More Evidence BoJ Desperate To Steepen Yield Curve

Two days ago, we highlighted how Bank of Japan officials have been briefing Reuters about reducing its monetary stimulus earlier than markets had been expecting – around 1Q 2018 rather than later in the year. In particular, the yield curve control (YCC) is likely to be eased from the current target of zero percent for 10-year JGB yields. It seems the BoJ became frustrated that markets had failed to respond to his hints about the “reversal rate”, i.e. that central banks can lower rates too far and damage financial institutions and the provision of credit in the economy. The one (former) BoJ official who was prepared to go on the record explained.

“Reversal rate is a pretty shocking word to come out of the mouth of a BOJ governor. It’s unthinkable the BOJ would insert it in Kuroda’s speech without any policy intention,” said Takahide Kiuchi, who was a BOJ board member until July.

 

The BOJ may allow long-term rates to rise more by shifting its long-term rate target to five-year yields from 10-year yields around the first quarter of next year, Kiuchi said. “The BOJ could put a positive spin on the move by saying it can more effectively reflate growth by keeping short-term borrowing costs low while allowing longer yields to rise.”

We might assume that the BoJ is becoming obsessed with steepening the yield curve and we got confirmation of this overnight. A story which flashed up on Bloomberg about the BoJ tapering bond purchases at the super long end.

BOJ Bond Cut Shows Desire to Steepen Yield Curve: Merrill Lynch

 

Bank of Japan’s slight cut in buying of bonds maturing in more than 25 years suggests its desire to steepen the yield curve, says Shuichi Obsaki, chief rates strategist for Japan at Bank of America Merrill Lynch.

 

Yield curve has been flattening of late and the BOJ is probably sending a message that it wants the super-long yield curve to steepen.

In terms of the mechanics, the BoJ today cut its purchases of bonds maturing in more than 25 years to 90 billion Yen from 100 billion yen at the previous offer on 17 November 2017. This was the first cut since March. JGB yields rose on the news in Friday trading, as Bloomberg reports.

JGB yields rose across the curve after the BOJ trimmed outright debt purchase in the super long sector.

 

BOJ reduced purchases of bonds with maturity of more than 25 years by 10b yen to 90b yen; it was the bank’s first cut in the sector since March.

 

Purchase volume for the 10-to-25-year zone was unchanged at 200b

 

JGB futures closed regular day down 0.13 at 151.02; key futures suffered the biggest intraday loss since Oct. 2, losing as much as 0.21

 

10-year cash bond yield rises 0.5bp to 0.025%; 20-year yield gains 1bp to 0.57%; 30-year climbs 2.5bps to 0.830%

 

Falls in JGB futures were exaggerated by sharp rise on Wednesday

It appears that the BoJ had become panicked by the yield curve flattening after reports that the government might reduce the issuance of super-long bonds in the next fiscal year, i.e. to March 2019. On Wednesday, there was a meeting between officials from Japan’s Ministry of Finance and primary dealers to discuss the plans for issuance in the next fiscal year.

While inflation is remains far below its 2% target, the BoJ is being forced into a policy reversal due to the damage its NIRP/ZIRP policy is doing to the financial sector. However, it’s portraying its defeat as  a victory via the supposed reflationary signalling of steepening yield curve. It’s utter nonsense and a shameful reflection on the depths which central bankers will stoop to.

BoJ Briefs Reuters: We"ll Let 10-Year Yield Rise Above Zero Percent Target Around 1Q 2018

It looks like BoJ Governor, Haruhiko Kuroda’s, minions are getting out and about to brief the financial news services that the biggest stimulator of all the central banks might reduce stimulus earlier than expected. The recipient of the unofficial briefings by BoJ officials is Reuters, which has this to say.

The Bank of Japan is dropping subtle, yet intentional, hints that it could edge away from crisis-mode stimulus earlier than expected, through a future hike in its yield target, according to people familiar with the central bank’s thinking.

With inflation still way below its 2 percent target, the BOJ sees no immediate need to withdraw stimulus, and regards weak price growth as its most pressing policy challenge. But bank officials are now more vocal on the rising cost of prolonged easing, such as the hit to bank margins - a sign that their next move would be to roll back stimulus rather than expand it, the people said.

