The Shizzle - Japan Bond Maths

The Shizzle Feb 13th, 2013

Why I’m writing:  'The BOJ said that they are increasing buying bonds, but they're also putting power into lowering interest rates. If the economy gets better, then l/t interest rates like a 10yr yield at less than 1% are unlikely. . . . . If we think about the future and if interest rates go up, then 67% in bonds does look harsh. We will review this soon.’   Takahiro Mitani, president of Japan’s Govt Pension Investment Fund (Y108tr in assets).

The evidence:  How much does Japan’s government depend on Bank of Japan, rather than private sector savings surpluses, buying the bonds it needs to float?

Yn tr	2012	2011	2010	2009
JGBs Issued	26.29	27.79	43.03	-10.63
FBs Issued	11.26	14.08	6.03	35.22
Total Supply	37.55	41.87	49.06	24.59
PSSS	15.77	27.53	49.74	13.94
Net BOJ Holdings	23.31	13.28	5.41	9.79
Total Demand	39.08	40.81	55.15	23.73
Demand – Supply	+1.53	-1.06	+6.09	-0.86

JGBs = Japanese Govt Bonds; FBs = Financial Bills; PSSS = Private Sector Savings Surplus; Net BOJ Holdings = Change in BOJ’s holding of JGBs, less changes in govt deposits

Conclusions:

·         In 2012, private sector savings surplus could have bought only 42% of the JGBs and FBs the government needed to sell. BOJ buying was the equivalent of 62.1%.
·         Between 2010 and 2012, annual debt issuance fell by 30.7%, net BOJ buying grew by 76.8%, and the private sector savings surplus shrank by 68.3%
·         Increasingly, Mitani-san’s portfolio, and the ability of PM Abe to finance expansion, depends pretty much solely on what BOJ decides to do next.
·         BOJ gov Shirakawa steps down on March 19^th.  Who his successor is really matters.

Follow up?  If you’d like further analysis, or to argue the toss about the conclusions, please email me on michael.taylor@coldwatereconomic.com