The BOJ's Stench of Desperation

Takeaway: The BOJ is monetizing over half of annual JGB issuance but has still failed to energize economic growth.

Editor's NoteBelow is an excerpt from a research note written by Hedgeye Senior Macro analyst Darius Dale. To access our institutional research email sales@hedgeye.com

The BOJ's Stench of Desperation - Nikkei  BOJ cartoon 09.13.2016

That Japan's failure to launch

 

...is occurring at a time when the Bank of Japan (BoJ) is expanding its balance sheet at a near +25% annual clip speaks volumes about the inefficacy of the BoJ’s existing monetary easing platform.

 

And while market participants have yet to defend critical ratios with respect to the size of the BoJ’s balance sheet or the pace of its accumulation of JGBs, the seemingly egregious nature of both is worth flagging.

 

Specifically:

  • The BoJ’s balance sheet is nearly three times the size of the next closest G4 counterpart when adjusted for the size of the respective economies.
  • When assessed as a ratio to total nonfinancial sector credit (a good proxy to evaluate where LSAP programs may face frictional resistance), the BoJ’s balance sheet is twice the size of the next closest G4 counterpart.
  • Prior to the start of Abenomics, the BoJ was a fairly distant third with respect to JGB ownership at 12% of the float. It’s now far and away the #1 holder at 33.9% of the total. Monetizing over half of annual JGB issuance has a tendency to do that for you. 

 

The BOJ's Stench of Desperation - central bank 9 20

 

All told, the purpose of this note isn’t to speculate on what the BoJ will or won’t do tomorrow. For all I care, Kuroda could tightrope across the towers of the Tokyo Metropolitan Government Building wearing nothing but whitey tightys and I would be largely unfazed.

 

While there’s no doubt the BoJ has the potential to shock global bond markets for a TRADE, there’s also no doubt that nothing they do tomorrow or in the not-too-distant future will outweigh economic gravity in the pricing of interest rates over the long term. How they plan to achieve the aggressive growth and inflation targets as mandated by Abenomics remains well beyond our purview – and likely theirs too (hence the stench of desperation and policy fatigue).

 

See the forest, not the trees. The central planning #BeliefSystem continues to break down right before your very eyes.


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