It seems that BoJ has been sending signals – in particular by referring to the “reversal rate” - but some people weren’t paying attention.

The first sign of change came in Nagoya on Nov. 6, when BOJ Governor Haruhiko Kuroda - whose current term ends in April - said he was “mindful” of the risk prolonged easing could hurt banks’ appetite to lend. Days later, board member Yukitoshi Funo said the BOJ must be vigilant to the cost of easing. The most striking warning came from Kuroda last week, when he referred to a “reversal rate” - the level where rate cuts by a central bank hurt, not help, the economy by damaging banks and discouraging lending.

Kuroda gave a speech with the catchy title “Quantitative and Qualitative Monetary Easing and Economic Theory” at the University of Zurich on 13 November 2017. During the speech, in a section “Determining the Optimal Yield Curve”, he specifically referred to the reversal rate.

Another issue that has recently gained attention with regard to the impact on the functioning of financial intermediation is the "reversal rate." This refers to the possibility that if the central bank lowers interest rates too far, the banking sector"s capital constraint tightens through the decline in net interest margins, impairing financial institutions" intermediation function, so that the effects of monetary easing on the economy reverses and becomes contractionary. In Japan"s case, financial institutions have a solid capital base and credit costs have fallen sharply, so that at present their financial intermediation function is not impaired. However, because the impact of the low interest rate environment on financial institutions" soundness is cumulative, the Bank will continue to pay attention to this risk as well…Taking also various kinds of qualitative information into account, the Bank of Japan will continue to pursue the shape of the yield curve that is deemed most appropriate in order to maintain the momentum toward the 2 percent price stability target.

Okay, so we know Kuroda is focusing on the impact of the so-called reversal rate in the context of the yield curve. The unnamed BoJ officials spell it out to Reuters.

The most likely first step - albeit some time away - would be to allow long-term rates to rise more, reflecting improvements in the economy, they said. “The change in tone doesn’t have immediate policy implications, but it’s probably intentional,” one of the people said. “The BOJ wants to make its policy framework more sustainable,” said another. “Allowing longer-term rates to rise more would give banks some breathing space.”

We really should have paid more attention because Reuters implies (kind of) that referencing the reversal rate is central bank code for "we are preparing to reduce stimulus"…and the BoJ does like to drop hints.

European Central Bank (ECB) executive board member Benoit Coeure referred to the reversal rate in July last year in discussing when further rate cuts could become counter-productive. Five months later, the ECB decided to cut monthly asset purchases from 2017. The BOJ also has a history of dropping early hints of a future policy shift. Roughly a year before adopting its yield curve control (YCC) policy, the BOJ published a research paper analysing the feasibility of the idea.

In his speech “Assessing the implications of negative interest rates” at the Yale Financial Crisis Forum, Coeure noted.

it has been suggested that at some point the level of rates can become low to the extent that the detrimental effects on the banking sector outweigh the benefits of lower rates. In a recent paper, Brunnermeier and Koby refer to this rate as the “reversal rate”. At the reversal rate, bank profitability will fall, reducing capital generation via retained earnings, which is an important source of capital accumulation, and thereby eventually restricting lending.

Surpassing itself, Reuters “found” a BoJ board member, a former one anyway, who will speak on the record.

“Reversal rate is a pretty shocking word to come out of the mouth of a BOJ governor. It’s unthinkable the BOJ would insert it in Kuroda’s speech without any policy intention,” said Takahide Kiuchi, who was a BOJ board member until July.

 

The BOJ may allow long-term rates to rise more by shifting its long-term rate target to five-year yields from 10-year yields around the first quarter of next year, Kiuchi said. “The BOJ could put a positive spin on the move by saying it can more effectively reflate growth by keeping short-term borrowing costs low while allowing longer yields to rise.”

So there we have it…the BoJ is preparing to pull back on its obscene level of stimulus. Some time in the first quarter of 2018, or just after, the bank will adjust its Yield Curve Control (YCCC) policy, allowing the 10-year JGB yield to rise above the current zero percent target. Reuters explains.

The shift in communication comes as the U.S. Federal Reserve and ECB head for an exit from ultra-loose policy, and suggests the BOJ could follow suit sooner than expected. A majority of economists polled by Reuters before Kuroda’s latest comments expect the BOJ’s next move to be a withdrawal of stimulus - but not until later next year or beyond.

Just to make it really clear what’s happening, this was Reuters’ parting shot.

“It’s important the BOJ prepares markets in advance with careful communication,” said a third person familiar with the bank’s thinking.

Is this why the Yen is strengthening?

What Everyone Will Ask Kuroda Today: Why Has The BOJ Has Already Tapered QE By 45%?

Unlike Wednesday"s FOMC decision, few are excited about tonight"s BOJ announcement in which Kuroda is expected to announce no changes; in fact the biggest mystery is what time the "fluid" meeting will take place. What little suspense there is in Kuroda"s remarks, will likely be confined to his comments during the press conference about the BOJ"s exit strategy.

For those who plan to stay up in hope of catching some of the USDJPY volatility upon the BOJ announcement, here is a recap of what to expect from BofA:

We expect the Bank of Japan to remain on hold at its 16 June monetary policy meeting (MPM), keeping both its targets for rates and risk asset purchases unchanged. We also think the policy board will retain the "about ¥80tn" guideline for JGB purchases and refrain from announcing official tapering out of concern that doing so may send an unintentionally hawkish message to the markets. The central bank has every reason to be cautious. Growth has been running well above potential in 1H17, but price pressures remain weak, with BoJ-style core inflation (CPI ex fresh food and energy) languishing at 0.0% as of April. Downside risks to the inflation outlook suggest the BoJ is nowhere close to hiking rates or shrinking its balance sheet.

However, with the media and some members of parliament expressing increased interest in the BoJ"s "exit strategy", we believe it will be a focal topic at Governor Kuroda"s post-MPM press conference. But we doubt he will say anything new. The governor will likely remain cautious in his communications, reiterating that the central bank is not yet considering specific plans, given the 2% inflation target remains a long way away.

The Sankei Shimbun recently reported that the BoJ board will consider upgrading its overall assessment of the economy at the 20 July MPM, when it updates its estimate of the output gap in the next quarterly Outlook Report. However, risks to the board"s FY17 Japan-style core inflation forecast of 1.4%YoY are tilted firmly to the downside, in our view, especially if commodity prices stay at current levels. Another downgrade to the board"s CPI forecasts seems likely in July, or by the October MPM at the latest. In our view, the last thing the BoJ wants to do in this situation is to signal policy tightening.

In the absence of policy changes, the focus will be on Governor Kuroda"s post-MPM press conference, scheduled for 3:30pm JST. We expect the Q&A to be dominated by two themes: (1) the BoJ"s latest stance on an exit strategy from ultra-accommodative monetary policy and (2) the seeming contradiction between the policy board"s commitment to increase its JGB holdings at an annual rate of "about ¥80tn" and the ongoing slowdown in the central bank"s bond purchases, which we now estimate is running at about ¥60tn.

But before we get into BofA"s discussion of these two topics, it is worth reminding readers of something we first noted three months ago: the BOJ is quietly engaging in stealth tapering of its QE, for the same reason that the ECB will have no choice but to taper its own purchases - it is running out of eligible bonds to buy.

In a report by JPM, the bank calculates that in May, the Bank of Japan bought just Yen7.89 trillion ($71.6 billion) worth of Japanese government bonds. This was the the least outright buying since October 2014, when the central bank surprised markets by saying it would increase its asset purchases. Since launching its own version of QQE (before it twisted into Yield Control), the central bank has kept in place its target of increasing bond holdings each year by "about" Yen80 trillion. However, at the current rate of buying, the WSJ writes, the holdings are set to rise this year by only about Yen55 trillion.

The central bank is "technically tapering," said Hiroshi Shiraishi, senior economist at BNP Paribas in Tokyo. This can be clearly seen in the following chart from Bank of America.

