Courtesy of Nattering Naybob.
On November 16, 2016 the BoJ announced it is buying 1-3 year and 3-5 years government bonds using a “fixed-rate method”.
Under this method, BoJ will be buying 2-year bonds at -0.09% and 5-year bonds at -0.04%. And its an unlimited supply, “The amount offered is unlimited“.
The 2 yr JGB went from -0.102 to -0.17; 5 yr went from -0.042 to -0.110 ; 10 yr went from +0.030 to +0.010
Under theory, by paying a premium (less negative rate) those holding might be enticed to sell back to the BoJ. The desired effect is to force the yield on those duration’s further negative, and the price higher by reducing the float with purchases. Here’s the rub…
The BOJ’s bond buy offer attracted no bids as market players can sell them at a lower yield (further negative), or a higher price, in the market. Resulting in no takers, no purchases, and no credits to any buyer accounts.
However, the desired effect was achieved, without a reduction in float, for now. Should MARKET rates further dislocate and retrace to the BoJ’s line in the sand (“natural” or target rate), then the offer might attract bids.
Contrary to popular belief, when a central bank buys bonds in this fashion, no money is printed and this is not stimulus. It is documented that the effect is quite the opposite, viz. contractionary in nature. How so?
The facts are, only electronic bank credit is created with the click of a button. Being that the holders are usually large institutional and banks, any credits to their accounts would probably be sequestered withing the confines of the Japanese banking system.
There is little chance the electronic bank credits created, would be used in any kind of economic activity, or productive investment, which would benefit the economy. In all likely hood the proceeds would be involved in further financialism, parked at the central bank remunerated with IOER (interest on excess reserves), or speculative asset and paper shuffling.
It is known that transfer payments extinguish each other, and have a deleterious economic effect. This kind of speculative asset shuffling siphons off capital which could be used in actual economic expansionary investment. which increases the velocity of transactions and benefits the economy.
Said perversion or diversion of capital causes a reduction of real or productive GDP. So this is not stimulus, not money printing, just more corporate and banking welfare in an attempt to keep rates in NIRP and ZIRP.
