Goldman Sachs Joins Chorus Saying BOJ Easing Is Nearing Limits

Goldman Sachs Group Inc. is the latest to join a chorus reasoning the Bank of Japan is reaching the limits of its stimulus program, just as nation’s bonds tumbled the most in more than three years.

Governor Haruhiko Kuroda has struggled to get insurers and pension funds to cut their holdings of longer-dated Japanese government bonds, and speculation about the sustainability of the central bank’s debt purchases is unlikely to die down unless investors are convinced prices of the notes will decline, Rohan Khanna, a London-based interest-rates strategist, wrote in a research note. Goldman follows Pacific Investment Management Co. and former Ministry of Finance official Eisuke Sakakibara in saying Kuroda is running out of room to expand the BOJ’s record stimulus.

A four-day rout pushed 10-year JGB yields to within three basis points of turning positive on Tuesday for the first time since March, after policy makers disappointed investors last week by leaving bond buying and negative deposit rate unchanged. The sell-off is a reflection of the market’s assessment that the central bank may reconsider its policy mix away from further rate cuts and an expansion of debt purchases, according to Goldman.

Debt Monetization

“Our analysis indicates that there are some alternatives to JGBs to which the BOJ could redirect its purchases, but such alternative assets are not as liquid and abundant,” Khanna wrote in the Aug. 3 note. Stimulus “sustainability discussion is unlikely to die down unless there is a shift in market expectations,” and a “more convincing” interaction between fiscal and monetary policies that can potentially lead to something like debt monetization is required to change perception, he said.

Ten-year JGB yields rose to minus 0.025 percent, the highest level since March, on Tuesday, compared with minus 0.295 percent on July 27, two days before the BOJ announced its decision. They were last above zero on March 11. The securities yielded minus 0.095 percent as of 10:53 a.m. in Tokyo.

Goldman estimates the BOJ will need to buy about 115 trillion yen ($1.14 trillion) to 120 trillion yen of JGBs, or as much as 50 percent more than planned, to keep the monetary base expanding amid redemptions. That would be challenging as the central bank now holds 38 percent to 45 percent of JGBs with a residual maturity of fewer than 10 years, and holders of longer-dated paper are reluctant to sell.

The central bank holds only 24 percent of bonds with residual maturity greater than 10 years, according to Goldman.

While Kuroda announced a review of the expansionary policy to be completed for the next board meeting in September, he also said the central bank hadn’t reached policy limit and was unlikely to wind back its monetary stimulus. BOJ last week enlarged a program of buying exchange-traded funds, while keeping its negative interest rate unchanged and avoiding an increase in raising the target for the monetary base.

While Goldman listed other assets the BOJ might be able to buy in its long-running battle to stimulate the Japanese economy and end deflation, the lender cautioned that none of these are large or deep enough to replace JGBs altogether.

The list includes municipal debt, corporate bonds and mortgages from banks. While such securities might give the BOJ additional ammunition, they probably will be considered “quasi-fiscal policy,” Goldman said.

“Looking at this list of alternative asset pools, one conclusion can be easily drawn: There is no obvious alternative to JGBs in terms of size and liquidity,” Khanna wrote.

Narayanan Somasundaram
Bloomberg
August 4, 2016