Aside from the a declining supply of bonds held by the private sector, one tactical reason why the BOJ may be buying fewer bonds is its "yield curve control" policy, which aims to keep the yield on 10-year government bonds at zero. This implies it can buy fewer bonds when the yield is close to that target. Wednesday, the yield was at 0.06%.

Previously, Kuroda has acknowledged this slowdown, but has been quick to declare that what effectively amounts to a 35% taper doesn"t signal a retreat from easy-money policies. "At this stage, we are not exiting," Kuroda said at The Wall Street Journal"s CEO Council meeting in Tokyo on May 16.

Yes but what happens when the BOJ officially announces the need to start tapering? And more importantly, what will be the reaction of the market, which has so far taken the "technical tapering" in stride, in the country where the central bank already owns over 43% of all Japanese government bonds, and where the BOJ"s balance sheet is 90% of GDP?

So, here is Bank of America again explaining what Kuroda will likely respond if and when asked about (1) the BoJ"s latest stance on an exit strategy from ultra-accommodative monetary policy and (2) the seeming contradiction between the policy board"s commitment to increase its JGB holdings at an annual rate of "about ¥80tn" and the ongoing slowdown in the central bank"s bond purchases, which we now estimate is running at about ¥60tn.

We think Governor Kuroda"s communications will remain cautious in response to both issues. Attention on the BoJ"s exit strategy has increased since Bloomberg reported in an 8 June article that the BoJ was considering "re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus, without giving the impression that this is on the agenda anytime soon." At the same time, opposition lawmakers have raised greater concerns over the BoJ"s financial health when the central bank eventually raises interest rates and have pressed the central bank to disclose detailed exit plans and its associated costs. While the Bloomberg article did not contain any new information, in our opinion, it ended up causing some volatility in the markets, suggesting investors will remain sensitive to Governor Kuroda"s comments. For this reason, we think the governor will likely say very little on the subject.

On slowing JGB purchases, Governor Kuroda is likely to acknowledge-as he has in recent Diet hearings-that the rate of increase in the central bank"s JGB holdings has recently fallen to around ¥60tn on an annualized basis. However, we expect the governor to stress that the slowdown in JGB purchases does not reflect intentional "tapering" but reflects an automatic adjustment mechanism under yield curve control (YCC). In other words, the slowdown in BoJ bond buying is a result of reduced upward pressure on JGB yields, reflecting a fall in US rates.

In other words, Kuroda will hope that the BOJ"s communication remains on autopilot. Still, at a time when the Fed just laid out what its balance sheet normalization would look like, and when even the ECB has "trial ballooned" it will soon follow, the discussion will inevitably turn to the most sensitive topic facing not only the BOJ, but Japan itself: how does the central bank hope to reduce its gargantuan balance sheet, which recently surpassed that of the Fed. Here is BofA"s answer:

The BoJ has continued purchasing significant amounts of JGBs for over four years under its QQE policy, and consequently its balance sheet has ballooned to over ¥500tn, comparable in size to Japan"s GDP. Various side effects have emerged. Since the beginning of 2016, the BoJ has carried out more JGB lending through Securities Lending Facility operations, a sign that the market shortage of JGBs has become more serious. Moreover, the repo rate plunged near the end of FY16 (March 2017) due to strong demand for TBs. Recently, the BoJ has reduced its purchases of short- and medium-term JGBs, so its Securities Lending Facility operations have also dwindled. The rise of short- and medium-term yields shows supply-demand has eased somewhat. However, if investor demand (and not necessarily such strong demand) turns to JGBs again, the risk is rising that supply-demand will tighten and prices will be distorted.

Naturally the BoJ knows this very well, so last year it introduced yield curve control (YCC) as a step on the way to making monetary policy more sustainable. So far the BoJ has succeeded at maintaining yields near targeted levels, and it has quite smoothly reduced its JGB purchases. The year-on-year increase in the BoJ"s holdings of JGBs has declined to about ¥70tn, well below the guideline figure of ¥80tn. If the current purchasing pace is maintained, YoY growth in holdings will decline even more. The BoJ"s gross annual purchases amount to about ¥96tn now, and at the end of May it held ¥43tn of JGBs that were set to be redeemed within one year, so its net purchasing pace is around ¥53tn now. For five months from January to May 2017, the BoJ increased its JGB holdings by ¥30tn, and if the current purchasing pace is maintained, its JGB holdings should increase by about ¥60tn in 2017.

