- 2018-09-28
The Japanese bond market has become a "zombie"
Haruhiko Kuroda, who was re-elected as the governor of the Bank of Japan, said recently that he would not reduce the scale of easing until the 2% inflation target is achieved, but this statement is more interpreted as intended to "avoid market chaos." In fact, the Bank of Japan’s Financial Policy Committee has begun to discuss the side effects and related risks of unconventional monetary policy. Kuroda himself unexpectedly mentioned the concept of reversal of interest rates in a speech last year, indicating that he also recognized the limitations of the current policy.
The negative effects of Japan's ultra-loose monetary policy are evident in its national debt market. Since 2013, the Bank of Japan has "injected a lot of water" into the market mainly in the form of buying treasury bonds. This move has shrunk the transaction of Japanese government bonds by more than half, and the average daily trading volume has dropped from 35 trillion yen (100 yen is about 6 yuan). The scale fluctuated all the way down to the 15 trillion yen level. The Treasury bond market has gradually become lifeless and has even been called the "zombie market."
According to data released by the bond brokerage Japan Bond Trading Corporation, Japan's 10-year Treasury bonds were not even traded on March 13. On certain days of the month, there were also zero transactions in other types of Treasury bonds. Data show that the two-year treasury bond has not been traded for two consecutive days.
Like most major central banks, the Bank of Japan has been buying government bonds to stimulate its economic growth. Data show that the Bank of Japan already holds 40% of Japanese government bonds. In 2016, the central bank introduced a new easing policy framework with "long-term and short-term interest rates as the inducement target". The two core contents are that the 10-year Treasury bond interest rate is maintained at 0% and the short-term interest rate is controlled at negative 0.1%.
Doug Peebles, Chief Investment Officer of AB Fixed Income, pointed out: "The yield curve control policy has fixed the price of government bonds. The Bank of Japan's share of the 10-year government bond market is as high as 80%. What else is there for others to trade?"
As a result, traders turned to bond futures. In the bond futures market, more buyers and sellers come in and out with relative ease. You know, the futures market is often used to trade oil, gold and agricultural products. Using derivative products allows traders to bet on price trends without having to purchase the commodity itself.
According to data released by the exchange operator, the Japan Exchange Group, the open interest of Japanese 10-year government bond futures increased by 46% year-on-year in March, and showed a year-on-year increase in February and January, increasing by 23% and 23% respectively. 19%.
Jerry Lucas, senior strategist at UBS Wealth Management, said: “The key is to realize that the futures market largely complements the cash market and is where trading activities are located. In the futures market, this is used to The easiest way to express where you think interest rates will go, especially in a low-volatility environment.” Lucas expects the Bank of Japan to increase its holdings of Treasury bonds to 50% soon.
Brian Nick, chief investment strategist at Nuveen, said: "Because it is difficult for Japanese investors to hold those bonds, they are gradually looking for alternatives."
Some analysts pointed out that these "alternatives" may include German bonds and US bonds. The more purchase demand, the greater the rate of return decline. According to the latest Treasury bond data released by the United States, Japanese investors were net buyers of U.S. Treasury bonds in January for the first time in six months.
Japan's financial risks have risen sharply
The Japanese government bond market is well-developed, accounting for more than 80% of the bond market. Key indicators such as turnover rate and liquidity are very dynamic, and they play an important role in economic operations. The dullness of the national debt market has caused Japan's financial risks to rise sharply.
The first is the sharp decline in the liquidity of national debt. In the past, the Japanese government bond market was dominated by financial institutions such as commercial banks and life insurance. In 2012, they held more than 63%, and now they only hold 17% and 22% respectively. In contrast, the Bank of Japan recently held the scale of government bonds in 2012. Approximately 4 times of that, holdings accounted for more than 41%. These treasury bonds lying in the accounts of the central bank will no longer enter the market, and will soon face a situation of "no debt to buy".
Second, the price formation mechanism of the national debt market was destroyed. In September 2016, the Bank of Japan introduced a new easing policy framework with “long-term and short-term interest rates as the inducement target”. The two core contents are that the 10-year Treasury bond interest rate is maintained at 0% and the short-term interest rate is controlled at negative 0.1%. This kind of monopolistic policy inducement has severely distorted the market mechanism, making it difficult to play the role of resource allocation.
Third, the financial intermediary function of treasury bonds has been greatly weakened. It is difficult for commercial banks and annuity insurance institutions to use treasury bonds as a guarantee for financing or capital operation. The central bank's forcible intervention and interest rate control make the financial function of treasury bonds disappear.
Finally, the biggest hidden danger of a recession in the Treasury bond market is that it increases the exit risk of the central bank. The central bank has squeezed out the original main body of the national debt market, which means that once it decides to sell the national debt, it will face a huge risk of no taker. At the same time, some of the original Japanese government bond market entities have turned to overseas financing. The landmark event was the announcement of the Tokyo-Mitsubishi UFJ Bank in June 2016 to give up the special qualification for government bond transactions issued by the Ministry of Finance. In addition, the start of interest rate hikes will threaten the stability of the central bank's own financial foundation, because its own capital is only 7 trillion yen, a ratio of only 1%.