Bank of Japan alarms

Japanese Yen Market Likely to Become Even More Lucrative

When a major central bank commits 25 percent of its annual profits to recapitalization, this only spells that more volatility

The Bank of Japan has just reported its annual results which were more than just positive. Yet that shouldn’t be very surprising during the current quantitative easing effort in which the Japanese central bank has been engaged in. It’s easy to make money when you’re printing it, some might say, yet still, the devil is in the details.

 

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Net profits surged 28 percent in fiscal 2015 ending in March to just above ¥2 trillion ($16.2 billion). Definitely not bad, but when comparing the figure to the expansion of the central bank’s balance sheet which shot up 34 percent over the same period due to the Bank of Japan’s quantitative easing effort.

Let’s get real here – currently the Japanese central bank cannot stop buying government bonds… ever

Under the local rules and regulations, the Bank of Japan (BoJ) is obligated to set aside about 5 percent of its profits for reserves about 5 percent of its profits. This time around shows the lack of certainty about the effects of the unwinding of ultra-easy monetary policies across the globe.

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The central bank’s holdings of Japanese government bonds have increased by about 43 percent, the return on those holdings “has fallen persistently, despite the lengthening maturity”, while the returns on this investment have collapsed further.

The average Japanese Government Bond yield which the BoJ is receiving for its trillions of holdings is around 0.521 per cent as of the second half of fiscal 2015.

Increasing reserves of the central bank may spell two scenarios – firstly, the bank could be filling its coffers in anticipation of more volatility ahead on the capital markets or in preparing to announce an end to its debt purchasing program. Meanwhile, trading volumes on the Japanese retail forex market remain robust despite recent declines.

Let’s get real here – currently the Japanese central bank cannot stop buying government bonds… ever. The imploding debt levels have not been constrained by the sales tax rise implemented by the government last year. While the economy is currently growing, the sustainability of this trend is questionable at best, especially in light of rumors of the second round of sales tax hikes around the corner.

Unfortunately, all of the major central banks are currently on their way to face the volatility conundrum. With the ECB playing with fire with every additional loan it extends to Greek banks and the Federal Reserve contemplating whether to finally raise interest rates after fueling the biggest cycle of financial engineering in decades, volatility on the foreign exchange markets is not likely to subside any time soon.

Once more Japan is different – Japanese yen volatility could turn violent due to the country’s burgeoning government debt surpassing 230 percent of GDP (higher than both Zimbabwe and Greece).

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