Whatever explanation Kuroda comes up with, the reality is that the "liquidity impulse" generated from purchasing ¥53tn vs the designated ¥80tn, represents a greater than 30% reduction. And sooner or later, the market will realize that the liquidity added to the market by the BOJ is nearly half of what it should be in theory. That moment could result in a rude awakening, as it will likely come as the Fed continues to tighten its own monetary policy with the ECB potentially starting to tighten too as it is about to run out of eligible Bunds to buy. So how will the BOJ proceed? Here, again, is BofA:

We think the BoJ will find it difficult to change policy for the time being, so the JGB market"s volatility might stay low for a while. However, as the economic recovery deepens and domestic inflation picks up, it would not be surprising to us if the BoJ increased its communications with the market and put more effort into forming a consensus about its exit from QQE. Of course, it will proceed cautiously to avoid sudden yield surges and yen appreciation. If some conditions are fulfilled-inflation rises to about 1% and the Fed and ECB proceed steadily towards monetary normalization-it is possible the BoJ shifts from excessive easing to a more sustainable monetary policy even if its exit lies well in the future (The BoJ"s public and private face). One risk is that an unexpected event triggers global risk avoidance leading to lower yields and a simultaneous round of yen appreciation. For example, even if the 10yr yield fell far below its target, a reduction in JGB purchases could prompt further strengthening of the yen. Steering this course would not be easy. In that case, the BoJ would probably need to take countermeasures such as setting a minimum yield and continuing with its purchase operations.

Finally, here is Bank of America"s take on what the BOJ"s action could mean for the Yen:

The BoJ is widely expected to leave its policy unchanged, and the Fed"s stance and US data will be the predominant concern for the USD/JPY. We believe the BoJ is careful about not sending the wrong signal about a policy exit when the financial market is questioning the strength of the US and Chinese economies, and Japanese inflation measures are hovering around 0%. Instead, the market is likely to focus on upcoming US data to judge if the Fed is right about its policy normalization plan, forcing the market to catch up, or the Fed has to adjust toward the dovish market expectation.

We argued that self-sustained USD strength may need more time to materialize such that Japanese equities may be a better position for now. In fact, our US strategists argue it could take a few more months to know whether the US will reform its tax system. We prefer being long NZD/JPY for now while we fundamentally remain constructive on USD/JPY.

In short, for now the BOJ remains on autopilot, which is why don"t expect much from today"s BOJ announcement.

Abe Advisor Says It's Time To Pull The Plug On QE

In what may be one of the few sane policy recommendations to emerge out of Japan in years, Nobuyuki Nakahara, an adviser to Prime Minister Shinzo Abe and an influential former Bank of Japan board member said the BOJ should make a "clean break" from its current policy
approach when Kuroda"s term ends next spring, roughly at the same time as Yellen"s term is ending (at which point a Trumpian Fed is said to arrive).  According to Nakahara, Kuroda"s successor should announce a "second phase" of the BOJ"s quantitative-easing program that end the BOJ"s attempts at "yield control" and slashes purchases of JGBs by at least half, Dow Jones reported.

He described the central bank"s efforts to control the yield curve as an attempt to make up for the "mistake" of introducing negative interest rates in early 2016.

In a radical - and accurate - departure from the status quo which will inevitably result in currency collapse and hyperinflation, controlled Inflation in Japan would return thanks to the correction in the yen"s strength, the tightening of the labor market to full employment and a tick-up in wages, the former central banker said, so the bank should scale back its efforts to fuel it. If the bank is reluctant to act so boldly, it should commit to buying only as many JGBs as needed to reach 2% inflation by 2023 at the latest, he added.

"Under the new governor they should think hard about what they will do for the next five years," said Mr. Nakahara, who has already said he doesn"t favor a second term for Mr. Kuroda.

