Japan Approaches Limit To Bond Buying Former BOJ Official Okina Warns
A day after we highlighted the veritable collapse in U.S. shadow banking liquidity (down by nearly half since 2008) occasioned by a potent one-two punch from Fed bond purchases and regulatory measures designed to stem prop trading (but which have apparently impaired market making), we get rumblings out of Japan that the BOJ might have hit the limit on how many JGBs it can purchase without breaking the market. Specifically, Yuri Okina, vice chairman at Japan Research Institute, is concerned about the exact same issue raised by the Center for Financial Stability in their report on the “steep slide” in market finance: namely, that the absence of liquidity created by QE will create distortions and volatility.
From Bloomberg:
“If additional easing is done using government bonds, it may have the considerable side-effect of impairing the functioning of the market,” Okina, an economist and a former BOJ official, said on Feb. 26 in an interview in Tokyo.The BOJ’s purchases have had a “huge” impact on the market’s liquidity, Okina said. Buying bonds at a faster pace would make it more difficult for the BOJ to exit from its easing policy when the time comes to reduce stimulus, she said.
Clearly there’s something self-evident (even tautological) about this discussion. That is, the BOJ is set to monetize all JGB gross issuance in 2015 (and may own 50% of the entire market within three short years), so yes, there are likely to be rather serious issues with market liquidity going forward.
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