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Breakingviews: Japan bonds face black hole risk

Tuesday, November 04, 2014 - 02:04

The Bank of Japan's massive bond buying program to reflate the country's economy could also present some challenges to investors in the long run, says Andy Mukherjee of Breakingviews.

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(SOUNDBITE) (English) REUTERS REPORTER, TARA JOSEPH, SAYING: "The Bank of Japan black hole, Andy. It's already sucked in a quarter of all Japanese government bonds." (SOUNDBITE) (English) COLUMNIST, REUTERS BREAKINGVIEWS, ANDY MUKHERJEE, SAYING: "Yes, yes, yes, Tara. I mean, Japanese government debt more and more of it is going into the BOJ's vault which is, as you said, a black hole from which this debt may never really re-emerge. Now even assuming that the central bank stops its asset purchases in late 2016 or early 2017 after hitting its two percent inflation target - if it ever does - how will they ever sell a debt portfolio that's as big as 70 percent of GDP by then? I mean who will buy these bonds and at what yields? So investors' best guess at the current juncture will be to assume that the BOJ's balance sheet just might get frozen at some stage, but that bonds that have already gone into that black hole by then really won't pop out again." (SOUNDBITE) (English) REUTERS REPORTER, TARA JOSEPH, SAYING: "It sounds like this plan could actually backfire on Japan." (SOUNDBITE) (English) COLUMNIST, REUTERS BREAKINGVIEWS, ANDY MUKHERJEE, SAYING: "Well the policy could backfire; this whole plan could backfire if something happens that forces the BOJ to remove excess cash from the economy in big chunks by selling bonds. Now that something could by hyper-inflation which is very unlikely in aging Japan, or it could be a massive 1980s-style Japanese economy asset bubble which is actually quite likely. Or at least not unlikely. But if the BOJ starts selling bonds in massive quantities, then the government will have to sell less in order to keep yields from blowing out. Now that will make it a simultaneous fiscal and monetary contraction on consumer economy. And we saw the impact on consumer economy off a tax increase earlier this year. Consumer economy, if there is fiscal and monetary contraction going on simultaneously, will be very badly hurt." (SOUNDBITE) (English) REUTERS REPORTER, TARA JOSEPH, SAYING: "The Bank of Japan's big black hole of bonds presenting some serious challenges for the future."

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Breakingviews: Japan bonds face black hole risk

Tuesday, November 04, 2014 - 02:04