at “ around zero percent.” Markets assumed this meant a range from -0.10% to +0.10%. The 10-year yield stayed close to 0%, while the BOJ was piling up huge amounts of JGBs.

But in late 2020, Abenomics was declared dead, and the BOJ began to taper its bond purchases. The peak of its holdings of government securities was in February 2021 at ¥540 trillion ($4.37 trillion) and then zig-zagged lower. In March, they dropped to ¥526 trillion, down 2.6% from the peak in February. The BOJ has now shed the equivalent of $113 billion in Japanese government securities!

One reason the BoJ has to be careful with its money-printing is that the yen has been getting crushed as other central banks are tightening, and Japan is a huge importer of commodities, including nearly all its natural gas and crude oil, and a weaker yen make the imported commodities a lot more expensive for Japanese companies and consumers to obtain.

This is likely why the BoJ played this mind-game with the market of buying large amounts of bonds when in fact it was more worried about the weakness of the yen.

The other over-hyped thing: Corporate bonds, Stock ETFs and J-REITs.

The financial media has long hyped the BOJ’s purchases of corporate bonds, commercial paper, stock ETFs and Japanese Real Estate Investment Trusts (J-REITs). But the amounts were always tiny by BOJ standards, and haven’t gone anywhere since February 2021. All combined, they account or just 6.6% of the BOJ’s total assets:

What has increased in March: Stimulus Loans

The BoJ operates pandemic loan programs, and pre-pandemic loan programs, designed to stimulate bank lending. Combined, they’re the second largest line item on the BoJ’s balance sheet, after government securities, and account for 20.6% of its total assets. These loans have continued to grow, and in March jumped by ¥6.9 trillion to ¥152 trillion:

For a sense of proportion, here are the top three asset categories on the BoJ’s balance sheet from February 2020 forward: government securities (purple), loans (green), and the combined total of stock ETFs, J-REITs, corporate paper, and corporate bonds (red line at the bottom).

Total assets.

Driven by the increase in loans, and despite the declines in government securities and the combined corporate credits and ETFs, the BoJ total assets rose by ¥5.3 trillion to ¥736 trillion ($5.95 trillion) at the end of March.

The economic religion of Abenomics under Prime Minister Shinzo Abe kicked off in early 2013 and ended after Abe’s departure in late 2020, when the BoJ quietly began tapering its asset purchases.

Note the period of Quantitative Tightening (QT) from January 2006 through June 2007 (circled in green) when the BoJ reduced its assets by 36%, unwinding five years of QE:

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