It’s Not Stupidity, It Is Apathy (For Now)

Ten days ago, it was reported that the Bank of Japan for the first time set aside reserves against expected losses should its massive portfolio of JGB’s finally move toward QQE success. The main part of all this “stimulus” has been the accumulation of primarily government bonds at massive premiums. If it were ever to actually work, then the Japanese central bank will have the very good problem of a winning economy causing financial losses as market-determined interest rates rise. To account for that scenario, BoJ last year updated its policy framework so that it could set aside some interest income to offset any such principal losses.

The first accumulation of this reserve was reported as ¥450 billion for the year ending March 2016. It is a tiny fraction of the ¥350 trillion in total JGB holdings, but much larger in proportion to the payments the central bank makes to the central government (but it’s not monetization?). In fiscal 2015, the BoJ is believed to have only remitted about ¥425 billion, much less than the ¥757 billion paid during the prior fiscal year. Part of that drop was in relation to this new reserve, while BoJ also had to take account the rest of its enormous asset holdings – including those denominated in foreign currencies (like UST’s).

As with any bank’s loss reserves, the intent is to minimize swings in income so that results are far more predictable, in this case payments to the federal government. The implication is that BoJ is more confident in the ultimate success of QQE and NIRP so that it would begin what is really an “exit” strategy.

Around the same time as news of this “exit” found its way into the mainstream, Japanese government officials spent the better part of the latest G-7 meeting trying to get the group to declare a high risk of another Lehman-type crisis.

Japan had pressed G-7 leaders to note “the risk of the global economy exceeding the normal economic cycle and falling into a crisis if we did not take appropriate policy responses in a timely manner.” On Thursday, Abe presented documents to the G-7 indicating there was a danger of the world economy careering into a crisis on the scale of the 2008 Lehman shock.