Contra Corner All Japanese Financial Roads Lead To The Printing Press: How The Government Pension Fund Plans A Masssive Bond Dump Into A Dead JGB Market

So this is how it works. Japan has the most massive public debt in the world relative to national income, but the implicit aim of Abenomics is to destroy the government bond market. After all, if inflation goes to 2% or higher, government bonds yielding 0.6% will experience thumbing losses. Even the robotic Japanese fund managers no longer want to hold the JGB—- as evidenced by another session when no future contracts on either the 10-year or 20-year bond changed hands. As Zero Hedge noted,

You know things have got a little too strange when the largest government bond market in the world saw no futures trades in the morning session last night. We may complain in the US of falling volumes but none, zero, zip, nada is about as low as it gets; and that is how many trades occurred in the 20Y futures contract in Japan (and 10Y cash bond market). This is not the first time as Mizuho warned in Nov 2013 that “to all intents and purposes, there is no JGB market.” And this lack of trading on a day when major macro data printed far worse than expected… well played Abe… you entirely broke your bond market.

In effect, the BOJ is the bond market—that is, the buyer of first, last and only resort. Yes, there are upwards of $12 trillion of Japanese government debt and other obligations outstanding. In normal times, a bond market that didn’t trade in the context of such a massive overhang would have produced sheer panic and bedlam among officialdom.

But not in this Keynesian day and age. The implicit assumption is that the BOJ can ultimately buy all the bonds ever issued and the massive outpouring of new bonds yet to come. Otherwise how can you explain the Wall Street Journal article posted below.

After endless prodding by the Abe government, Japan’s pension system (GPIF) will now begin to massively dump hundreds of billion of JGBs—so that it can reduce its bond holding from 60% of its $1.3 trillion portfolio to 40%. This is being done, of course, to stimulate the Japanese economy by putting pensioners in harm’s way. The cash to be derived from this program of bond dumping will used to purchase Japanese and international equities, along with real estate, private equity, hedge funds and other “alternative asset” classes.

And who will buy negative return bonds to be dumped by the GPIF? Why the BOJ. In Japan, all financial roads lead to the printing press.

TOKYO—Japan’s $1.26 trillion public pension fund will likely announce a boost to stock and foreign-bond investments in early autumn, the head of its investment committee said Tuesday, potentially sending tens of billions of dollars into new markets.

A shuffle at the world’s largest pension fund would achieve one of Prime Minister Shinzo Abe’s objectives and could help invigorate Japan’s economy, which is beginning to emerge from a decadeslong era when investors mostly avoided risk.

“I personally think that we need to complete [the new portfolio] in September or October,” Yasuhiro Yonezawa, head of the Government Pension Investment Fund’s investment committee, said in an interview. “There’s no reason to be slow.”

Mr. Yonezawa outlined a tentative plan for a portfolio shift that would put an additional five percentage points of the fund’s assets each into domestic stocks, foreign bonds and foreign stocks. The aim is twofold: to boost returns to ensure that Japanese retirees get the payouts they expect, and stimulate risk-taking at home by funneling money into growing Japanese businesses.

That is in tune with the prime minister’s pro-growth “Abenomics” policies. Since taking office in late 2012, Mr. Abe has exhorted the pension fund to rethink its long-standing conservative investment strategy.

Currently, domestic stocks and foreign stocks are each targeted to get about 12% of the fund’s investment. Under the baseline scenario outlined by Mr. Yonezawa, those figures would rise to 17% each, while the portion allotted to foreign bonds would rise to 16% from 11%. Domestic bonds would fall to 40% from 60%, and the portfolio would likely include a new category for alternative investments in areas such as infrastructure, he said.

Mr. Yonezawa said he and two other members of the eight-member investment committee would begin to craft a new portfolio this week.

The figures could change based on the group’s discussions, he said, adding that the three members would discuss whether to carry out the reshuffle before or after the announcement set for this autumn.

The changes could raise uncertainty for tens of millions of Japanese who count on steady pension payouts in retirement. With its traditional focus on Japanese sovereign debt, the fund has performed relatively well in recent years despite extremely low debt yields, in part because the country’s deflationary environment was good for bonds.

Not everyone in Japan is drinking the Cool-Aid. One apparently retired former GPIF manager does point out the obvious risk. But when Keynesian policy is in full heat, as under the lunacy called Abenomics, everything is a piggy bank.

“The GPIF shouldn’t be used as a tool for short-term-oriented intervention in asset markets. It’s not a piggy bank for short-term policy purposes. Each penny of the GPIF is pension money,” said Nobusuke Tamaki, a former fund official who now teaches at Otsuma Women’s University.

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