All Japanese Financial Roads Lead To The Printing Press

By David Stockman

So this is how it works. Japan has the most massive public debt in the world relative to national income, but the implicit aim of Abenomics is to destroy the government bond market. After all, if inflation goes to 2% or higher, government bonds yielding 0.6% will experience thumbing losses. Even the robotic Japanese fund managers no longer want to hold the JGB—- as evidenced by another session when no future contracts on either the 10-year or 20-year bond changed hands. As Zero Hedge noted,

You know things have got a little too strange when the largest government bond market in the world saw no futures trades in the morning session last night. We may complain in the US of falling volumes but none, zero, zip, nada is about as low as it gets; and that is how many trades occurred in the 20Y futures contract in Japan (and 10Y cash bond market). This is not the first time as Mizuho warned in Nov 2013 that “to all intents and purposes, there is no JGB market.” And this lack of trading on a day when major macro data printed far worse than expected… well played Abe… you entirely broke your bond market.

In effect, the BOJ is the bond market—that is, the buyer of first, last and only resort. Yes, there are upwards of $12 trillion of Japanese government debt and other obligations outstanding. In normal times, a bond market that didn’t trade in the context of such a massive overhang would have produced sheer panic and bedlam among officialdom.

But not in this Keynesian day and age. The implicit assumption is that the BOJ can ultimately buy all the bonds ever issued and the massive outpouring of new bonds yet to come. Otherwise how can you explain the Wall Street Journal article posted below.

After endless prodding by the Abe government, Japan’s pension system (GPIF) will now begin to massively dump hundreds of billion of JGBs—so that it can reduce its bond holding from 60% of its $1.3 trillion portfolio to 40%. This is being done, of course, to stimulate the Japanese economy by putting pensioners in harm’s way. The cash to be derived from this program of bond dumping will used to purchase Japanese and international equities, along with real estate, private equity, hedge funds and other “alternative asset” classes.

And who will buy negative return bonds to be dumped by the GPIF? Why the BOJ. In Japan, all financial roads lead to the printing press.

David Stockman was the Director of the Office of Management and Budget during part of the Reagan Administration, from 1981 to 1985. He is the author of The Great Deformation: The Corruption of Capitaism in America and The Triumph of Politics: Why the Reagan Revolution Failed.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission.