The reason there were insufficient government securities is that the banks which own these securities do not have anywhere else to profitably reinvest the proceeds.
Regular readers will recall that quantitative easing is one of the policies that results from adoption of the Japanese model for handling a bank solvency led financial crisis. With its focus on protecting meaningless bank capital ratios, the Japanese model effectively undermines the real economy.
Pursuing the Japanese model long enough and monetary policy in the form of quantitative easing become impotent.
The Bank of Japan (8301)’s asset-purchase program, expanded twice in three months, hit a roadblock today when the central bank couldn’t find enough government securities to buy.
Financial institutions agreed to sell 480.5 billion yen ($6 billion) of one- to two-year debt, less than the BOJ’s planned 600 billion yen of purchases, the central bank said on its website.
It was the first shortfall since the BOJ set up the program to spur growth in October 2010.
The result may boost pressure on BOJ Governor Masaaki Shirakawa’s board to broaden the program to encompass longer- dated debt, or other types of assets.
Japan’s financial companies are the largest holders of the nation’s government debt, amid a lack of demand growth in corporate and household lending and a flight to safety sparked byEurope’s crisis.
“As the BOJ expands its asset-purchase fund, we may see more people rejecting dealing with the central bank’s buying operation because there is nothing to invest in when they sell short-term notes,” said Toshiaki Terada, a researcher at Totan Research Co., a money-market brokerage in Tokyo.
In a second part of today’s operation, the BOJ received 700.8 billion yen in offers for debt with a maturity from two to three years, compared with its goal of 100 billion yen.
The failure to meet the targets suggest limits to the central bank’s main policy tool since the benchmark interest rate was brought near zero as the global financial crisis deepened in 2008....
Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo and a former central bank official, said today’s failure may help the BOJ to argue that it’s doing all it can to boost liquidity as politicians push for more aggressive moves.
“This isn’t necessarily a bad thing for the BOJ because it can tell lawmakers that they are providing more than enough liquidity,” Adachi said. “If this failure continues, the BOJ will have to reconsider the contents of its asset purchase program.”