Friday, June 14, 2013

JGB Watch: BoJ minutes reveals of concerns over a JGB storm

Back to my JGB-Japan debt crisis watch.

Yields of JGBs across the maturity curve made substantial pullback today. This appears to have underpinned today’s oversold rally in the Japanese stock market.

The Nikkei 225 and the Topix posted modest gains todays following yesterday’s harrowing crash

Both benchmarks were actually very much higher (more than 3%) during most of the session but both surrendered the bulk of their gains during the close. 

Again, even in the intraday sessions we see signs of “stable instability”.

The BoJ’s minutes came out today only to reveal of apprehensions within members of the institution of the risks of a panic in JGBs

Many Bank of Japan board members were concerned that highly volatile Japanese government bond prices may accelerate JGB selling, the minutes of the BOJ's May 21-22 policy meeting released Friday showed.

"The recent rise in long-term interest rates in Japan was attributable to such factors as the increase in U.S. and European long-term interest rates, the rise in Japanese stock prices, and the further depreciation of the yen," the minutes said.

"Many members pointed out that, if the bond market remained high volatility, this could increase the amount of interest rate risk incurred by banks and other financial institutions, thereby further boosting sales of JGBs."

The 10-year bond yield briefing rose to 1.000% on May 23, a day after the BOJ's nine-member board decided by a unanimous vote to leave the bank's new policy target unchanged, as widely expected, at its monthly meeting.
Well the anxiety of some of the BoJ officials have merit; Japan’s banks have reportedly been unloading or have been hedging against interest rate risks.

Some of Japan's biggest banks are cutting their exposure to Japanese government bonds, a sign of how the central bank's unprecedented easing efforts are starting to reshape the country's financial markets.

The country's second- and third-biggest lenders by assets both say they are cutting "interest-rate risk"--a measure of the impact that moves in rates have on their balance sheets—so that a rise in bond yields won't hurt them by pushing down the value of the trillions of yen in Japanese government bonds they hold.
Some have been taking on derivatives to insure against interest rate risks…
The banks say they aren't necessarily dumping bonds, a move that would reduce exposure but could roil the already volatile JGB market. Instead, at least one of the banks, Mizuho, told The Wall Street Journal it is using interest-rate hedges to cut exposure to interest-rate risk by as much as a third. Mizuho said it is keeping the size of its bond portfolio roughly unchanged at Y30 trillion.
…and the reduction of JGB in their portfolio also translates to diminished profits from bond trades.
Meanwhile, an expected rise in interest rates means bond prices have likely peaked, and the era of easy trading profits is over. Japan's four biggest banking groups shed some ¥10 trillion of JGBs in April, and by the end of that month had a combined total of around ¥96 trillion, BOJ figures show.
Bankers hardly seem optimistic on Abenomics which for them hasn’t been working and seems as unlikely to work…
Still, it is unlikely that loan demand will increase sharply any time soon, Japanese bankers say, since the country's economy has only recently begun to pick up and the government's plan to stimulate growth hasn't gotten off the ground.

When it does, bank executives say they aim to tap into industries the government is targeting, such as agriculture or health-care, as well as overseas infrastructure for financing. Until then, they say, even if they do move some of their trillions of yen out of bonds, much of it will likely go into central-bank deposits rather than into the economy
And Abenomics has been exacting tremendous toll particularly to domestic companies.

From another Bloomberg article
For some domestic manufacturers that face higher costs without the export benefit, the situation is worse than after the global slump that followed the collapse of Lehman Brothers Holdings Inc. in 2008, said Tanaka at Uchida, which had 1.6 billion yen in sales last year.
The above is an example of how inflationism impedes on the coordinative functions of the price mechanism the economy.

As I pointed out last Sunday Japan’s merchandise trade constitutes only 28.59% of the GDP where exports account for 15.2%. 

This also means that a vast majority of the Japanese economy will be hampered by the PM Shinzo Abe's inflationism. 

Stable instability will likely remain as the dominant theme for Japan's financial markets which is likely to spillover to the world.

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