The bond market is pushing the end to QE in Japan and EU

After the financial crisis in 2008, large economy entities are flowing the Quantitative Easing actions from US. The injection of money to capital market effectively solve the liquidity problems of US financial market and lead major indices back to pre-crisis level one year ago. This year, the 2% inflation target is very likely to be meet. The US economy is doing well while the same government plan is not working for Japan and EU at all. They both suffered from the slowdown economy growth and potential bubble in the stock market. Sadly for them, QE is the only hope for these two economy entities to meet the inflation target. But serious problem is coming to both of them, the government debt buyback program will not work consistently in the future.

The Bank of Japan is snapping up the equivalent of more than $750 billion worth of government debt a year in an effort to spur inflation and growth. At that rate, analysts say, banks could run out of government debt to sell within the next 18 months.

The BOJ holds about a third of Japan’s outstanding government bonds, a figure that analysts estimate could rise to 60% by the end of 2018. It is currently buying ¥80 trillion ($786.32 billion) worth of Japanese government bonds a year, roughly twice as much as the government is newly issuing.

Banks, meanwhile, held ¥94.7 trillion of JGBs with maturities over one year at the end of March. They use around ¥30 trillion worth as collateral when borrowing from the central bank, which leaves ¥64.7 trillion available for sale. Add it all up, and banks will run out of Japanese government debt in about a year and a half, according to Deutsche Securities Inc. in Japan. Frederic Neumann, co-head of Asian economics research at HSBC Holdings PLC in Hong Kong predicts that the BOJ’s bond buying could face practical limits sooner—by the end of this year—which could force it to consider cutting interest rates again which means negative interest rate for Japan. And this action will deeply put Japan’s economy into doubt.

The problem is mirrored in Europe, where self-imposed rules limit how many eurozone government bonds the European Central Bank can buy from individual governments. Facing a diminishing supply of sovereign bonds, the ECB started buying corporate debt in June. Some economists have even called for the ECB to start buying stocks. The central bank left its bond-buying program and interest-rate policy unchanged at its meeting Thursday.

For both of them, the bond market is pushing the end of QE since the central banks’ activities on bond market is not as useful as expected. BOJ is transferring from bond buyback to ETF purchasing program which is similar to ECB’s action of buying corporate debt. But the key problem still exists where the economy growth drivers are missed. In this way, even though the QE volume is sufficient enough for them, economy will still barely get positive growth.


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