Article 3.4 Kuroda always looks on the bright side, but reality is dark

By Ben McLannahan

Financial Times June 11, 2014

For Bank of Japan governor Haruhiko Kuroda, things are always looking up.

The 2% target for inflation will be met before long, he keeps saying.

Really? People actually in the Y854tn ($8.4tn) Japanese government bond (JGB) market - the world's second largest - tend to give a different story. Dealers say the BoJ's commitment to buy up about 70% of net issuance by the government has forced almost everyone else out, and institutions complain that they cannot buy or sell when they want to. In fact, in the fiscal year to March, the turnover of JGBs fell to a record low. One risk of such a gummed-up market is that it sends out false signals. At the moment, for example, the 10-year yield seems stuck at about 0.6%, while core inflation - excluding the recent tax increase - is about 1.3%.

A second, more serious risk is that thin trading magnifies the effects of a sudden sell-off. In March, the market wobbled after the BoJ said it would buy fewer bonds than expected. Given that reaction, how can the bank dare to hint about an exit from its buying policy?

Credit Suisse has already calculated that, if the bank keeps buying bonds at its current rate, it will hold nearly 40% of all outstanding five to 10-year JGBs by next March - nearly double its current share.

FT

Source: McLannahan, B. (2014) Kuroda always looks on the bright side, but reality is dark, Financial Times, 11 June.

Chinese bonds

China's government bond market was established in 1950, but that experiment by the Communist Party was closed down in 1958. With the economic reforms of the 1980s the Chinese bond market was re-established and is now one of the largest in the world, having grown exponentially during the 21st century. Unlike most debt markets the Chinese one is generally closed to foreign issuers, investors and intermediaries, except for investments via qualified foreign institutional investors (QFIIs), which are a select few foreign financial institu­tions allowed to invest in the Chinese securities market.

The amount of bonds (government plus corporate) outstanding at the end of 2013 was over Rmb 35 trillion (about £3.4 trillion) - see Article 3.5.

The bond market is split into three roughly equal portions: (1) government bonds consisting of Treasury bonds and bills, savings bonds and local govern­ment bonds, and central government bonds; (2) policy bank bonds, issued by the Agricultural Development Bank of China, China Development Bank and Export-Import Bank of China; and (3) corporate bonds, most of which are issued by state-owned enterprises and a few private corporate entities and financial institutions (they also issue medium-term notes, commercial paper). There are two main types of government bonds traded in China:

• Treasury bonds - these have maturities up to 50 years. They are issued at auctions with no set pattern of issuance

• financial bonds - these are issued by banks and financial institutions and are heavily backed by government-owned or controlled institutions. They are traded in the interbank markets.

Wary of foreign investment and control, most domestic debt is still purchased by state-owned or state-controlled financial institutions, thus concentrating risk in quasi-government-owned institutions instead of spreading it among many investors. The secondary market is very thin.