Japan: Concern over impaired functioning of the JGB market - AGFxC

Greg Gibbs, Director of Amplifying Global FX Capital, suggests that a key concern is that the functioning of the JGB market has been impaired by the dominant buyer position of the BoJ that now owns over a third of outstanding government bonds and bills.

Key Quotes

“Many commentators argue that the BoJ is reaching the limits of its capacity to buy JGBs and continuing at its current pace will achieve little other than risk destroying a market by crowding out existing private sector buyers. Critical voices worry that there may be significant volatility in the market in future, especially if the BoJ ever cuts back or even reverses its purchases, threatening stability of the economy and the JPY.

Furthermore, critics have viewed the damage to Japanese bank profits caused by negative yields and a flat yield curve, spilling over to a weaker equity market, without any increase in growth of bank lending.  As such, instead of seeing lower borrowing costs as supporting growth, they see them as a detriment to the economy.

It is fascinating that conventional wisdom is that monetary policy essentially works by lowering real borrowing costs as much as possible across the curve, and yet the BoJ is under fire because its policy, until last week, was contributing to new record low yields across the curve.”