According to Nakahara, continuing to buy government bonds at the same pace of JPY80 trillion per year, will limit the bank"s leeway to respond in a crisis and stop interest rates from rising gradually as inflation picks up. A bigger problem is that as this website first, and then the IMF calculated, the BOJ will run out of monetizable debt in a little over a year, at which point it will have bond market failure to deal with as well.

The comments from Nakahara are a striking U-turn from one of the strongest Japanese advocates of QE, and are the latest indication that central bankers around the globe have realized the past 8 years of policies have led to a monetary policy dead end.

Last week, Japan"s government announced the unemployment rate in February fell to 2.8%, the lowest since June 1994, which in a normal world where the Philips curve works would have led to a spike in price, and yet in Japan CPI barely rose by a mere 0.2% (and that"sonly after using one of the BOJ"s endlesslyrevised CPI definitions).

"We have been fighting deflation for 20 years, and finally we have full employment, but the BOJ still hasn"t gotten consumer prices up or considered what kind of relationship it should have with the finance ministry regarding their JGB holdings," he said. Well, the reason for the is demographics and technology, but one thing that is certain: keep pumping enough money, eventually shifting to the infamous monetary "helicopter", and you will get your inflation, just like in Venezuela.

Nakahara hinted as much when he suggested that one measure the BOJ could consider would be turning one part of its JGB holdings into a perpetual bond, he added.

In other words, instead of pushing away from unconventional policy, Abe"s advisor was really calling for helicopter money, although since that is a Ministry of Finance responsibility and not that of the BOJ, one can see why the former central banker is eager to reduce the role of the BOJ.

Finally, Nakahara said there are risks for the BOJ and to his view. If domestic stock prices fall and the yen strengthens against the dollar, the bank would need to scrap its yield-curve control earlier and focus on bond purchases as its main policy tool. The same approach would also be necessary if global oil prices stagnate between $30 and $50 a barrel. Considering that the Yen is already surging, and a plunge in the Nikkei - which correlates one to one with the Yen - is now inevitable, means that far from scrapping QE, the BOJ may soon have to do much more of it, mercifully reaching Japan"s monetary  endgame that much faster.

And speaking of the Yen, moments ago it just hit fresh five month lows.

Spot The Intervention (Bank Of Japan Edition)

We warned earlier "the market would test the BoJ," and sure enough Kuroda and his "lost boys" answered the market"s question by intervening aggressively (offering to buy an unlimited amount of bonds) to rescue what was a rapidly escalating collapse in Japanese government bonds.

As Bloomberg reports, The Bank of Japan offered to buy an unlimited amount of bonds at a fixed rate in an unscheduled operation to reassert control over surging yields. The yen and yield for 10-year debt fell.

The central bank will buy five-to-10 year securities from the secondary market, it said in a statement Friday. It’s offering to buy the benchmark 10-year notes at 0.110 percent, it said.

The move comes after an earlier attempt Friday morning to cap yields by expanding bond purchases in a regular operation failed. 

Governor Haruhiko Kuroda on Tuesday recommitted to his strategy to hold 10-year debt yield at around zero percent even as accelerating inflation and an improving outlook for some of the world’s biggest economies push up bond yields globally.

The reaction is self-evident...

And USDJPY spiked...

It would appear Governor Kuroda has shown his hand one too many times (after November"s first operation - which failed to garner any bids).

Japan Slashes 2017 Bond Issuance By 5% In Implicit Boost To QE; First Reduction In 10Y JGBs Since 1998

Just days after raising its economic outlook, Japan"s ministry of finance announced on Thursday that for the first time since 1998 it would slash government bond issuance in fiscal 2017 which starts on April 1.  The MOF plans to issue Y154.0 trillion in JGBs in coming fiscal year, down 5% from an initial Y162.2 trillion for the current fiscal year, as a result of sliding demand for debt amid continued very low to negative interest rates.

The JGB plans also feature a rare year-on-year cut in the issuance of 10-year JGBs: such a reduction is the first since fiscal 1998.

According to MarketNews, the government is also trying to reduce its dependence on debt issuance for financing a budget deficit for the third consecutive year. In fiscal 2017, it plans to meet rising social security and other costs by using funds set aside for currency market operations in the face of slow tax revenue growth.

Looking to capitalize on still record low , and in many cases negative, rates around the curve, the MOF will reduce the issuance of 20-, 10-, 5-, 2-, and 1-year debt while raising the share of 40-year bonds to take advantage of continued low bond yields caused by the Bank of Japan"s aggressive monetary easing, which has pushed some yields into negative territory. The amount of the JGBs to be sold to institutional investors through auctions in a calendar year will decrease for the fourth consecutive year in fiscal 2017 by Y5.8 trillion to Y141.2 trillion.

A partial breakdown of the shorter-end in proposed 2017 issuance:

• Y27.6 trillion of 10-year bonds, down from Y28.8 trillion in the current fiscal year;


• Y26.4 trillion in five-year notes, down from Y28.8 trillion in the current year;


• Y26.4 trillion in 2-year notes, down from Y27.6 trillion;


• Y23.8 trillion in 1-year bills; down from Y25.0 trillion.


• The ministry will also sell inflation-indexed 10-year bonds worth Y1.6 trillion, down from Y2.0 trillion in this fiscal year.

Additionally, the government will continue issuing more 40-year debt totaling Y3.0 trillion on a calendar year basis, up from Y2.4 trillion in the current year. The issuance of 30-year debt will be unchanged at Y9.6 trillion. Meanwhile, the MOF will decrease the sale of 20-year bonds to Y12.0 trillion in fiscal 2017 from Y13.2 trillion in fiscal 2016 in response to declining investor demand.

The ministry plans to auction liquidity-providing bonds worth Y10.8 trillion next fiscal year, up from Y9.6 trillion. These auctions are aimed at providing the market with additional bonds to cope with specific shortages.

While the ECB has been fighting with a lack of eligible collateral in recent months, which have sent the 2Y Bund to record low yields in a year-end scramble by banks to window dress their books, a similar problem has emerged for Japan, where massive asset purchases by the BOJ are "drying up the bond market" according to MNI. At the end of September, the BOJ held about 38% of Japan"s debt outstanding that has topped Y1 quadrillion (Y1,000 trillion), double of its GDP.

The MOF assumes an interest rate for fiscal 2017 of a record low 1.1%, down from 1.6% in the current year. It is based on the BOJ"s new policy framework under which it is trying to  keep the 10-year Japanese government bond yield around zero percent. Indicatively, a 0.5% point drop in the assumed interest rate is estimated to trim borrowing costs by Y500 billion.

Some additional details of the proposed budget:

• The MOF will sell Y34.37 trillion in new bonds to finance the fiscal 2017 budget, down from this year"s initial plan to sell Y34.43 trillion. The issuance of JGBs to refinance maturing bonds will fall to Y106.1 trillion from Y109.1 trillion.


• Bonds issued to help rebuild Japan"s northeastern region hit by the 2011 earthquake will also decrease to Y1.5 trillion from Y2.2 trillion while bonds to finance the Fiscal Investment and Loans Program will fall to Y12.0 trillion from Y16.5 trillion.

What does this mean from a market standpoint?

Well, if nothing changes on the BOJ QE side, the 5% reduction in gross issuance means that, "all else equal" Japan"s QE just got a 5% boost as the BOJ will have Y8 trillion less primary issued bonds to monetize, leading to even greater purchases from private holders to offset the difference. Implicitly, it means an expansion of QE, not a taper as some have speculated.

Perhaps in confirmation of this, the USDJPY spiked on the report...

... while 10Y JGB yields have continued to decline:

The question is whether all else will be equal, or if Kuroda will take the hint from the MOF and at the next BOJ conference cut the amount of BOJ QE by a similar, if not greater, amount, especially if indeed the central bank is expecting faster growth and a pick up in global inflation.

Finally, with the ECB recently tapering as well, many have wondered if and when the BOJ will join the global tightening party. Today"s MOF announcement may be just the catalyst to get the ball rolling.